Alternative business structures taking off in U.K.

British law firm Irwin Mitchell LLP has made plans to embrace several aspects of the Legal Services Act that will spike its bottom line by nearly seven per cent in the same year most of its counterparts have seen their revenues slashed.

The top-100 law firm announced plans to become the first one in Britain to publicly back capital investments from non-lawyers last year and has since driven up revenues while starting the process of becoming licensed as an alternative business structure in January.

So far, the firm has seen a 6.9-per-cent increase in its revenues during the most recent financial year.

“The opportunity to commoditize is really there,” says John Pickering, group chief executive of Irwin Mitchell.

He notes the firm’s application for licensing as an alternative business structure under the act is still in the approval process.

“That’s why our firm was one of the first, if not the first, to apply for licensing.

It will enable us to take in external investments and will broaden the range of services we can provide.”

The Legal Services Act came into effect in October 2011 and is the first attempt to bring Britain’s entire legal market under one regulatory framework.

Most notably, the act allows non-lawyers, such as banking and insurance businesses, to work with law practices to provide legal services through alternative business structures and opens the door for multidisciplinary legal practices.

The Solicitors Regulation Authority, created under the act to regulate and license lawyers and solicitors, has received more than 150 applications from law firms and corporations across the country interested in becoming licensed as alternative business structures since October.

Seven entities have received licences so far, including Co-operative Legal Services Ltd., in March.

Eddie Ryan, managing director of Co-operative Legal Services, says the licence will allow the company to offer more consumer legal services that were previously available only from solicitors.

“This move is a natural extension to the range of professional services we currently provide within the Co-operative,” he says. “Our customers already receive market-leading levels of service in these areas and our legal services business will follow in the same vein.”

The company plans to provide family law services on a fixed-fee basis in the future and will also offer legal aid, he adds.

Legal aid cuts, costly premiums for professional indemnity insurance, poor certificate fees, and the dreary economic climate were key sticking points for British law firms prior to the act.

The government introduced the act to tackle those issues by allowing outside investors, such as corporations and retail chains, to buy into law firms, increase their profit margins, and diversify the sector.

The result has been the largest and most significant shift in the country’s legal landscape in more than a decade.
But Britain is still in a period of transition.

While some players like Irwin Mitchell and Co-operative Legal Services have been successful in driving up revenue, other law firms have cut staff and services to ride out the economic downturn.

At the same time, Australian powerhouses like Slater & Gordon have been gobbling up firms. Slater & Gordon took over Russell Jones & Walker in January, for example.

Pickering says the economic downturn has been a challenge for many British law firms and suggests most will have to adapt to the new legal climate to survive.

He notes that, combined with Britain’s very fragmented legal services industry, a perfect storm exists for consolidation that makes the alternative business structures introduced by the act in October particularly enticing for some cash-strapped firms.

“Alternative business structures are just one place where firms might be able to consolidate to reduce costs. But the potential the act has to change legal services is very important and the ability to seek outside capital is just one component of that.”

Tony Williams, a principal at Jomati Consultants LLP, says the changes have resulted in significant moves by several British law firms over the last nine months that have fundamentally changed the way lawyers practise law.

“The climate has become much more competitive, which allows new firms to come into the market more quickly and easily than before. In a flat market, one of the ways firms can grow is through mergers.

Because the market is more fluid, it has created a space where, if you aren’t taking mine, I’m taking yours.”

Still, not all law firms are on board. Some critics of the act point to concerns that law firms will become less independent when they receive financial backing from third parties. Others say the act will do little for Britain’s biggest firms.

Ted Burke, chief executive of Freshfields Bruckhaus Deringer LLP, says he doesn’t expect his firm will change its structure any time soon. “The act really hasn’t had a material effect on our firm,” says Burke.

“I don’t anticipate that we’ll be raising capital from third parties or change in any significant way under the act. Things are going well for us, so it’s unnecessary at this point.”    

This is the second instalment in Law Times’ summer series on reforms to the legal profession around the world.

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