UK: Much Ado About Nothing?

Last Updated: 14 July 2009
Article by James Roberts and Dorothy Herman

Although the incidence of LDPs is currently low, the likely impact of LDPs and implications for the legal profession are considered below.

Solicitors may now practise in partnership with: (a) other types of lawyer - including barristers (although see further below), legal executives, law costs draftsmen and patent attorneys; and (b) up to 25 per cent non-lawyers - including accountants and heads of support departments.  LDPs may be partnerships, LLPs or limited liability companies. The non-lawyers who are partners, members or directors in an LDP must be individuals approved by the Solicitors Regulation Authority ("SRA").

Who Will Regulate LDPs?

The Legal Services Board, the new regulator created by the Legal Services Act 2007 (the "Act"), has delegated its powers to regulate LDPs to various existing regulators including the SRA, the Bar Standards Board ("BSB") and the Council for Licensed Conveyancers. An LDP will be able to choose its regulator, but this may limit the type of services it can provide: for example, the Council for Licensed Conveyancers only regulates conveyancing services and so an LDP regulated by the Council could not provide other legal services.

Whether barristers may currently join an LDP remains unclear. The BSB is still considering the ability of barristers to practise within an LDP, and the regulatory boundaries between itself and the SRA. It has recently published responses to a consultation on the issues. At the time of writing, the BSB is understood to be taking advice on certain matters raised by the consultation, and is not likely to issue draft regulations until the autumn, effectively putting LDPs for barristers on hold.

Who Will Become LDPs?

At the time of writing, the SRA has indicated that 34 firms had become LDPs. The many UK law firms with three or fewer partners will be limited in their ability to become LDPs unless they expand due to the 25 per cent limit on non-lawyer ownership. Differing regulation in other countries may also hinder the adoption of LDPs by firms with international offices.

LDPs are only the first step in the structural reform of legal services and are intended to be an interim regime, pending the full introduction of alternative business structures (ABSs) under the Act. In an ABS, not only will lawyers be able to offer legal and non-legal services in multidisciplinary partnerships with non-lawyers, but they will then also be able to seek external investment - for example, from private equity houses or by floating on the stock exchange. Firms taking on non-lawyers as partners, members or directors under the current LDP rules will be committing themselves to the as yet unfinalised ABS rules whether they like them or not, which may account for the relatively low take up to date. The SRA is currently consulting on its approach to the regulation of ABSs.

The experience in Australia, which already permits law firm floatations, suggests that firms are not currently queuing up to convert to ABSs either. Australia has seen only one firm, Slater & Gordon, go public; it is thought to be the only law firm with a stock market listing. The economic downturn has reportedly caused some pending applications to be shelved but the truth behind the limited take up may be more fundamental. The ability to raise capital will appeal especially to firms that need capital to expand and are able to use it to create value for shareholders, for example by acquiring other practices or investing in new IT systems. Such investments will be driven by clear cost savings and increases in profitability, which perhaps most obviously suggests a reliance on legal work that can be readily commoditised and so achieve economies of scale. By contrast, many larger firms are not as capital intensive and they can therefore rely on more traditional sources of capital - equity partners - and thereby retain the attractions of traditional partnership such as mutual commitment, control and sharing of profits.

Risk Management And Insurance

The development of potentially wide ranging multi-disciplinary partnerships, particularly joint enterprises between law and accountancy firms, will bring numerous challenges. Many such challenges are familiar but will arise in new and varied ways - for example, the traditional tension between the provision of audit and non-audit services to a corporate client, coupled with an ever wider range of services.

The new regulatory regime might also lead to more disciplinary proceedings against firms, especially when the new consumer orientated complaints body, the Office of Legal Complaints, is established in 2010. This could, in turn, lead concerned firms to augment their insurance cover for disciplinary proceedings, given the current scope of the SRA's Minimum Terms and Conditions.

Cultural changes will also have to be grappled with. Professionals within an LDP might be regulated on a firm level by a different regulator, but as individuals will remain accountable to their own professional bodies. A team that was once the powerhouse of a small firm might become less influential in a merged entity. Barristers, used to working as sole practitioners, may well find themselves on the partnership lock-step.

Innovation?

A persistent concern is whether household names will use ABSs to expand into legal services and squeeze out small and mid-sized firms. Whatever the risks here, there are already signs that this sector of the profession is innovatively preparing for the challenges ahead. QualitySolicitors.com is one marketing initiative intended to promote the services of high street practices. Which? and QualitySolicitors.com have now joined forces so that customers can access the services of the online legal alliance through a dedicated telephone advice service. A number of medium sized firms have also joined up to market their business and consumer services by operating under the shared brand name 'The Legal Alliance'. Meanwhile, LawNet, a national network of mid-tier firms, has entered into an arrangement with accountancy network, the Charter Group, to refer business and share expertise. Expect to see more such arrangements in future, as the ABS market begins to mature.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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