Wales: consolidation horizon

Delivering services in a predominantly rural area where distances can be a challenge has never been straightforward. For ordinary people and businesses it can cause difficulties in terms of access to justice. For firms it places limits on natural growth and leads to a fragmentation of the market into a large number of small suppliers. This is the situation in Wales, where 454 out of 522 law firms have fewer than four partners.

The recession and approaching liberalisation of the legal services market have brought a new set of problems. Firms on the high street do not have plans to conquer the world but most are acutely aware that life will be very precarious if they do not reach a minimum size and move away from the generalist approach.

Morris Roberts, a five-partner firm in Carmarthen, has recently acquired a small practice in Whitland to expand its geographical reach and is looking to grow further as the Legal Services Act kicks in. 'There are a lot of practitioners in small firms encountering serious difficulties; we certainly wouldn't want to be any smaller,' says senior partner John Griffiths. But there is the other side of the coin too: Griffiths says his firm has good relations with local firms and would be happy to talk to them about opportunities which would help expand the client base, both geographically and by sector.

Tactically, Morris Roberts is also working towards offering a range of specialist services. High street solicitors have traditionally handled a wide range of issues but according to Griffiths people now turn to specialists to deal with their problems.

On the whole the firm has done reasonably well during the downturn. Private client work has remained stable, as has commercial work. Like elsewhere, residential property has been down. Many Welsh firms got into bulk conveyancing, in parts with the intention of attracting work from England, but not Morris Roberts '“ something which, with hindsight, the partners are relieved about. Griffiths agrees that the conveyancing market could be changing with the advent of Tesco law, in particular at the lower end and first-time buyers who are more price-sensitive. Specific features of the Welsh property market, however, should help law firms resist the onslaught of the likes of Tesco or the Co-op. Very few national chains have entered the Welsh property market, which means that estate agents are, in the main, small independent businesses. Nurturing the relationship with these agents has been a lifeline for local firms but, even if the market is not big enough to attract national chains, the pressure the high street retailers could place on the market should not be underestimated, according to Griffiths.

Much as private client has held up for most firms, it is an area to watch, according to Huw Owen, senior director at Ungoed Thomas and King, a five-director firm also based in Carmarthen. The firm's strategy over the years has been to offer a more personalised service, which has allowed it to maintain fee levels. This has been made possible because of the firm's client base, which, Owen says, does not make decisions solely based on price. But the firm is conscious of the threats, in particular in residential conveyancing and wills and probate.

'We pitch ourselves as the Waitrose of legal services,' says Owen, 'but we are aware that the situation could change under the Legal Services Act.'

Ungoed Thomas and King used to have an arrangement with an independent financial adviser who had office space at the firm. It came to an end in 2008 because the regulatory burden was too much for the benefits it brought. Now though, the new structures the LSA could lead the firm to revisit the situation.

Certainly by the time alternative business structures are allowed, Owen reckons the firm will have tied up with another organisation. This could be either another law firm or a non-legal professional entity. 'A lot of small firms will be priced out of the market because of the rise in professional indemnity insurance costs, and in many cases the partners are at or nearing retirement age, which could present opportunities for us,' says Owen.

As to whether joining forces with an IFA or accountants could cut the firm out of its existing referral network, Owen says it could be a risk worth taking because the firm is not so reliant on referral work that it could cause significant damage to its revenue stream.

In the meantime, the firm has rolled out a more systematic cross-selling programme, in particular across its private client offering. 'If a client comes to see us about a divorce, we'll talk about making a will and drawing up lasting powers of attorney, and it has proved very successful,' says Owen.

South coast options

Closer to the economic powerhouse of Wales that is the Cardiff-Swansea stretch, the economic fabric and more developed transport network offer a more diverse set of options.

Neath-based Hutchinson Thomas has consolidated into one office within easy reach of the M4 and mainline railway station, which allows it to reach out to a wider potenial client base. But with eight partners and 23 lawyers altogether, the firm is only marginally larger than Morris Roberts and Ungoed Thomas and King, and it shares much of the same concerns.

