Into his stride

October 2011 was to be the month of climax regarding the introduction of alternative business structures (ABS) in England & Wales – the time when virtually any business model for providing legal services became open to regulation by bodies such as the Solicitors Regulatory Authority. It hasn’t quite happened that way, though that outcome is likely to be achieved by early 2012. So what does it all mean for Scottish firms operating south of the border, who were anxious to have a level playing field with their English competitors?

One person taking more than a passing interest in the scene down south is Chris Smylie, recently into the chief executive’s seat at Maclay Murray & Spens. Being neither a corporate lawyer nor someone who has been at MMS since his trainee days, but a planning specialist who joined as a lateral hire from Ledingham Chalmers in 2000, he is something of a new departure for the firm in holding the role.

Ironically, having been London-based for the past couple of years, he now finds himself having to spend most of his time back in the firm’s three Scottish offices, due to the demands of his post. “It would be nice in one sense to say there are just one or two big things that are occupying my priority list,” Smylie comments, “but the reality is, given where the profession is and the challenges that are facing it, and similarly the economy, there are a lot of challenges and priorities to be faced up to.”

Succeeding the high profile Magnus Swanson, Smylie speaks of having “big shoes to fill” – though with his 6ft 6in frame and his track record as an “Iron Man” triathlon competitor, among other sporting achievements, you would not expect him to find the task unduly daunting.

Turning the ship

Before turning to ABS, we run the rule over his firm, and the legal market generally. With or without the regulatory reforms, one of Smylie’s challenges is repositioning MMS for the changed business climate: the last published results showed that turnover had not yet reversed the decline of the recession, though profits had. Smylie says that corner has now been turned, but his strategic imperative, in getting MMS back on the front foot, is to grow the firm “in a sustainable and profitable way”. Turnover reflects the reduced number of partners, and fee earners, since 2007-08, “but the important thing, and I’m very keen to get this message across, is that it’s not just about scale. Scale is an important measure when you get to our sort of position in the marketplace, but it has to be profitable, sustainable scale to make sense”.

Smylie doesn’t expect a massive resurgence in the market over the next 12 or 24 months. Where, then, does he see the best prospects for growth? Among “a number of very strong areas”, he singles out energy, and the oil and gas sector in particular. “Unlike other parts of the corporate arena at the moment, there is a lot of deal activity happening there.” Alongside that, MMS is also putting more resources into an already large renewables team, as that sector claims an increasing share of the energy market.

And the prospects for Scotland compared with London? “Undoubtedly the economic conditions in London are stronger across most sectors of the corporate arena, there’s no question about that. In fact, in many senses the recession has been more of a blip than a big bite out of the London economic scene.

“Having said that, I don’t regard it as a picture of doom and gloom in Scotland. How the market recovers and the extent to which it recovers remains to be seen, but there is a lot of entrepreneurship going on in Scotland, a strong entrepreneur spirit that augurs very well for the economy in the longer term.”

ABS: it could be you

Such is the scene into which the newly constituted ABSs could make their appearance. Some will undoubtedly launch; but what of the major London firms who were, at one time at least, assumed to be the most likely to seek external investment? An assessment carried out for the Legal Services Board in England & Wales reported last month that City firms were reluctant to cede control to obtain such investment. Smylie and MMS are not about to buck that conclusion.

“We’ve considered things, and we keep our options open, but we have no current plans”, he says. “The reason for that is we’ve got a pretty clear idea of where we’re going, and we believe that we have the resource and the ability to get there ourselves without having to seek external investment.

“Having said that, it is very much a ‘watch this space’ situation, and if ABS develops in a way that changes the face of the profession, we’re going to have to respond to that and make sure that we are structured accordingly. So it’s a ‘never say never’ situation, I think.” But like others, he welcomes the chance to bring non-lawyers into the partnership. “For example, the head of our advisory division is an accountant, not a lawyer, by profession, and as a result she can be a director of our business but not a partner, which frankly seems a little bit silly because her contribution to the business is every bit as worthwhile as a head-of-division lawyer.”

Interestingly, like Philip Rodney in last month’s interview, Smylie believes that the most immediate effects of the new market will be felt in high street and commoditised work. He adds:

“If it proves to be the success that I think the private equity houses imagine it’s going to be, then they will look at what opportunities exist within what we lawyers regard as more mainstream premium legal services. That said, the traditional partnership structure of a premium quality law firm doing premium quality work at that very high level, is probably not one that’s going to commend itself enormously to the venture capitalists, because they won’t see the same opportunity for provision of a commoditised service within that.”

However he warns against complacency. “I think there are opportunities within the provision of pretty much the full range of legal services for external investors to be interested in a different model for delivery. The legal profession needs to be alive to what might be quite significant structural changes that will follow as a result of that type of external interest in how to run law firms.”

That includes Scotland, he believes, even though private equity houses will be less keen on the minimum 51% ownership by regulated professionals, stipulated in the 2010 Act.

