The new poster boys
Successful alternative business structures will be those likely to follow the same ethical and professional approach as traditional law firms, says Nick Denys
The first Alternative business structures are likely to be licensed in the next two to three years. Both the Legal Services Board and Solicitors Regulation Authority are working on the framework which will allow external capital, non-legal companies, and other professionals to own and have management responsibilities for law firms. It doesn't matter whether or not your firm is contemplating going down the ABS route, it is imperative that the consequences of these changes in the legal services market are monitored by all those who operate within it. Those who behave like the proverbial ostrich run the risk of missing opportunities and ignoring threats.
Predicting the future can be an entertaining pastime, especially if there are no reliable benchmarks to attach your ideas too. During his tour around the country, Lord Hunt heard a variety of views on what the future of the legal services market may hold.
On the specific subject of ABS, there was roughly a three-way split between those who view them as a threat, those who believe ABSs will offer new opportunities for well-run firms, and those who thought that it will all just be a damp squib.
A more pressing concern was the current economic downturn which had already begun to affect the business environment.
It was reported that clients had become a lot more concerned about cost and were comparing service providers. Firms had to be flexible, innovative and above all business-minded to compete, survive and prosper in the 'credit crunch' environment.
One optimistic partner from a mid-size Manchester-based firm highlighted an important link between the current economic situation and impending new market structure. He believes that a positive effect of the current financial downturn would be that legal practices are being forced to assess their running costs now. In his view, this will ensure that firms are leaner and more prepared to compete with ABS, or as he put it 'Tesco law'.
This insight chimed with one of the conclusions Lord Hunt had come to early during his research. Solicitors are very adaptable and have modified their practices greatly over the years to provide tailored services to clients. Competition, whether it is from licensed conveyancers, unregulated will writers or other solicitors, is not a new phenomenon. The solicitor brand has stood up to the test of time, and each moment of liberalisation in the Law Society's history has coincided with a growth in the amount of practitioners.
Lord Falconer claims that one of the benefits ABSs will bring into the world of law is the importing of good business practices. In his view, prices will drop, customer service standards will improve and there will be fewer law firms but more lawyers. It remains to be seen if this prediction is accurate. What is more certain is that when the amount of choice increases, the 'branding' becomes more important. In the Google world, words, and the meanings associated with them, become ever more valuable. This scenario potentially puts 'solicitors' in a strong position.
A level playing field
It is the Law Society's position that ABSs should be subject to the same regulatory requirements as other law firms. Public and consumer protections are best secured by ensuring that ABSs are treated as 'just another law firm'. Lord Hunt supports this view: 'I still believe the 'poster boys' for ABS will not be those firms that look and behave least like traditional law firms; it will be those that demonstrate the most admirable qualities of a traditional firm.'
The Law Society is currently working with the SRA and LSB to ensure that in principle all entities that provide legal services should be subject to all the regulatory requirements of other law firms. If the SRA believes that any rules are unduly burdensome, these rules should be removed or relaxed for all law firms '“ not just ABSs. Having a level playing field is the best way of ensuring both competition in legal services and that clients are properly protected.
Another of the major unknown aspects of ABSs is that external owners and non-lawyer staff will be able to have controlling rights in a firm. For many years, new firms have employed paralegal staff to provide expert advice. They also employ senior operating staff in the areas of general management, accountancy, IT and HR. These individuals play an important role in the success of a firm. The Legal Services Act will give firms more options when attracting investment and the best non-lawyer professionals, allowing firms to lock in their loyalty and make them a true part of the firm.
One of the risks that has been suggested is that non-lawyer managers may put undue pressure on solicitors to disregard their professional obligations. The Law Society expects that everyone within an ABS will be obliged to adhere to the professional principles, and breaches of the Solicitors' Code of Conduct should be punished in a consistent way. One of the possible ways of managing this risk is for requirements on fitness applying to all those non-lawyers involved in management of law firms, and education of non-lawyer managers so that they understand the rules that solicitors, and themselves, must adhere to. When the SRA publishes its draft rules, the Law Society will work with them to ensure that this risk is managed appropriately.
One of the unexpected discoveries during the Hunt review was the extent of the lack of enthusiasm among young lawyers to become equity partners. One representative of a young solicitors' group stated that in her experience young lawyers only aim to be partners because it is currently the only way of receiving recognition within a firm. In her opinion, many young solicitors do not aspire to sit on a board or have ownership responsibilities. Some firms are already reacting to this by creating new retention strategies; for example, senior management positions without being a partner. When the possibility of becoming an ABS arrives, new strategies, such as share options, will become available.
It is not just young solicitors who are questioning the value of the partnership model. High liability, stressful management functions and prohibitive tax disadvantages were all brought up as examples to suggest that the old partnership structure is not as viable as it once was. One firm from Wales informed the review team that they had changed to limited company status. Instead of being partners, the nine principles became directors.
Taking AIR
In many respects these dilemmas are ones which many firms have always had to consider. The difference is the introduction of ABS will give legal entities the widest ever possible range of options for answering the question: 'What is the best structure for my business?'
No one knows exactly what type of business models will gain most prominence, but as long as the legal sector is regulated fairly one would expect entities, whatever their make-up or funding, to seek out the most efficient and advantageous structure.
The SRA, in its consultation paper 'Regulating Alternative Business Structures', sets out 11 different models that legal services providers may adopt. This wide variety of possibilities suggests that a prescriptive regulatory approach would be difficult to implement and unwieldy to administer.
Lord Hunt supported the Law Society's long held opinion that the best form of regulation, post-ABS, would be a more flexible approach, using widely understood principles as a base, and the regulator concentrating on the capability of each firm. Lord Hunt unified these needs in a system he called Authorised Internal Regulation (AIR). Lord Hunt believes all firms should be encouraged to have high standards of internal governance, appropriate risk management capability and an understanding of how they meet the objectives set by the regulator: 'Since the model attempts to treat the regulatory communities as adults, capable of arranging their affairs with their clients true interests in mind'¦ encourages the embedding of regulatory compliance into firms culture, and gives flexibility to adapt regulation to firms specific business models provided that the regulator's essential standards are maintained.'
The SRA is currently considering Lord Hunt's recommendations and how to achieve effective and proportionate regulation of the legal market post-Legal Services Act. The profession waits with interest to see how it chooses to meet the challenges it faces.
Thanks to the Legal Services Act, change is inevitable. What is not inevitable is how this change will manifest itself. A recent survey found that 83 per cent of those who have used a solicitor in the past five years are satisfied with the performance of their practitioner. Any non-lawyer company who wants to enter into the legal services market will either have to compete against the reputation that solicitors have or buy into the brand. We at the Law Society are working hard to ensure that a level playing field will exist which allows firms to make business decisions that are best for them and the clients they serve.