Ten years of Alternative Business Structures
Incredibly, it has been ten years since reforms to the Legal Services Act introduced Alternative Business Structures (ABSs) and the Solicitors Regulation Authority (SRA) issued its first ABS licences. Its aim was to create a wider and more liberalised legal market by allowing legal services businesses to be owned and managed by non-lawyers, whilst still protecting consumers. Opening up what had previously been a closed shop to new commercial entrants.
Prior to the change, there was much talk about the potential horrors of what had been coined ‘Tesco Law’, which interpreted the changes in two ways: that legal services would become as affordable and simple as doing the weekly shop, and that supermarkets would step up their offering alongside comestibles, insurance and banking and start selling legal advice.
The earliest solicitor-led ABS was the Co-op, which used its newly acquired licence to offer family law as a complement to its existing non-reserved legal activity services. The AA, BT and Saga also dipped a toe in the legal services water at the time, but with distinctly mixed results. For the first few years, many ABS licences were granted to traditional law firms who simply wished to appoint non-lawyer managers. And for most early ABSs, specifically those in the small to mid-sized market sectors, their reasoning for changing had been centred around ownership and risk as opposed to building new business models.
Additionally, for those becoming a limited company, limited liability and tax threshold changes meant many firms became limited companies for tax-efficiency purposes whilst still operating a partnership philosophy. And this continues today. Statistics from the SRA show that the volume of ABS licences continues to grow and currently accounts for about one in ten firms. Many ABSs are incorporated companies, followed by sole practitioners with non-solicitor management, LLPs and partnerships.
Ten years on, there is a broad range of ABSs now operating and England and Wales. This includes listed companies, private equity backed business, online platforms, US based law firms, alternative providers, and multi-disciplinary practices mixing law and other professions. Perhaps one of the greatest effects of liberalisation of the market is the rise of integrated global multi-disciplinary practices, combining law, accountancy, consulting and outsourcing. And it is not just global firms. Mid-market multi-disciplinary practices offering audit, business advisory, legal services, outsourcing and tax advice are becoming commonplace. This is being driven, in part, by demand, and clients looking for one-stop shop advisory and legal services. In conjunction with multi-disciplinary firms, the rise of one-stop shops such as LegalZoom and Rocket Lawyer has seen a combination of unregulated practices merge with regulated solicitors.
In the small-tier sector, not much seems to have changed. It appears to be more about involving non-solicitors, whereas for large practices where there has been real high-profile success, the justification centres around access to external finance. Consequently, there has been an increase in enquires from angel and private equity investors who are seeking opportunities in the legal sector.
Another, and yet probably unforeseen, effect of ABSs is the ability of law firms to adapt by seeing the potential and investing in technology and people. It is a fact that if Covid had happened ten years ago, practices able to operate remotely would have been in the minority. But because firms have invested significantly over the last few years in response to market pressures, it has meant they have been able to shift almost seamlessly to remote working.
There is little evidence that non-lawyer ownership has increased professional risk, which was a tremendous concern ten years ago. However, SRA disciplinary records indicate ABSs are no more likely to fare any better or worse than their traditional practice counterparts. The SRA retains the power to impose higher fines on ABSs than law firms, which means when there are incidents, they are more likely to be reported.
Mostly, liberalisation has been a huge success because it has improved professionalism in the management of legal services from mid-tier upwards, which arguably improves firms and ABSs risk profiles. They run the same business, have the same legal obligations, insurance and regulations. The only difference is whose money is behind it.
The influx of capital continues to open up the possibility for new ventures and listed companies by relaxing regulations and admitting new entrants, which in turn has encouraged legal practices to become more business-like and commercial. However, large ABSs need the right management framework to become investible, and although the legal market is far more sophisticated than it was ten years ago, in a further ten years, it will have evolved again, with an increase in private equity funding and listed companies.