Views from the front line

If all this hadn’t been driven from south of the border, would we be looking at it at all?” That was the first question asked when an invited group of solicitors, accountants and their respective professional regulators discussed the future of legal services against the prospect of alternative business structures (ABS).

It was posed by high street practitioner Caroline Flanagan, who was President of the Law Society of Scotland at the time the Clementi report was beginning to drive change in England & Wales. “My own view”, she continued, “is that a large amount of competition will come in. I don’t think that’s a bad thing where this is feasible, absolutely not. I fear that we will end up with Tesco law or something similar; the inevitability is that law will be more commoditised and again I don’t necessarily see that as a bad thing, I just don’t see how it’s going to be regulated.”

Chaired by Paul Steven of sponsors PRG, specialist recruitment consultants, the debate ranged across the market forces at work, who might set up forms of ABS and how, the prospects for different types of legal practice, and the challenges of regulation.

Patrick Andrews of Shepherd and Wedderburn took up Flanagan’s question: “I think the short-term answer is probably not, but would that stem the flow of change in terms of the market for legal services in the UK? It certainly won’t. If Clementi hadn’t been there we would still be faced with the challenges and changes which are in prospect in the UK legal market and which inevitably impact on the Scottish legal market, including the high street.”

Looking at the way insurance companies are now directing the provision of advice for clients, whatever kind of insurance is involved, he added: “They are driving towards a consolidated position, and that is something that’s happening within the current regulatory framework, and actually the prospect of reform gives the profession the opportunity to address that and to address it in a proactive way”.

Pointing out, as did others, the potential for new providers to expand the legal services market, Andrews suggested there were two classes of clients to bear in mind: those who would continue to go to the advisers they had trusted over the years, and people who would never have thought of making a will, or taking up a whole range of legal services, until presented with the opportunity in the Co-op, or Tesco or wherever. He added: “I think that the high street practitioners should keep the faith in the quality of services that they already provide, because that is what is going to keep them in business.”

Andrew Chalmers of Davidson Chalmers supported Andrews’ client analysis: “I do agree there will be a drift away, there will be much more commoditised services, but there will be niche providers, specialist providers, and perhaps one of the outcomes will be that it will enhance the specialist.”

As both Andrews and Flanagan noted, the Co-op is already handing out leaflets advertising that they provide legal services. But, Steven asked from the chair, if firms lost, say, wills and conveyancing as entry points, would they then not lose the ability to grow their business?

Johnston Clark of Blackadders came in: “You would be nuts not to operate estate agency and conveyancing systems in private client practice and what we have to do is find ways of making these profitable. Estate agency does need volume. We prefer to have our own; a tie-up with an estate agent is unlikely to be of benefit to us.

“It’s quite interesting,” he continued, “when you speak to other professions, they say that lawyers and accountants don’t have the sort of relationships where you can have a sustaining business relationship because it’s transaction based: it’s only when something goes wrong that you ever talk to them; they are task focused, and don’t look at opportunities to build up relationships in other ways. I don’t think that round this table that would be true but I would think in many cases it would be.”

Asked for his view of the forces operating from down south, Fraser McMillan of international firm Pinsent Masons thought that while the general view there is that people are comfortable with ABSs being in place and looking forward to them being implemented next year, “the scepticism among people I talk to is precisely how law firms will take advantage of shared ownership to do something they’re not able to do at the moment”.

He added: “There are many ways law firms can innovate that don’t require shared ownership, and some firms have showed little ambition to explore those options. One of the advantages of shared ownership is perhaps less to do with the influx of capital, but the influx of ideas and management which might themselves generate the novelty and a different approach. In general, it’s very much a positive, wait and see attitude. I sense a similar approach from people I’ve spoken to in Scotland, from commercial firms.”

Neil Craig of BDO offered an accountant’s viewpoint: “Market forces push you down a certain route, that’s consumers and markets saying this is what we want. We are a small nation, so if as a small nation we say we will go down a different route and we will operate a different service to our consumers here because they are so different from the rest of the UK and the rest of the world, I just can’t see that.”

Business drivers

At a later point the chairman asked what was the clients’ perception of what was going on, and what could the impact be in terms of choice?

