The Legal Services Bill, which is now going through Parliament, will create an entirely new way for law firms to be run. Many 21st-century lawyers will be very commercially-minded. The key objective is ‘alternative business structures’. It means outside investors can, for the first time, buy into legal practices as shareholding owners. The Bill provides for regulation by the Legal Standards Board (LSB). Thus the legal profession faces a new system for legal practice with oversight by a new regulator, neither having any experience relevant to this system.
The Bill essentially leaves regulatory standards to the LSB — fitness to own, amount of outside shareholding, conflicts of interest and the protection of the public interest. There may be successful amendments which clarify some of these matters on the face of the Bill.
Nevertheless, unlike the detailed structure under the Financial Services Authority, this Bill sets out general objectives with no substantial or detailed guidance as to what should happen. Will there be a big boom, or cautious, creeping investment? The LSB will determine the rules and the timetable. The details of its proposed system should be the subject of full consultation and public debate before the new regulatory system is established. But whatever it is to be, the profession and the legal services it provides are bound to change.
Who will invest? Investors will look for attractive targets like firms specialising in commoditised or volume legal services such as debt collection, uninsured loss claims and small personal injury cases. These areas of profitability produce significant revenues and, in some cases, create the potential capital value for selling on in the investment market.
The higher the return, the more likely private equity will be interested. The longer and steadier the return, the more pension and long-term investment funds will be attracted. Both types of investor will be applying EBITDA analysis to law firms as they would any other business enterprise. They will expect profitability to be backed up by efficient systems, a strong client base and, above all, good staff who will stay.
What will be paid? Looking for return on turnover, the investor will naturally look to the profitability and work capacity of individuals and departments. The traditional idea of a partnership share will be drastically reassessed, if indeed it survives. Those who put in capital demand the appropriate return. If pay becomes expressly determined by performance then there could be offers of share options for lawyers or handsome bonus payments.
The risks of potential conflicts of interest are obvious. Existing partnership structures may give way to director/management systems on the usual company model. The ethos in this new kind of firm will surely be significantly different to what we have known in the past.
What is the scope of the new system? There is no doubt this new system will be ready to operate within 18 months or so of the passing of the Bill. The legal profession and the public should look for the opportunities in this new system in a much wider context.
With the restrictions on legal aid, and the importance of the social welfare sector of the law, why not even more radical change? Trade unions, non-governmental organisations and not-for-profit organisations could acquire ownership of law firms and operate them for the benefit of their organisations, their members and the general public. The social enterprise model is a ready analogy. Members or supporters could in fact become the individual shareholders in a form of legal cooperative. This should spell wider access to lawyers at reasonable cost.
Some of these factors indicate that the tension between corporate profitability and public service is likely to be a constant. The LSB and the profession must ensure that profit does not dominate at the cost of professional integrity and standards. That will be the real test of this new system.
Lord Daniel Brennan QC, Matrix Chambers.