One of the most radical of changes to the legal market as a result of the Legal Services Act 2007 (LSA) was the introduction of Alternative Business Structures (ABSs) which are law firms owned partly or wholly by those outside the legal profession Whilst some considered that this would reshape the legal profession in England and Wales it is worth reflecting as to whether this is indeed the case 10 years on.

How it all began

There is little doubt that the policy intention of the LSA was to re-shape the market. In 2001 the Office of Fair Trading indicated in its report Competition in Professions that there were a number of potentially unjustified restrictions to competition in the legal services sector.

In its report “Competition and regulation in the legal services market” (July 2003), the Government expressed support for the principle of enabling legal services to be provided through ABSs. It was predicted that ABSs would provide an “opportunity for increased investment and therefore enhanced development and innovation, for improved efficiency and lower costs. . . The Government accepts in principle that new business entities such as multi-disciplinary partnerships and corporate bodies should be allowed to provide legal services”. It was also thought that allowing lawyers and non-lawyers to work together on an equal footing would better serve the needs of consumers, and that if external investment was possible, new business structures would give legal providers greater flexibility to respond to market demands.

Has the LSA met those aims?

The Legal Services Board (LSB) reported on ABSs and investment in legal services in June 2017. There had been 950 ABS licences issued by four licensing authorities and as of March 2017 there were 892 active licences. Only a minority of these ABS firms were new to the market, with the majority being existing legal service business converting to ABSs. The ABS model can be very attractive to existing law firms who wish to reward their senior professions in say finance, marketing and HR. These are not radical new entrants to the market but simply a variation on the existing model.

The current Licensing Authorities and Approved Regulators are listed below:

  • Council for Licensed Conveyancers (CLC)
  • Solicitors Regulation Authority (SRA)
  • Institute of Chartered Accountants in England and Wales (ICAEW)
  • Intellectual Property Regulation Board (IPreg)
  • Bar Standards Board (BSB)
  • Chartered Institute of Legal Executives (CILEX)
  • Costs Lawyer Standards Board
  • Master of the Faculties

The LSB’s overall conclusion was that there had been a low level of external investment in the legal market (only 12% of ABS surveyed used any form of external finance) and it was mooted that this was a symptom of weak competition in the market overall. Without competition, there is little incentive for law firms to take greater risks involved with using external capital. To that extent, it can be concluded that the introduction of ABSs has not had a significant impact on the legal market. However, on the positive side, it was not thought that legal services regulation was a significant barrier to investment.

Impact

The overall majority of ABSs have been existing legal businesses and so from a consumer perspective the perception of the legal market might not be drastically different to life before the LSA. From a lawyer’s perspective, the potential threats of non-lawyer competitors have not come to fruition. Whilst the LSA’s introduction of ABSs and licenced authorities was radical, it is probably fair to conclude that it has not resulted in itself to radical changes to the legal market.

Have ABSs been successful businesses?

The statistics analysed by the LSB confirm that not all those who made applications are still active ABSs and there have been some well reported closures in the legal press. Some might argue, that ABSs are no more unsuccessful than other traditional law firms and given that they are an innovation many are doing well when considering that they are the new kids on the block. So whilst there have been instances of ABSs closing, being bought out or facing difficulties, some traditional law firms have not fared well in recent times either.

Conclusion

Looking back 10 years it seems that there was not a pent up demand for new, radical, ABSs simply waiting for a regulatory framework to enable them to be unleashed. Both new providers and clients have been slow to evolve. Even though the regulatory model is permissive, England & Wales is still waiting for its Uber moment.