McGrigors’ Richard Masters thought that clients were either disinterested in, or bemused by, the current debate. He continued: “In terms of ultimately what does it mean, I think that’s quite difficult to answer at the moment. Do I think it is likely that we are about to see an influx of capital into legacy law firms, if I can call them that? No, I don’t. You will see some of that but I don’t think it will be massive. What you will probably see is advantage being taken of ABS by new entrants to the market, and it’s probably the warehouse in Cardiff or somewhere else which is pushing out commodity legal services in a very cost effective way, and people will buy it.”

Craig said: “That’s already happening though, isn’t it?”

Masters agreed: “Yes, and that’s a very important point, because if we turn our backs on this and say we are not going to embrace this legislation in any shape or form, it will happen anyway, and what we actually have here is an opportunity to try and bring some of those providers of services into the regulatory net. And it seems to me that ought to be a good thing.”

Johnston Clark and Andrew Chalmers both thought that for their types of firm, the most likely effect would be the ability to bring key people such as their chief executive or finance director into the partnership. Clark commented: “I suppose there are already partner equivalent models in quite a few firms, so it’s not a new thing, but for firms with a leveraged model, fewer partners and a big commitment to capital, why shouldn’t key people be entitled to participate, provided the public protection is there?”

Chalmers was curious about the notion of allowing the external investor into law firms, “because that brings into play the valuation of goodwill in law firms, which traditionally we’ve never done” – though he could see how it might operate in the commoditised sector.

But the proposal for up to 25% non-lawyer ownership, open to employees of the firm only, was given short shrift by Andrews as “tactical tokenism”; and by Masters as “just a nonsense”.

On the unanswered question of how ABS would actually work, Masters continued: “I think that’s being reflected in what’s happening south of the border, because there is no end to discussions in terms of what’s actually going to happen, there is no shortage of people who are keen to provide external capital into law firms. They’re there, they are actively going out into law firms and speaking to them. It seems to me inevitable that if that is the case, then it is going to happen. And we cannot then put ourselves into a position in Scotland where we have firms who want to adopt that operating model, but are prohibited from doing so. That doesn’t mean that everyone has to, it’s entirely permissive, but we’ve got to have the flexibility to do it.”

But being listed was “a completely different debate altogether. Crystal ball gazing, do I think in five years’ time there will be some law firms that are listed? Yes, I probably do. Do I think that is likely to be any of the larger commercial firms? No, I don’t. Again, that will drag back into commodity providers and I think there’s every chance of one of them being a new entrant.”

George McCracken of Grant Thornton CA came in: “We’ve been down this road slightly earlier, and how many listed accounting firms do we have? One. There’s not a lot to be frightened of, chaps. How many people access external capital?

Not a lot. So why should the legal profession be so culturally different from the accounting profession?”

Craig commented: “I’ve been partner of a firm that Tenon bought bits out of. Tenon are now going for a full listing as opposed to AIM, and a lot of that’s just about how people are going to get capital out of their business at the end of the day. It’s about succession, it’s about business issues, it’s not driven by legislation. Is there not consolidation happening in the legal profession anyway, for that sort of reason? So the market just moves in that direction.”

However, he added: “I agree with George that access to capital is not the only driver. Servicing clients has been a big driving force… people change their business model to give the clients what they want.”

To the question: “Does anyone feel that they are losing people because of this, because you can’t bring them into the equity?”, Andrews replied that he did not know of any actual instances, but if you were talking about people at the top of their profession, it was bound to be a consideration in choosing a career move whether they were going to have a chance to influence the future strategy and direction of the business they worked for.

Regulators and risks

How difficult is it to regulate a firm 75% or 51% owned by professionals, Paul Steven asked?

“I think some people make a meal of it”, ICAS’s Charlotte Barbour replied. “I don’t see any reason why you can’t get on with it and come to an arrangement”, she added as respects the professional bodies, whom she does not see as in competition with one another as long as there is a level regulatory playing field.

Patrick Andrews: “In our case we are regulated by the Law Society of Scotland, the English Law Society, the Financial Services Authority, and what we end up doing across the broad spectrum of the services we provide, is applying the highest common denominator.”

