Conference on external capital and cooperation with other professionals, Brussels, 23 November 2012
Dr Patricia Greer, Chief of Corporate Affairs, The Law Society
Good Morning,
It gives me enormous pleasure to be invited to talk about alternative business structures (ABS) - not least because I know that some of my international colleagues and friends view them with some degree of scepticism.
I welcome any opportunity to explain the reasons why I - and the Law Society of England and Wales - think there's no need to be as afraid or as cynical of them as some appear to be.
ABS in their most simple sense allow for external capital, ownership and management of law firms.
The thinking behind ABS is that any business structure that can satisfy the regulator that the interests of its clients, and the independence of the lawyers working in it, are protected, is entitled to be licensed as an ABS.
This means, for example, lawyers and non-lawyers are allowed to share the management and control of a business which provides reserved legal services to the public.
It also means that reserved legal services can be provided alongside other professional and non-professional services.
I see ABS as part of the evolution of legal services. Consumer and business expectations are changing and the way that services are provided has been evolving.
Before ABS became a reality, all sorts of creative and innovative ways of delivering services were provided by traditional partnerships and, and I have no doubt this will continue.
I don't believe that goals or regulations can make something happen that consumers and markets are not demanding. Governments and regulation can however remove barriers and enable things that the market is already seeking to happen.
ABS enables innovation through the availability of external funding and the vigorous cross-fertilization of ideas that comes from different professions sitting down and providing client services under one ABS roof.
There is an obvious attraction to clients who may find it easier to have an estate agent or solicitor working together. Or to entrust their probate, or their conveyancing, to their bank.
It may prove an attractive option to businesses who see opportunities to pursue economies of scale. One rather than multiple offices, shared rather than individual functional services such as HR or facilities.
Businesses will benefit from bringing together a broader range of specialist expertise but still managing to keep overheads screwed down as tightly as possible.
This is not aspirational. Recently we have seen how the AA (a roadside recovery service and insurance provider) and SAGA, a provider of holiday, insurance, money and health services to the over fifties have dipped their toe into the English and Welsh legal services market.
Both businesses are likely to stick with their established markets, with SAGA looking to provide wills, estate planning, probate and conveyancing services and the AA likely to help with Personal Injury claims for its members who suffer accidents.
In England and Wales, we are, as you will know, a split profession.
Our lawyers are solicitors and barristers.
That division was originally based on higher court advocacy being reserved to barristers and the conduct of litigation (and some other non-contentious legal services) being the reserve of solicitors.
With solicitors gaining higher court advocacy rights, one of the key planks supporting the division of the profession has already been removed. In addition, as ABS make inroads into the market there is some speculation that increasingly both barristers and solicitors will practice under one Solicitors Regulation Authority (SRA) regulated entity.
Not least because there is likely to be competitive advantages and efficiencies to be gained from having the full range of dispute resolution services under the same roof.
Will this lead to the blurring of lines between solicitors and barristers? I believe that it may do.
ABS provide a means for widening access to legal services by introducing cutting edge services; operating longer opening hours and providing more services via modern communication methods - although all of these can be (and in some cases already are) achieved by traditionally-structured firms.
Early evidence suggests that the Co-op are intending to do just that. Provide fixed fees, online advice and longer hours.
It is incongruous this is seen as revolutionary. Shoppers have been shopping smarter for a while now. They expect to be able to shop around for the best value and most convenient service for them.
Consumers want to know what they are going to pay in advance, and have clear ideas about what they expect for that. They want to be able to look online and talk to someone outside of their working hours. They want their service providers to look smart, professional and up to date.
So while some new ABS's might be smarter about this, understand their consumer better, and drive this change - it follows that more traditional law firms will need to follow in their wake if they are to compete effectively.
The enabler might be regulatory change, but it is not incorrect to say it is a necessary response to market change.
Some solicitor firms may benefit from the introduction of professional 'managers'. But overall, many ABS will be recognisably solicitors practices, simply with added features that are not now permissible, such as non-lawyer partners or external investment.
Either aspect may bring competitive advantages with it, but not necessarily unfair competition.
I would urge you not to equate ABS with 'big', which I think is an assumption that is often made.
ABS is a term which covers a wide range of possibilities.
Our regulatory body, the Solicitors Regulation Authority names eleven types of ABS firms from the big brand juggernaut 'Tesco law and accountancy' to a smaller high street firm making their office manager a partner.
And we have seen both of these types of firms in the initial application process. Although instead of Tesco we have 'the Co-op' which is a recognised brand and service provider on the UK high-street.
Some ABS will have greater access to capital for expansion or IT investment through external investors.
Others may benefit from economies of scale through offering other professional services as well as law.
In addition, some new entrants may have the marketing advantage of a national brand, even if it is not an established reputation in legal services.
