Government pledges big bang revolution for UK law market

UK law firms will be able to tap outside investment within two years - or sell their business outright - as the Government this week pledged to press ahead with the most radical shake-up of UK legal services for decades.

Unveiling the White Paper in response to the 2004 report from Sir David Clementi,the Lord Chancellor, Lord Falconer, confirmed that the Government would adopt the Prudential chairman's most radical recommendations.

The reforms, which promise to make the UK by far the most liberal legal market in the world, will allow outside investors to own law firms entirely, subject to a new vetting procedure for potential owners.

The Government is working on plans to set up a special board to vet the sale of law firms, in a move that is expected to encourage supermarkets, banks and accountants to acquire legal practices.

In addition, law firms will be able to attract minority outside investors and float on stock markets.

Unveiling the reforms on Monday (17 October), Falconer said: {This White Paper heralds real change. There was no doubt that something needed to be done.{

As expected, the Government will hand responsibility for regulation to the new over-arching Legal Services Board (LSB), which is expected to cost £4m to create, but will continue to delegate most regulation to the Law Society and the Bar Council.

Falconer also said that the reforms would allow law firms to attract extra investment to expand internationally.

The White Paper will now be put out to consultation until 20 January. It is expected that the legislation will be introduced in draft form next summer, with a bill due to go through Parliament before the end of 2006.

The proposals have already received a widespread but cautious welcome across the profession, with regulators such as the Law Society welcoming its continuing role as 'front-line' watchdog.

Details of the announcement will be pored over by the profession, with City lawyers focusing on the impact of outside funding.

David McIntosh, chairman of the City of London Law Society, told Legal Week: {We do not want City firms to be boxed in or to be put at a competitive disadvantage.{

Clementi in practice: the experts' view

{This goes further than Clementi envisaged. We will not see firms rushing to float. Some will probably go to market but it will be a slow creep rather than a dramatic plunge. Firms will probably seek external counsel and talk to investment banks to see what their true value is.{ Colin Ives, director, Smith & Williamson

{I do not think people are thinking enough yet about Clementi, with the opportunities and challenges for firms. It comes down to whether there is value in a firm's brand. If there is value, there are opportunities to float. The issue is also how to incentivise the next generation of partners, who will all be salaried.{ Giles Rubens, consultant, Hildebrandt International

{A number of firms are looking at what options are available on the Alternative Investment Market. UK law firms could be standing at the beginning of a period of a great rate of expansion, while many high-street firms may disappear.{ George Bull, partner, Baker Tilly