By Charles Wilson MD Lovetts

This is a very good article and so I wanted to share it.  Graham

On October 6, 2011, the most far reaching changes to affect the structure and provision of legal services will come in to force.  Colloquially called ‘Tesco Law’, firms such as Tesco will be allowed to own, direct, and manage (with legally qualified compliance officers), a business providing reserved legal services.

To understand why this is being done and what this means we first need to go back 30 years when law firms could not publicise themselves or form companies.

By the end of the eighties reform was coming and law firms were allowed to incorporate, and publicise the services in strictly limited ways.  However, if you incorporated, only solicitors could actually own the law firm and be directors.  Why? Well think what the effect would be if a Chartered Accountant were to be a director of an incorporated law firm….or if they owned one percent of its equity!

So in the early nineties, so if you decided to incorporate a new law firm specialising in debt recovery services as a PLC, The Law Society stated it could not be done, but it could be.  You still could not share equity to be able to raise capital, though, and in the early stages of corporate growth this is not ideal.  However, by 2003, it was clear to the Lord Chancellor, Lord Falconer, that the structure of the legal profession itself needed a good revamp.  So Sir David Clementi, former Deputy Governor of the Bank of England, was asked to review regulation for the legal profession.  His brief was ‘To consider what regulatory framework would be best to promote competition, innovation and the public and consumer interest in an efficient, effective and independent legal sector’.

Sir David’s concerns were threefold:

1. The regulatory framework for legal services was 2outdated, inflexible, over-complex and insufficiently accountable or transparent”.  He reckoned the mainline professional bodies were inappropriate for the regulatory tasks that they faced.  The complexity and lack of consistency in oversight of many aspects of the legal profession were considered inadequate.

2.  The complaints systems, particularly consumer complaints, and the overlapping powers of the oversight bodies.

3.  The restrictive nature of current business structures, in particular that those with Finance, or IT skills were not permitted to be principles of a legal services practice.

A lot of reform has already occurred to deal with 1) and 2) above.  For instance The Law Society lost its role as squire, gamekeeper and policeman.  The Solicitors Regulation Authority is now the policeman.  The Law Society still collects rents, but pays the police to regulate.  But Sir David reckoned that the funding, ownership and management of law practices should be widened to allow for greater competition and efficiency.  This was finally brought on to the statute book through the Legal Services Act 1977.  It has taken four years since to work out the detailed rules to allow this to happen in a secure manner.

Alternative Means

So what does ABS mean in practice?  In short, it allows competition from non-solicitors in providing legal services, known as an ‘alternative business structure’ (ABS).  ABS usually means a braking system on a car – here it means the opposite! Law Firms and ABS entities will compete with each other, and therefore need to be similarly regulated.  There is a complete re-write of the Conduct rules, so that both law firms and any ABS play by the same rules.  There is a new Code of Conduct which is not based around complex ‘do’s and don’ts’, but is focused on the outcomes delivered to the client or customer, based on ten core principles, with new accounts rules for the protection of client money.

It means that Tesco and any other firms can sell services in their stores, or can put their extraordinary commercial muscle behind conveyancing, wills and probate, personal injury, and other consumer sectors of the market.  Other investors also might wish to start up, or take over firms in the lucrative commercial law market, where huge multinationals spend millions in corporate deal-making.

For the first time in history, from October 6, 2011, an investor can own 100 percent of a law firm and direct its strategy and development.  It can manage the business, subject to employing two key compliance officers one (a qualified lawyer) to control its legal practice (COLP), and one its finance and administration functions (COFA).  It also has to get regulatory approval and the grant of a licence.  The Legal Services Board will authorise Licensing Authorities under the Legal service Act 2007 – present the first Licensing Authority is likely to be the current Solicitors Regulation Authority (SRA).

A Popular Choice

So is this popular? Yes, for those advocating reform and commercial practices for law firms.  Major law firms might decide to ‘cash in’ with stock market flotation’s, but there are few signs of that happening soon.  Mid-sized firms may want to take external investors to fund growth.  And non-lawyer corporates, e.g.  debt recovery agencies, will more legitimately be able to manage their own back-end legal services.

However, a lot of small high street law firms, and potentially some international organisations that are deeply suspicious of the new entities, are against the reforms.

Of course legal services could just become ‘Brands’, say opponents of reform.  But what’s the problem? Law firms of all sizes have ‘branded’ their services for many years, particularly in the commercial market place.

The competitive challenge of Tesco or the Co-op is not their branding; it is their ability to deliver a good value, commoditised service to a huge number of consumers.  Such brands have very well organised and powerful knowledge of the consumer and their ability to sell cost-effective legal services is undoubted.  A small high street practitioner will have to distinguish themselves through either their personal service, speed of response, specialism, or even cost-effective delivery.

The ‘big money’ will be careful to invest, and will only select the biggest opportunities.  Thus, very big players (e.g. Co-op) will look to sell mass-market consumer-orientated legal services.  Even there, law firms are already responding with ‘branded’ offerings through high street outlets e.g. ‘Quality Solicitors’ that have recently formed an alliance with W.H Smith.

Let battle commence!