Don’t overburden us

Operating on both sides of the border, MMS’s business is regulated variously by the SRA and the Law Society of Scotland. The former body is moving to what it calls “outcome-focused regulation”, which is intended to focus on standards of service and to give good firms more flexibility in how they operate, but which has not prevented the SRA producing some bulky codes of practice. I wonder whether the regulatory burden is noticeably different as between the two jurisdictions. Smylie reckons it’s too early to pass judgment on the new English approach. He adds: “I think we just fundamentally accept that the profession is one that is quite heavily regulated, and there are perfectly good reasons why. I don’t think that I would describe the level of obligation or bureaucracy that’s attendant on it at the moment as overbearing. Equally, I’m trying to run a business, like any other business, and I don’t want the level of bureaucracy associated with the regulation of our profession to get to a point where it detracts us from running our business efficiently.

“My message to the Law Society here, and my message to the SRA and the regulators down south and to the Law Society there, is bear in mind that we’re trying to run businesses, and if we add £20,000 or £30,000 worth of costs to do something on the regulatory front, that’s one less job that I can offer to the market. I think that’s quite important.”

One way and another, the environment within which all firms operate is set to change. Our discussion takes place just after news breaks that Dundas & Wilson are considering a merger with 48-partner London firm Bircham Dyson Bell. Smylie expects to see an increasing element of such consolidation within the marketplace. “I think it’s clear that as respects those whom we regard as our competitors here in September 2011, in two or three years’ time we might be looking at quite a different legal landscape. We will play our part amongst that consolidation process if the right opportunity presents itself, there’s no question about that, but again it comes back to the strategic imperative of growing this business in a sustainable, profitable way. And simply adding scale for the sake of it is quite a dangerous strategy in my view.”

ABS regime slips to the New Year

Meanwhile, has everything gone quiet on the ABS front in Scotland? Not so, though the timetable for likely introduction has slipped by some months, as Philip Yelland, the Law Society of Scotland’s Director of Regulation, told the Journal.

The original indication was that the Scottish Government would have regulations and guidance in place late this year, allowing the Society to finalise its regulatory model, apply to become an approved regulator and then begin licensing probably next spring. Through regular contact with the Government, the Society understands that the initial regulations will not be finalised until early 2012, with the result that the first licensed providers of legal services could be approved in the summer.

As in England, one issue to be resolved is that regarding spent convictions of anyone wanting a stake in a licensed provider. “We’ve always said we think that type of information needs to be available to us as an approved regulator, to consider whether someone is fit and proper to be an owner”, says Yelland. “At the moment we’re talking to Government about what they need to do to ensure that’s the case.”

Other matters have emerged, including the definition of legal services (perhaps not as wide as the approach currently taken to solicitors’ business); financial compliance oversight if another regulator seeks to rely on the Guarantee Fund; and even how registered European lawyers would operate within licensed providers.

The first regulations, expected shortly, will it is understood set out the categories of regulated professional capable of making up the required 51% majority ownership of a legal services provider. The Society is waiting to see whether these are as proposed in the consultation earlier this year, or include any others.

Although much is still to be finalised, the Society now has a draft handbook for those may be interested in becoming licensed providers, “and we’re happy to share that with people so they can see the approach that we’re likely to take to licensing and registration”, says Yelland. “And also to understand what types of business model people might potentially come forward with. We’ve looked at what some might describe as some of the more obvious ones, and looked south of the border, but we’re keen to share the handbook and talk to people so we can give thought to whether the models that may come forward would fit into our registration and licensing regime.”

To date, the few informal approaches to the Society have mainly been from current firms who might be looking to restructure, and as with incorporated practices, for example, the initial uptake may be slow until the new model proves its worth. It remains to be seen how potential entrants to the market from outside, such as the Co-op in England, will consider the 51% rule that applies only in Scotland.

So far, also, no one has emerged as a likely regulator alongside the Society and the accountancy body ICAS, which is considering whether to apply. The Act allows for three.

The Society has recognized some potential cross border issues and is talking with the SRA on the effect on firms with cross-border practices, among other things. He suggests however that the difference may be more in the way in which compliance is measured, than with the core practice rules themselves.

His main message to practitioners is, “If you are thinking of becoming a licensed provider for whatever reason, please talk to us. Because we already know from those we have talked to that there are different motivations for different firms, and different types of business structure. We’ve got the draft handbook available; we’re happy to talk people through that; we would welcome input.” And once the Society is in a position to apply to become an approved regulator, it may offer to consider provisional applications from those seeking licences, as the SRA has done.

The Society also wants to be able to say, when presenting its regulatory model to Government who have to approve it, “that we have been talking to people and we do understand that the types of model which are coming forward are capable of being regulated through our model”.

Look out for more on this around the turn of the year, when it is hoped that with publication of the Government regulations and guidance, the way ahead will be that much clearer.