Managing partner Robert Williams says the residential conveyancing market has been through ups and downs since the beginning of the year, with a surge in enquiries since the election. But he is in two minds about the abolition of HIPs announced by the government on Thursday. 'It's not clear whether this will really help regenerate the market,' he says. 'Vendors had got resigned to them and solicitors used them as a marketing tool '“ we would prepare HIPs without charging for our costs, which would help us increase our database.'

Elsewhere in the private client department, trust and probate has remained strong but Williams puts it down to the way this service has evolved within law firms generally rather than to a change in the market itself. 'Trust and probate work used to be done at the end of the day by the conveyancers; now specialist solicitors do it, which means there are standalone trust and probate departments which do the work and actively sell the service.'

Confident as he is, Williams admits that law firms will have to contend with the advent of ABSs and Tesco law. He is not averse to expanding by amalgamation to other parts of Wales, but, again, this would have to complement the existing skills set and allow the firm to set foot in locations where it does not already have a presence.

Like a lot of smaller firms in Wales, Hutchinson Thomas also counts on legal aid to bolster its revenue. In the past year, however, many have pulled out in the face of dwindling payments and increased administrative costs.

Williams says the firm will remain committed to it for everybody expects cuts but hopes that the government will objectively consider the distinction between cases involving public bodies and entirely private ones in the way it decides to allocate the legal aid budget (see box for Robert Hanratty's comments on legal aid in Wales).

This time last year, Welsh firms were battening down the hatches and fighting their way through the recession. The LSA agenda was already on the radar; 12 months on it has become a priority item. There are no grand plans to take on Tesco and the Co-op, but firms appear confident that gradual consolidation '“ even if it is forced '“ and greater specialisation should help them keep their share of the market.

Legal aid: 'decisions driven by statistics rather than common sense'

'Rural practices await with trepidation what the cuts will mean for legal aid,' says Robert Hanratty, one of two partners at Hanratty and Co, in Newton.

His principal concern as a rural practice right in the middle of the largest criminal area in England and Wales is that there doesn't seem to be any coherent strategy for the delivery of legal aid.

Hanratty mentions ongoing attempts to close down the local weekend and bank holiday remand court, which would force people to travel up to 100 miles to the next available court. 'These decisions appear to be driven by statistics rather than common sense,' he says.

He also says that the chief clerk at Welshpool Crown Court is retiring and not being replaced, leading criminal practitioners to fear that there will be further reductions in service. There also appears to be no prospect of new facilities being built, although this is badly needed. 'This lack of priority makes a mockery of access to justice,' he says.

A further concern for practitioners is the inevitable decline in the number of legal aid suppliers, which could accelerate following the recent proposal to reduce the number of suppliers. 'The system is reaching breaking point and there will be job losses.'

Family work is no better. 'It's already thin on the ground and there is little incentive in large practices setting information points outside their immediate catchment area.'

Still, Hanratty reckons, the likely development is that there will be more mergers, with fewer, bigger firms left. But even large legal aid practices could be under threat, especially if there are further glitches to the payment system resulting in firms not being paid on time, as happened last month. 'There is a real risk that the LSC will get rid of supplier base and that we could see legal aid firms from England coming into the Welsh market,' he says.

Another problem is the reform of Crown Court costs, which, in Wales, take on another dimension because of the distance to court. Hanratty says he recently acted for a defendant in a road traffic offence case and won. 'My costs were in the region of £1,500; I'll get around £400.'

Top 100: slow recovery

The handful of large commercial firms have in the main resisted the recession but some sectors have fared better than others.

The downturn has all but put an end to the large conveyancing centres set up by the larger commercial firms, and recovery will be slow, according to Robert Cherry, a partner at Morgan Cole's Swansea office.

'Growth for any law firm in Wales in the short term will be about increasing market share,' he says. 'The market itself is not going to grow materially; it will all be about getting new clients and being good at getting new clients.'

Morgan Cole is in the comparatively fortunate position of having a balanced portfolio of clients across the private, public and insurance sectors.

The decline in revenue from its private client base has been compensated by an increase from the insurance market, while the public sector has remained stable. 'We anticipate that the settlement for the Welsh assembly and other local authorities in Wales will continue to be strong,' he says, as the public sector tends to maintain the levels of outsource when budgets are cut.

'Firms that have not edged will be buffeted. The recovery in instructions from the commercial sector will be very slow and all firms will have to adjust growth expectations in line with the economy.'