As the senior partner of a cross-border UK law firm, I am generally in favour of many of Sir David Clementi’s proposed legal reforms, the measures outlined in the current Legal Services Bill and, in particular, the one specific area where I feel a change would be most significant — the enticing prospect of alternative business structures (ABSs) and the injection of external investment into the UK’s law firms. I am sure the prospect is tantalising for many of the larger firms in the
UK although, naturally, change would not suit every legal practice.
The Office of Fair Trading’s (OFT’s) report of 31 July this year, has recommended sweeping changes in the way the legal profession is structured, including the use of ABSs. The Scottish Executive has committed to a response within three months and early indications are that it will accept the report’s recommendations to provide increased choice for consumers and level the playing field with the English profession.
Meanwhile in England, the Legal Services Bill states that one of its regulatory objectives is to encourage an independent, strong, diverse and effective legal profession. With top UK law firms now turning over £1bn a year in revenues, there is no doubt that the corporate legal profession is a major driver in the UK’s service-driven and financial service-led economy. It is an effective and successful industry in its own right.
A future Legal Services Act will allow lawyers and non-lawyers to work together on an equal footing to deliver legal, financial and other services. Lawyers and non-lawyers working in the UK’s law firms should be allowed to seek external funding and investment or take a stake in mergers and acquisitions, provided that proper safeguards are in place.
In today’s global marketplace, there are compelling reasons why law firms should be able to raise money from other sources to build strong, independent and diverse law firms. This prospect is building a head of steam south of the border but, unfortunately from my point of view, the Law Society of Scotland appears to be less than enthusiastic.
As in any field of business, the onus is on those people prepared to take the risks. If lawyers are prepared to drive forward, building larger and larger businesses, then ultimately, they should be entitled to that risk-taking being rewarded by an uplift in the capital value that could be realised. Other areas of financial services provide major capital returns. I can see no reason why this should not apply to the legal profession as well, accepting there needs to be robust and transparent regulations to ensure this is done properly.
In the US, the largest New York practices have been mooting this for a long time. They argue that they require external investment to ensure growth and to attract the best and brightest people. And although the major UK firms are highly profitable, investment has to come purely from the equity partners. Modern corporate law firms, in such a competitive environment, need to invest to stay ahead.
Law firms have changed dramatically in the past 10 years. Firms are much better at bringing in external and qualified non-lawyers in whatever capacity. Within HBJ Gateley Wareing in Scotland, we have an accountant as our chief executive; I do not see any difficulty with this. It is merely the case of getting the right person for the job. If it happens to be a lawyer from your own team, or a lawyer from elsewhere or an accountant or a business person, it does not matter. Our public sector legal practice has a key adviser with a background and track record in local government work which helps us identify the issues more effectively and, increasingly, we are giving independent financial advice to our clients, which is regulated by the Financial Services Authority.
So there is nothing new about bringing in non-legal expertise. The finance, human resources and IT directors of many firms often sit on managing boards alongside their legal colleagues. So law firms are not exclusively for lawyers anymore and we need to share out the fruits of future success.
Where will the external investment come from? I can see a level of interest popping up from private equity houses and the banks. Institutional fund managers are likely to view law firms as a reasonably safe and secure investment where the firms have a long track record of profitability and integrity.
In Australia, the landmark flotation of Slater & Gordon valued the business at 15 times the annual earnings. That will make some of the leading London firms worth billions. This is likely to be a lucrative area for the external investors. For these reasons, I can see financial institutions considering careful investment in the best-run law firms.
But while I can gaze into my crystal ball and see all this, the Law Society in Scotland does not seem to be on side at all at this stage and, indeed, is already setting out its objections to the OFT report. My concern is that if Scotland fails to progress this, the bigger Scottish firms, which already have a substantial English practice and perhaps want to go down this route, would probably end up becoming English limited liability partnerships (LLPs). The firms would retain a branch office in Scotland, but I think the Law Society of Scotland would suffer in the longer term. I am not predicting that all or, indeed, many law firms will go down this route, but it is likely to be those in the top tier in Scotland. I have been speaking to a lot of senior partners and managing partners of other Scottish firms and I know there is mounting interest in the idea. Although nobody is yet able to say categorically that they are going to do it.
To maintain a “strong, diverse and effective legal profession”, I can see the major law firms in England considering stock market flotation in the future. It is not imminent but it is a possibility. So the Law Society of Scotland really needs to keep up with such changes, examining the opportunities and preparing to keep the big and successful firms in Scotland. The law firms are very distinct and an important part of Scottish life. They create a lot of highly-skilled jobs and Scotland’s law firms enjoy a high reputation internationally. But these firms have to be given the same opportunities as their neighbours in England.
My thinking has been driven by commercial reality, as there is much more cross-border work going on in the south of England and in the Midlands. In most cases, there is no doubt there are a greater number of deals going on in the Midlands than there are in Scotland and average deal value is higher. This perhaps explains why Scottish firms with English offices are seeing the English business grow faster than the Scottish offices.
We must ensure that our best lawyers are not sucked down south to work. Scottish lawyers, more often than not, choose to live in the north because of the quality of life, the environment and the work they do. So we have to allow these firms to grow and prosper.
There seems to be an attitude at the Law Society of Scotland that, in principle, external investment is not right for the profession: I do not have that view. Legal firms do require investment. Scotland’s firms are no longer sitting in new town offices with two IBM golf ball typewriters. Today a practice management system can cost £1m. That might not be a great deal but, for many smaller firms, this is a substantial sum to take out of the partnership coffers. Allowing external investment gives the opportunity for proper expansion, and I do not see this as a bad thing.
I know the most common issue raised is conflict of interest. There are concerns about just who might be controlling a legal business. But lawyers would still have the same professional obligations upon them as they have always had. This would not change. The individual lawyers working in a practice would still be regulated in the same way as they are now.
I have been an advocate of ABSs for a few years, so now is the time to take the logical steps to the next stage and, ultimately, if the market wants it, allow law firms to become listed as companies on the stock market. This would certainly make for an exciting future for lawyers.
Malcolm McPherson is joint senior partner at HBJ Gateley Wareing.
