The Legal Services Act isn't working

Recent headlines have been grabbing attention, stating that: “95 per cent of top law firms predict ‘massive consolidation’ over next 2 years.”

The study, carried out by legal PR firm Byfield Consultancy and City law firm Fox Williams, found that 95 per cent of managing partners at the UK’s top 200 law firms predicted ‘massive consolidation’ of the legal market would take place over the next two years. Are we really surprised by this fact?

Perhaps more important is what is happening to the 10,000 law firms that do not form part of the elite ‘top 200’.

At all levels, experience suggests that of all the firms following the takeover/merger model, only 15 per cent succeed as a business, with many breaking up and disintegrating within a short time of the merger taking place.

In the survey, only 43 per cent of managing partners at recently merged firms rated the majority of mergers from the last five years as a success. Some 21 per cent expressly said they had been a failure, while the rest declined to answer.

So, how does this affect those in the profession who are seeking to merge or be acquired?

Need for change

Firms of all shapes and sizes have been ‘chatting’ with friends and neighbouring firms about potential mergers, but why have so few actually come to fruition?

Is it the false expectations of the firm that needs to merge but won’t admit it? Is it a lack of working capital to fund the merger? Is it the desire of the top 200 firms to consolidate with each other and not bother with the rest?

There is obviously no definitive answer to those questions. As I have highlighted in previous articles, many firms with some degree of vision are asking for help in developing a strategy for merger or simply for exit. There are solutions, but sadly most firms will not engage and make the fundamental changes needed to become suitable to merge.

What will happen to the thousands of firms that fall into this category?

The various commentators who supply opinion about the future of the profession are, for once, in some agreement – we will lose around 3,000 firms as a result of mergers (unlikely), consolidation (unlikely), or insolvency (more likely). I do not wish to be the harbinger of doom, but this mess cannot continue.

How can the profession build on the future while we are still subject to judicial reviews that affect our decisions (ie best-value tendering for criminal legal aid contracts)? We are also waiting, with baited breath, to see if we are to be dual regulated by the Financial Conduct Authority and the SRA on the subject of consumer credit, a decision delayed until October.

Legal market

Many firms are still in ‘we are a profession’ mode and do not feel they are subject to normal commercial rules. The market created by the Legal Services Act 2007 desperately needs an independent examination to assess whether the reforms are working; the general consensus seems to be that they are not.

Even the Lord Chief Justice appears to be questioning the direction in which the profession has been moving. The next government, he said, will “have to look very carefully” at the regulation of services, including the relationship between the LSB and the regulators.

We have seen a massive expansion in the population of lawyers over the past 25 years, with the number of legal professionals tripling, so why haven’t we seen prices from solicitors coming down? It is the new entrants, alternative business structures (ABSs) not regulated by the SRA, that seem to be driving down the price for legal services.

This raises the question of whether the market created by the Act is operating correctly. As Lord Thomas asked, is the profession’s structure and fee-structuring working “to produce legal services that people can afford”?

Let us assess the conveyancing market – one of the major revenue earners for most independent law firms. The lenders and insurers are deeply concerned about risk, and firms will be assessed by their ability to manage process and their people. Many firms will fail this test, and I suspect the lenders will end up controlling the majority of this sector. If you do not work within the parameters they dictate, then you will simply not be on their panels.

This lack of commercial awareness and desire to return to the ‘good old days’ is extremely worrying for all law firms, never mind the top 200. Consolidation, mergers, and (sadly) insolvency will increase within the profession, and I sincerely hope firms will engage with specialists to avoid the last of these possibilities occurring. SJ

Viv Williams is CEO of 360 Legal Group

@360legal