October 23, 2012

The U.K. Legal Services Act: What Impacts Loom for Global Law Firm Competition?

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July/August 2008 Issue | Volume 34 Number 5| Page 35


The U.K. Legal Services Act: What Impacts Loom for Global Law Firm Competition?

The biggest focus of the new Legal Services Act (LSA) in the United Kingdom is greater competition and demand for efficiency. We can expect significant consolidation in the market, too, but mainly for small to midsize British firms. The eye-opener for American law firms is the LSA’s green light for U.K. firms to take outside investment and combine with other professional services. Will U.K. firms also use the capital raised to expand globally and raid the talent ranks of top U.S. firms? Here’s a look at the issues.

In July 2003 the U.K. government commissioned Sir David Clementi, chair of Prudential plc (one of Britain’s largest insurance companies), to review the regulatory framework for legal services in England and Wales. In 2004 Clementi issued two government reports. The first found the British legal market to be outdated, inflexible, overly complex and insufficiently accountable or transparent. The second promoted increased innovation and competition. The bill that drew primarily from the Clementi reports was passed into law in October 2007 as the Legal Services Act.

The act aims to liberalize and regulate the market for legal services in England and Wales, to encourage competition and provide a new consumer complaint mechanism. Most of the new legislation goes into effect in 2011 or 2012. The LSA also allows alternative business structures (ABSs) with nonlawyers in professional, management or ownership roles. These legal disciplinary practices (LDPs), which can have up to 25 percent nonlawyer managers, are expected to bring big advantages to U.K. consumers.

The news drawing lots of attention among industry commentators is that the LSA makes external investment or listing on the stock exchange possible. It will thus enable law firms to have more access to finance and subject them to more stringent reporting and governance practices. The external investment will facilitate firm expansion—though it’s unclear how much will be viable in international markets—and also fuel investment in sophisticated nonlawyer managers and large-scale capital projects to improve efficiency and performance.

ELD International sought the perspectives of some respected U.K. legal industry management consultants and found that current changes focus on purely domestic U.K. practices, rather than wider international firms. Tony Williams, principal of Jomati Consultants in London, comments, “The firms with strong international practices or presences will obviously have various regulatory issues in the other countries in which they operate outside the U.K.” It would take changes in the regulations of the various country bar rules to allow law firms with external investment to operate in those countries. Williams thinks that in the short term purely domestic U.K. practices, rather than global firms, are likely to take advantage of the LSA.

As far as domestic U.K. law firms are concerned, the act is a catalyst for major firms to think along more corporate and commercial lines. “Quite a number of firms will be seriously looking at restructuring,” says Alan Hodgart, founder of legal consultancy H4. “We will probably see half a dozen of them go down this path during the current year.” He feels that firms will have to restructure to attract outside investment and that this will undoubtedly affect the marketplace as firms raise capital and begin to use it.

Simon Slater of London’s First Counsel Consulting points to more immediate actions. “Law firms can already hive off parts of their business into separate vehicles,” he says. “And some of the smaller firms within the top 75 have already done that. But for another three years they cannot bring in external investment. When they can, then the landscape might change considerably.”

So should U.S. law firms be worried that U.K. firms, suddenly flush with capital, will start using their deep pockets to cherry-pick top American talent? “Firms that are listed will have funds available to them to go after lateral hires both of individuals and teams,” says Williams. Hodgart envisions that the inflow of capital might also alter the structure and size of deals, providing access to shares for use in mergers and takeovers. “The capital might be used to buy in teams and do what the U.S. investment banks did in London in the late-’80s,” Hodgart says, “offering big chunks of money for good people in local firms to join them.”

This likely won’t happen until the current economic downturn is far behind us. In a study released earlier this year by global law firm Eversheds (Law Firm of the 21st Century), the U.K.’s top 50 firms said there won’t be much impact from the LSA because they are content with the partnership structure. Few expected a rush to incorporate because “they don’t need recourse to that capital injection—they’re profitable enough as it is.” So at the top of the legal food chain, the LSA isn’t likely to trigger a tsunami. However, change could be gradual and profound—all the more reason for U.S. firms to keep an eye on the United Kingdom as things develop.

About the Author

E. Leigh Dance is President of ELD International, Inc., a consultancy serving global law firms and Global 500 corporate law departments.