The substitution of the term “legal services provider” for “law firm” is used advisedly when referring to how the practice of law is evolving with the passage of the Legal Services Act (LSA) in the U.K. It’s opened the door for the expanded network of self-regulated professionals to form legal disciplinary partnerships (LDP) and for both LDPs and law firms to raise capital by forming alternative business structures (ABS) and attract outside investors who are non-lawyers.
The long standing historic rationale for only allowing licensed lawyers to own a law firm through a partnership process has been that only lawyers can offer clients the unique service of solicitor client privilege/confidentiality. A substantive body of law has broadened the original narrow definition of confidentiality to include in-house counsel in organizations and support staff working under the direct supervision of lawyers in prescribed situations. The LSA has further expanded the scope by permitting non-lawyers to become investors so long as lawyers retain the control of the law firm and safeguards are on place to preserve solicitor client privilege/confidentiality.
At the outset, there was a flurry of media coverage speculating that t ABS capitalization would facilitate creation of gargantuan law firms with access to capital to buy out and/or force corporate type mergers with law firms in other countries and “go global”. At the other end of the spectrum aggressive retailers like Tesco (U.K. supermarket chain) would set up ABS organizations and install on premises law firms. Both scenarios or adaptations thereof may eventually come true but that isn’t how the process is unfolding in the short term.
First off the mark has been the formation of LDPs. A high performance legal executive is adding considerable value to a firm. Many law firms had replaced solicitors with licensed conveyancers to manage their residential real estate practices. Law firms had also opted to bring cost lawyers on board to manage billings up front rather than risk litigation by a cost lawyer representing a client disputing a legal bill after the fact. Permitting them to participate in firm ownership and share in the profits is providing a remedy to what has historically been an unfair situation and inequitable operational structure.
The ABS structure is more complicated since it will encompass persons and organizations that are not members of a self-regulated legal service provider. Every ABS must be linked to a self-regulated provider with oversight criteria that’s approved by the independent Legal Services Board (LSB). A self-regulated body must make an application to the LSB and demonstrate it has the requisite expertise and operational framework in place to supervise an ABS, no easy task. Organizations that can demonstrate they have a service relationship that is best regulated by that self-regulated provider can then apply for ABS status. It is envisaged that the Solicitors Regulatory Authority (SRA), Bar Standards Board(BSB) and Council of Licensed Conveyancers (CLC) will play lead roles in being licensed as ABS regulators. Although the LSA was passed in 2007 the first ABS wasn’t licensed until 2011.
Every ABS must have a designated “Head of Legal Practice” who is a licensed member of the self-regulated body granted ABS supervisory status. Think of that person as the managing partner. They have the primary responsibility and ultimate authority to ensure that all licensed and non-licensed providers and regulated activities conform to the dictates of the self –regulated legal service. Every ABS must have a “Head of Finance” who is approved by the regulator with responsibility for and authority over the administration of funds. Any non-regulated person or entity with more than a 10% ownership of an ABS that must be reported to the regulator as a person or organization with a material interest and satisfy the regulator they will not attempt to influence the ABS in a manner that will comprise or contravene its regulatory operational requirements. Independent trade unions, non-profits and community enterprises will be subjected to a lower standard of compliance.
The CLC was the first off the mark in being granted ABS regulatory status. The major property conveyancing firm for the U.K has been granted ABS status under its auspices with the intention of installing conveyancing offices in an as many as 1,000 bank branches. To date, approximately 20 other inquiries have been made, including a number by solicitors considering opting out of the SRA and becoming licensed conveyancers in order to obtain ABS status. In spring of 2012 the SRA became an approved ABS regulator. The rush is on with approximately 130 ABS applications in the pipeline. Rumors abound about talks between the London “magic circle” (big 5) firms with more than 1,000 solicitors per firm and one or more of the international accounting firms to create global professional services providers. But for the present most of the ABS activity involves medium sized firms with limited capital partnering with closely related service providers in an ABS structure; thinks insurance claims administrators and litigation firms. One enterprising barrister has set up an ABS Barristers’ Chambers under the auspices of the BSB with the objective of providing innovative fixed fee litigation services directly to the public, bypassing the traditional solicitor referral.