April 13, 2017    5 minute read

Alternative Business Structures: An Unfulfilled Fear?

Commoditising the Law?    April 13, 2017    5 minute read

Alternative Business Structures: An Unfulfilled Fear?

One of the three objectives of the Legal Services Act 2007 was to facilitate the creation of new structures of legal practice, which would include allowing non-lawyers to own and manage legal service providers. This was achieved through the introduction of alternative business structures (ABS).

The Case for Change

At the heart of the reforms are three themes: consumer focus, independence, increased competitiveness and increased choice for consumers. These reforms have generated concern within the legal profession. Lawyers feared that allowing non-lawyers to provide legal services would result in a loss of professional control which would damage the industry.

The Legal Services Act removed certain restrictions on the practice of law and sources of funding. Under alternative business structures, non-lawyers are able to own and manage bodies providing legal services, and carry out legal activities within a licensed body, which have traditionally been reserved for lawyers. Firms with ABS are able to raise capital by listing on the stock exchange, to float their shares, and be publically traded.

This is unlike a limited liability partnership (LLP) – the conventional structure of a legal practice – where capital is raised as equity from the partners or as loans from the bank. An ABS allows for the creation of multidisciplinary practices, or ‘one-stop shops’, for prospective consumers of legal services.

The number of existing solicitors’ firms adopting alternative business structures are few. Only 65 firms have been granted a license to practise as an ABS. Irwin Mitchell and DLA Piper, for example, are the biggest names to adopt an alternative structure.  Irwin Mitchell is a national firm, and DLA Piper a multinational firm located in more than thirty countries worldwide. Private equity firm Duke Street have invested in Plexus Law (part of the Parabis Group).

The reaction to ABS amongst leading law firms headquartered in the United Kingdom has been negative. Hogan Lovells and ‘magic circle’ firms, Linklaters and Slaughter and May, have flatly rejected the reforms. However, the threat that ABS pose to professional control does not stop here.

Tesco-style Law

The Legal Services Act has allowed well-established consumer brands to enter the legal services market. The Co-operative Group, a British consumer-owned retailer, became the first to adopt ABS in 2012. The Co-operative set up Co-operative Legal Services and divided it into six practice areas: probate, wills, family law, personal injury, employment and conveyancing. The brand’s approach to the provision of legal services brings to mind the guiding philosophy of the founder of Tesco, Joseph Cohen:

“Pile ‘em high and flog ‘em cheap.” Joseph Cohen

For Co-operative Legal Services, this equates to low-cost, high-volume work. Their diversification into legal services has been a success and they are now a market leader in probate and estate administration.

The AA, Saga, Direct Line and BT are also looking to expand their businesses into legal services.

Eddie Stobart, a transport and distribution company, launched Stobart Barristers in 2012. The ABS’s unique selling proposition was to cut out solicitors, enabling clients to go straight to barristers with their legal problems. However, the Stobarts reached the end of the road in 2014, when the wheels came off their venture into legal services.

A World of Alternative Business Structures?

The Co-operative Group’s innovation has caught on. Canadian law firm, Axcess Law, have been operating out of Walmart, an American multinational retailing corporation, since early 2015. Like Co-operative Legal Services, Axcess Law aims to offer accessible legal advice and support at consumer convenience.

The opening up of the legal services market to non-lawyers has been met with concerns from the legal profession who feared that a loss of professional control would damage the industry. As Lord Neuberger, the President of the Supreme Court said in a speech to the Bar Conference

“You cannot treat the supply of legal services like the supply of baked beans by a food retailer.”

Resultantly, safeguards were introduced to protect against such a loss. If a non-lawyer owns more than 10% of a firm, they have to meet a ‘fitness to own’ test. External investors are also subject to this test, which covers honesty, integrity and reputation, competence, capability and financial soundness. At least one manager must be a solicitor with a current practising certificate.

Commoditising Law

The emergence of alternative business structures follows the general trend towards the commoditisation of basic legal services. Commoditised work is work that can be routinised and replicated to meet the relatively simple legal needs of the consumer.

For example, an employment contract is required by law to contain certain terms, and as a result the majority of employment contracts look more or less the same. Commoditising these means their drafting no longer requires as much time, cost, or an expert lawyer. The new entrants serve a different function to the national and international players. Unlike in large City firms, Co-operative Legal Services only supply legal services to consumers. They do not, and could not, supply legal services to multinational corporations.

Mishcon de Reya, a London-based firm with an international client base that includes Microsoft, Prada and Pfizer, converted to an ABS in April 2015 and became an LLP in October of the same year. They believe their conversion to an LLP is a way of providing a more corporate structure to the way they operate their business and deliver their services. Further, their conversion to an ABS was simply a way of officially bringing their non-lawyer employees into the partnership.

The Legal Services Act enabled consumer brands to diversify and innovate their services by breaking into legal services. Among existing law firms, conversion to alternative business structures have been few, and the effect of the legislation on professional control slight. As the industry continues to move towards commoditisation and explore the commercial benefits of innovation, the opportunity for businesses to acquire ABS status remains an attractive one.

 

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