Brexit and PI reforms could harm UK legal services market value

Brexit and proposed reforms to the personal injury sector could have a ‘major impact’ on the value of the UK legal services market, which has shrunk for only the second time since 2005, new research has found.

The market value was an estimated £31.5bn in 2016, down from £32.2bn in 2015, according to IRN Research’s 7th annual edition of the ‘UK Legal Services Market’ report. It has downgraded its growth forecasts from last year due to market uncertainties and predicts revenue growth of 3 per cent in 2017, followed by 4 per cent in 2018, and 5 per cent between 2019 and 2021.

‘Forecasting the future of the legal services market is very problematic at the moment given the uncertainty regarding the final shape of any trade and business deal between the UK and the EU,’ the report said.

‘With exports of legal services representing over 10 per cent of turnover and with international dispute resolution and mediation also important aspects of the market, the final arrangement will have a major impact on the market. In addition, the final deal will impact on the attractiveness of cross-border mergers.’

IRN also suggested planned personal injury reforms could see that market ‘suffer a significant hit to its revenue’ once the rules come into force in October 2018 with many claims set to be rushed through before then.

A survey of 150 legal practitioners working in four consumer law areas (conveyancing, family law, personal injury, wills and probate) revealed that 59 per cent of respondents are expecting revenue growth in their practice area this year. One-third, however, are expecting no growth.

Personal injury lawyers were found to be ambivalent as to whether there will be growth or no change in either their work volume or revenue. The strongest revenue growth is expected by those working in family (67 per cent) and conveyancing (63 per cent).

Cutting costs

Over the last 15 months there has been a series of notable mergers as larger firms look to develop a greater international presence, while also domestically increasing their market share.

As firms look for greater efficiency and reduced costs, IRN is predicting more M&A activity: ‘There will be more mergers as firms seek to cut their back office, property, and support costs, and as the larger firms seek to expand their base of operations. More transnational mergers are expected among the larger firms as the declining pound has made UK firms more attractive to buy for overseas businesses.’

Domestic mergers among regional and national firms are also predicted but it’s not just at the top end of the market where mergers are likely, according to IRN. ‘There are over 1,000 medium-sized law firms in the market (i.e. 5 partners or more) and this is a crowded sector.

‘There are major opportunities to consolidate this part of the market, with mergers and takeovers in this sector offering major cost savings and improvements in economies of scale, especially in back office operations.’

IRN also predicts that firms will prioritise controlling costs with a view to doing ‘more with less’ amid the increasing threat of clients seeking to drive down prices and greater investment in in-house legal teams by companies.

‘Given Brexit and other uncertainties, many major companies will want to keep their legal advice close and integrated into their businesses. At the same time, major clients have found it easier to gather information allowing them to weight up the relative costs of legal advice from in-house and external teams and judge whether it is more cost effective to have legal advice in-house.

‘As major clients invest more in-house, these clients will increasingly seek to unbundle legal services and buy-in only certain legal services. This will make the legal market much more competitive and it opens opportunities for small and medium-sized law firms to specialise in specific service areas and become stronger competitors to the large generalist legal firms.’

Matthew Rogers is a legal reporter at Solicitors Journal

matthew.rogers@solicitorsjournal.co.uk | @lex_progress