Over the past few weeks we’ve examined a number of recent trends in the UK legal market, such as a re-emergence of strategic redundancy programs and increased M&A activity among UK law firms. As the third instalment in this tripartite series, today’s post examines new innovations in UK law firm ownership and funding brought about by the enactment of the Legal Services Act 2007.
The Legal Services Act 2007 is felt by many to be one of the most important legislative changes made to the rules governing English and Welsh law firms in recent history. In essence, the Act paves the way (subject to regulatory approval) for external financing of law firm partnerships by private equity investment or flotation on the stock market, and allows non-lawyer professionals to become partners and participate as active owners of the business. Firms are also able to offer non-legal services to clients from within the same entity, thus becoming multi-disciplinary practices.
2012 marks a pivotal year for the Act’s roll-out, as Alternative Business Structures (ABS’s) become fully operational for the first time. Firms wanting to take advantage of the extended ownership rule and raise equity from a broader base of non-lawyer partners, or are looking to receive external funding from outside parties, are required to convert to an ABS.
In January, the Solicitors Regulation Authority (SRA), the independent regulator of solicitors in England and Wales*, began taking ABS license applications from law firms, with close to 100 applications filed in the first month alone.
Although a number of law firms have voiced frustration regarding the length of time it has taken to secure a license from the SRA† – as of this week there have only been 21 applications granted – indications point towards a raft of new license approvals over the coming months, with as many as 30 in late stage approval.
So far many of the approvals have been concentrated in consumer legal services segments, as well as small, ‘high street’ practices. This is not unexpected given the driving aim of the legislation was to increase competition in the legal profession and to improve the delivery of legal services to consumers.
Last week saw two important developments in the application of the Legal Services Act. The first involved the licensing approval of Top 20-ranked national firm, Irwin Mitchell. Not only was it the first large firm to receive a licence, but also the first firm to receive a ‘multi-licence’ ABS‡. In addition, insurance firm Parabis received its ABS approval, allowing it to finalize £50 million of external investment from Duke Street Capital, the first private equity-backed deal to be ratified by the SRA.
Irwin Mitchell has been one of the strongest proponents of ABS conversion and has carefully positioned itself to take advantage of the regulatory changes. The firm was among the first firms to promote non-lawyers to its equity structure and the ABS approval allows two senior executive hires from PwC and KPMG to fully take up positions as parent company Chair (IMCO Holdings) and Chair of the company’s audit committee respectively.
The firm has also indicated that it is investigating the addition of non-legal business service offerings and may potentially accept external investment to help fund the acquisition of either legal and non-legal businesses. When the firm submitted its ABS application, Chief Executive John Pickering was quoted as stating:
“There could be M&A activity. We already are a multi-disciplinary practice in the sense that we have subsidiary businesses. The ABS structure would allow us to integrate and also possibly add new services. We want to take a more holistic approach to client needs and when you see it from that perspective, the possibilities really are endless”.
Parabis has also outlined plans for a significant expansion drive which could include up to five new acquisitions before year end to diversify its business into a legal process outsourcer. With further ABS conversions within large UK law firms expected shortly (two further Top 30 firms, Kennedys and Hill Dickinson, have also applied for ABS conversions), the UK legal market landscape could look substantially different in a relatively short space of time.
Posted by Tricia Pelton
* Part of the Law Society of England and Wales, the SRA is tasked with setting, monitoring and enforcing standards for solicitors, as well as disciplinary matters. It was formerly known as the Law Society Regulation Board.
† The SRA has justified this time lag as it has aimed to build a robust application model and build confidence in the process in an historically cautious and conservative profession
‡ Five different entities within the Irwin Mitchell Group are covered under the ABS, including its commercial legal business, a debt collection service, insurance claims handling business and trusts and estates focused entities