McCracken: “It’s the business stream that’s regulated, not the business. Let’s take an MDP, a big audit, tax, legal practice, at the end of the day you’re not expecting the audit business to be regulated by one of the law societies, and equally vice versa with the legal side of it.”

Chalmers: “That’s nice and cut and dried but there must be situations where it’s going to be blurred, and who takes precedence?”

Not some super-regulator, anyway – a chorus of “No!” greeted that suggestion from the chair.

“That’s what you get when you don’t have practising certificates”, Clark suggested, recalling an earlier discussion on the reasons for maintaining the PCs of solicitors not doing reserved work. “If all the big firms said you have to pay your own way, anarchy would follow and you would end up with a super-regulator.”

What about a new entrant to the market, Steven wondered from the chair: might they say we don’t see the need for all these PCs?

Chalmers: “Sure they will, that’s exactly what you would get, but they will be restricted to specific services that can be delivered in that way, by using non-qualified people – which will be quite a wide range of services, don’t get me wrong: we’re going to have to be cleverer about the way we deliver these services than we currently are.”

Jack: “And the regulators need to focus on what their job is, what is the risk in all of this… This is about risk to the clients, large or small, and focusing in on them and what you need to do between the two, three, four regulators that end up grouping together to work out where the risks lie.”

Barbour: “Do you not think there is a stronger role for a lead regulator, and having agreements, because if you are regulated by several bodies and they’re all checking on what you do, I would have thought there might be a stronger role to do something more co-ordinated.”

Jack: “Certainly for the entity, we wouldn’t want to be the regulator of professions that have strong professional bodies, but I’ve got huge sympathy for the firms we regulate that are dealing with clashing regulatory systems, and if there is a highest standard we all want to apply it if we want to aspire to be the best protectors of those we are operating to protect, so it’s challenging for me that even within the solicitors’ profession in England & Wales and Scotland we might have sets of rules that clash there.”

Caroline Flanagan said her nightmare with external ownership was not with the big firms but that criminals might find a young naïve lawyer, “and use them as their money laundering funnel, and I think the potential for that sort of difficulty is enormous”.

“Can I challenge you there”, Jack replied. “The requirements that the bill creates alone, before you start on us as a regulator, are far more onerous than for any legal firm right now. We never ask about debt and capital and source of funding. We don’t ask about over-influence of a single client just now, so what we’re legislating for is a higher standard than we apply right now…. Undue influence is a possibility right now and you can see it manifest itself in some claims on the Guarantee Fund and the like.”

Flanagan: “But I think it opens it up much more easily… you have to have done 10 years to be a partner in our system, by which time if you haven’t been weeded out you’ve done a pretty good job of hiding yourself.”

Jack: “I have more faith in our solicitor owners or even solicitor practitioners as head of legal practice in terms of that model.”

Masters: “I don’t see that as being terribly different from where we are at the moment, because if you had someone who was minded to do that, they can just as easily set up a law firm, and they might not be owners of it but they’ll provide all the funding, they’ll provide all the influence, and if that’s what they want to achieve, it’ll happen.”

Jack: “And there must be more profitable and less-well-regulated areas than legal services to invest your criminal money in if that’s your intent.”

Patrick Andrews: “If you have a commoditised legal service that’s employing 200 paralegals, and you have three solicitors holding practising certificates trying to run that business, that to me is a much greater risk, in terms of what the customer or client is getting for their money, in terms of the damage it does to the profession, and I think you guys at the Law Society need to look at how you price practising certificates for that kind of model, because they should be paying something that reflects the risks they are managing as a business, which have a direct feedback into the profession in terms of reputation, claims on the Master Policy, claims on the Guarantee Fund and hitting the pockets of everybody else.”

MDPs: learning from experience

Multi-disciplinary partnerships (MDPs) have been tried in the past: are they likely to work?

Andrew Chalmers suggested that for a small legal firm it might tend to cut off a supply of referral work if firms currently dealt with a number of practices in another discipline.

Charlotte Barbour agreed: “ICAS canvassed quite a few members to find out if there would be an interest, and we have had feedback like yours, so that might be a factor against wanting to link up in an MDP.”

