In this article we reflect on the UK legal market seven years after the “Tesco Law” big bang and highlight one very innovative project we advised on, involving the establishment of a major new member-owned ABS1 on an outsourced basis.

With the media reporting “rip-off Britain”, the Barbarians at the Gate, aka New Labour (as part of their wider modernisation agenda) decided it was time for change for our cossetted professionals. The Legal Services Act 2007 blew open the padlocked doors of the profession, bringing to an end centuries of self-regulation and “unnecessary” red tape which limited the ownership and management of law firms to lawyers only. Why this particular change was felt to be a priority was never clear but the Act, as a whole, was thought to be all in the best interests of consumers, providing them with better, cheaper access to “Tesco Law”.

Critics of the new ownership rules (which included lawyers’ bodies in Germany and the US) said that third-party ownership is fundamentally at odds with core values of the profession. They feared non-lawyer owners would inevitably influence the relationship between the employed lawyers and their clients and one way or another restrict lawyers from free exercise their professional judgement.

Sir David Clementi himself (appointed to carry out an independent review of the legal services market) concluded in 2004, that given the nature of the services, any changes on ownership should be made with caution on a gradual basis, with the majority ownership and management control remaining in the hands of lawyers. Westminster MPs, decided Tesco Law was the way ahead. They concluded Sir David was being far too cautious, going the whole way to abolish once and for all, all rules restricting the ownership of law firms to lawyers only. Those in favour of opening up the market predicted consumers would benefit from cheaper services, through economies of scale, more innovation, better IT all funded through new capital investment into a profession long overdue for modernisation.

Lawyers tend to be introspective about lawyering. They worry about professionalism and reputation. Do these systemic changes matter to consumers? They are, of course, the people the profession exists to serve.

We expect that most clients will not be too concerned whether their law firm is owned and managed by non-lawyers, as long as it provides good service at an affordable price. And for some kinds of clients, there may strong perceived advantages in instructing a law firm that is owned by organisations with which they support personally.

Things have changed a lot since 2001 when the planned market liberalisation was first devised. At that time, the big bang for banks was generally regarded as a success. Banks were merging with each other and markets booming. Labour had abolished to old cycle of boom and bust. In passing law to liberalise law firm ownership in 2007, MPs discounted the risk and were confident consumers would be the ones to benefit. At the moment there is nothing obvious to counter this view but the same thing was said (prior to 2008) about similar changes to the banking sector in the 1980s. When the Bank of Scotland merged with Halifax in 2001, who could have foreseen that within just seven years, the Bank of Scotland’s 300 year fine reputation for prudent banking would lie in ruins, after a corporate lending spree leading to unimaginable losses. Total insolvency was narrowly avoided by a last minute £37bn bailout.

We are no longer quite so confident that “markets know best” and that many of the old rules are “unnecessary”. MPs today may not be so certain that consumers would inevitably be better off if a supermarket did their conveyancing or pursued their accident claims. Following the collapse of the banks in 2008, we are no longer so confident that regulators are all that is needed to back up “light touch” market regulation. Traditional law firms are owned and managed by lawyers who (with a small number of exceptions) live and die by the conduct rules. Each one of them serves as a regulator of what the firm does. ABSs could quickly become a thing of the past if malpractice, conflicts of interest, negligence or mishandling of client money hits the headlines. Effective monitoring and swift enforcement to prevent abuse by the regulators will be vital for the long term success of the new ownership model. Where things do go wrong, it will be the regulators and not the shareholders who take the blame in the press.

During the passage of the Legal Services Bill there was much talk about a big bang for lawyers and a bonfire of red tape and restrictions. It may still be too early to assess the full impact of liberalisation but seven years on, it is clear the big bang has been a slow process. The launch of ABSs was delayed as four years passed before the Solicitors Regulation Authority (SRA) was approved to licence ABSs (December 2011). In addition, the planned reduction in red tape never happened. Indeed the opposite occurred with the already weighty SRA Handbook being expanded to include detailed rules relating the licensing of ABSs and approval of their owners and managers.

Despite the “slow bang” there is no question the profession is changing and new investment coming in. Since 2011, the SRA has received over 300 ABS applications. Licences have been applied for (and in many cases) granted to insurers, local authorities, fire services, charities, BT, major accountancy firms, trade unions, the AA, Saga and many others. The latest concepts currently trending in the ABS world are: outsourcing, commoditised legal services, pop-up ABSs and accountants selling legal services.

The demise of Arthur Anderson as a result of the Enron scandal serves as a reminder that hard won customer trust and reputation can be lost without warning: this is especially true in relation to professional services. To protect its brand, any company considering moving into legal services via an ABS, especially where any function is outsourced, needs to take great care to ensure the right processes, structures and services levels are put in place from the outset.

The RPC Outsourcing team recently advised on the highly innovative and successful “turnkey” contract for the establishment, licensing, operation and management of a new member-owned ABS law firm, set up to provide legal services to almost 1m members. The project required a multi-skilled team, drawing on expertise from our specialist regulatory, outsourcing, corporate and commercial lawyers. The corporate structure involved two LLPs with crossguarantees and separate membership agreements. The outsourcing agreement covered all aspects relating to the creation and licensing of the ABS, its hosting and operation (through a range of support services including ICT, FM, payroll, reception, and accommodation) as well as provision of the key regulatory officers, namely the head of legal practice and head of finance and administration.

All of our team had input into designing the optimum tiered-management structure, delineating the line between owners and managers, having regard to their respective duties, whilst at the same time meeting, not only SRA requirements but also our client’s own internal and wider commercial needs.

Finally our commercial and regulatory specialists advised on the terms of the retainers with each of the panel firms engaged to perform services on behalf of the ABS’ clients. Like any regulated sector outsourcing, high levels of control and reporting run right through the documentation in each instance is tempered against the service provider’s need to be able to get on and run the operations, on a day-to-day basis.

The owners of the new ABS believe it will increase access to justice for its members. The scale and structure of this ABS is therefore an exciting and innovative example of the change and opportunities brought-in by the Legal Services Act 2007.