These potential advantages are marginal, rather than fundamental, and in principle not enough to enable other solicitors in non ABS practices from continuing to compete effectively in the market, so long as solicitors are innovative, efficient and market themselves effectively. They need to continue to evolve to met changing consumer or business and market expectations.
The ABS can help firms like our President's, which has innovated from within a traditional structure for many years.
Our president, Lucy Scott-Moncrieff, has a 'virtual' firm, which is the name we give for firms that use IT to create an identity, rather than an office, or offices.
It started 25 years ago, in 1987, when she worked as a mental health lawyer and freelance criminal advocate.
Her firm has gone through a number of transformations that all pre-date ABS.
However, within the structure of a traditional firm, Lucy Scott-Moncrieff created something that was unique (I think) when she started, and is still uncommon.
There are now about 60 lawyers in the firm, mainly doing legal aid work, but also other private client work, and they are based all over the country.
The main differences between her firm and others is that her lawyers are self-employed and they work from home or their own offices.
She will confess that she has a small office in North London which accommodates admin staff, but apart from our Headquarters at Chancery Lane, Lucy's office is her kitchen table looking out across her garden.
These two differences make it possible for her firm to keep overheads screwed down tightly, allowing her to pay lawyers 70 per cent of what they bring in, which is about double the norm in England and Wales.
While legal aid rates are very low, this relatively high remuneration means attracting high quality, senior lawyers to do this important work.
The other difference between this firm and many others is that there are no ownership opportunities within the firm; people are free to develop their portfolios of work, or to mix work with other interests and responsibilities, but they are not in competition with each other for advancement to partnership.
There are supervisory and management roles which people can take up from time to time, and for which they get paid, but the even-handed and non-competitive ethos of the firm would not survive if it were possible for people to be 'promoted' to ownership status.
As a result, this virtual firm is attractive to good lawyers who do not wish to become partners or business people or bosses, but who also do not wish to remain as assistants or employees. They can practice law while the firm deals with regulation, practice management and business development.
Lucy will confess she has become dissatisfied with this arrangement as she feels that people who work in and for the firm should have an opportunity to share in its success, over and above what they get through their own efforts.
Under the pre-ABS regime, profit-sharing is only possible for the owners of law partnerships or limited companies, and those owners also have to take full business, compliance and managerial responsibility for the organisation.
However, people in Lucy's firm don't want to have to accept these responsibilities, and, helpfully, the ABS regime has now provided a solution, so she is in the process of applying for regulatory approval for her firm to become an ABS.
If the regulator grants the application, this new company will take over from the limited liability partnership, with directors instead of partners, and all the obligations to comply with company law.
As there will be no regulatory restriction on the classes of people who can own the business (although a tough 'fit and proper person' test applies to anyone who can influence how a firm operates), this will allow her to offer shares to the people who work in the firm, so that they will have a share of the profits without any of the burdens of business management or the firm's regulatory compliance requirements.
It will also make succession planning a great deal easier, and make it possible for the firm to survive her retirement with ease.
For the lawyers in the firm, there will be no day to day difference at all from the current regime, unless they buy shares, in which case they will get dividends!
It seems to me that the ABS regime, although as well as introducing new competition to traditional suppliers of legal services, also offers opportunities for existing suppliers to restructure, and meet the changing needs of the market and the challenges of the recession.
There are a number of business models that might well suit traditional law firms much better than what they have at the moment, and we have seen all manner and composition of firms applying to be ABS, including one fee-earner who has made his wife a partner in the business to deal with the management side.
I'll not be too unduly negative if I say there is no point in pretending that there are no risks attached to allowing external ownership and capital from non-lawyers into a profession which is, at its very core, committed to pursuing the rule of law with our duty solely to the client at the forefront of our mind.
But there have been strict measures put in place and the Law Society has campaigned strongly for a level regulatory playing field.
Legal Professional Privilege (professional secrecy) is a fundamental right of clients. Information held by an ABS will still be subject to privilege and will be protected as normal.
This protection for the giving and receiving of legal advice arises, in part, from the trust placed in solicitors and barristers by the courts. The fact that an authorised person is regulated to provide reserved legal activities in accordance with the Legal Services Act 2007 is indicative they are entrusted to protect their clients' rights, including each client's right to confidentiality.
The approved regulators are important custodians of these clients' rights and should take action if those rights are abused. ALL ABS have a Compliance Officer for Legal Practice, ensuring an authorised lawyer supervises all compliance activity.
Whatever the future of our legal services market I am confident that English and Welsh lawyers will continue to deliver legal services to an exceptional standard, meeting the needs of their clients.
The Law Society looks forward to working with all the management of ABS, as we do with other practices in pursuance of our core role in supporting all solicitors, in whatever environment they practise and protecting core principles around justice and the rule of law.
Thank you.