Neil Craig: “In the past where there were so called MDPs, they disentangled fairly quickly, it’s just like any acquisition or merger, there are a whole lot of cultural things that stop these things happening depending on both parties, so I can’t see any desire from accountancy firms to get tied up in any real mergers with legal practices.”

Richard Masters countered: “It’s happening. Without delving too much into McGrigors’ history, we did have what you might call an arrangement with KPMG, and did that work? No, but not because of any cultural issues but because of the Sarbanes-Oxley legislation that came in from the States – that killed it. And now KPMG are still providing legal services; so are PWC; so are Ernst & Young. And it’s growing, they’re expanding, it’s not within the regulatory umbrella because what they’re doing is not within the reserved areas, but we’re kidding ourselves if we think it’s not going to grow, because it will.”

George McCracken: “MDPs would probably still be here and flourishing had the impact of Andersons and Sarbanes-Oxley not happened. I can tell you it was working. At the end of the day it’s a slow burn, long-term investment strategy, you build it and gradually it becomes a success.”

Lorna Jack: “We always jump to the large commercial accountancy MDPs, but it’s operating just now with IFAs, just not as a business partnership model, but as an employee model, and again I think you’re seeing elements of it emerging in the high street. There are a whole pile of other possibilities in that MDP world.”

Through the crystal

Where will we be in, say, five or 10 years’ time?

Lorna Jack

“With each of the three groups of clients that legal practices serve of whatever scale or size, which is large commercial customers, small high street practitioner customers (who are constantly being consolidated through third parties), and the public sector customer, whether legal aid or other, every single trend is that they are looking for more for less. They’re looking for more value, they’re looking to ensure that the bit that is the highest level of expertise is what they’re paying for, and they want you to commoditise the rest, outsource the rest.”

George McCracken

“The only thing that will save you from commoditisation is differentiation of your service and your delivery of that service. If you believe in that, you’ve got to believe in it wholeheartedly to see you through and there will be weaker members in professional practice who will fall by the wayside, but the good firms will stay firm and there will be a flight to quality among individual clients.”

Patrick Andrews

“I think the landscape will be very different. We will see a significant level of consolidation. I think we will see quite a marked split in terms of the kind of legal services that are being delivered on the high street, those that are being delivered by the commercial firms, and those that are being catered for by new entrants, the commoditised services, and we will see quite a diverse array of both service providers and modes of service delivery. I don’t see any of that being a threatening proposition.”

Charlotte Barbour

“I think the Scottish Government is trying to encourage a legal profession which offers “added value” services to Scotland, and beyond, to other parts of Britain, Europe, and wider. So it’s there to be made the most of, and we certainly seem to be getting support for that which is great. If we can do it on an even wider basis for professional services rather than just legal services, well, that’s good for us accountants too.”

Caroline Flanagan

“I think the biggest difficulties, certainly with my end of the profession in the next 5-10 years, are going to be driven by the recession and the changes coming out of that. And whether ABSs will help us or not I really couldn’t say, but it is clear that there are some opportunities there. If I were to crystal ball gaze I can see sole practitioners, and two partner firms ending in 10 years’ time, unless they are boutique practices.”

Johnston Clark

“If you’re poor and criminal, if you’re poor and need civil work, with the exception of matrimonial, or if you’re a matrimonial practitioner for poor people, you’ll be in the hands of the Government. If you’re selling commodity-type services to people in their 20s or 30s, you’ll be doing it over the internet. Most firms outside the big cities will either shrink down a bit or die. But if you can build up your own client capital by making sure in a high street practice that you can cross sell, build relationships, all the things that every other professional services firm has to do, then you will probably be OK as long as you run your practice prudently and ensure that you’ve got succession in place.”

Fraser McMillan

“I think ABS will happen in Scotland and that we should embrace the chance to explore the options. It’s hard to imagine the brave new world post-ABSs. Partly it’s because we’re looking at it from the perspective of what we’re doing currently and how we’re doing it. I think the innovations are going to come from fresh entrants into the market and that individual solicitors’ firms are going to pick out ways of using this model to do things that are a bit different. The most successful firms thrive on innovation and we would be remiss to see this as anything but an opportunity.”