By Tomasz Drzewiecki
In 2007 the UK Parliament enacted the Legal Services Act containing provisions on the regulation of the legal services market. Part V of this Act introduced Alternative Business Structures or simply ABS – a new mechanism for providing legal services. Soon ABS became colloquially described as the ‘Tesco Law’, illustrating the idea that finding legal advisors is as simple and affordable as shopping in a supermarket.
The whole idea behind ABS is allowing non-lawyers to become shareholders and members of the management boards in law firms. The rules governing ABS came into life at the end of 2011 and the first applications from firms were accepted in early 2012. At present, 310 ABS licenses have been granted in the UK and there are over 100 applications awaiting a decision.
The largest firms with ABS licenses come from a diverse range of sectors and industries and in fact very few of them are ordinary law firms. The largest traditional law firm with an ABS licence is Irwin Mitchell, which consistently ranks top 20 in the UK – the only other firm worth mentioning is Gateley. However, these are the only two law firms that rank high in terms of size compared to other ABS firms. Amongst the largest ABS firms are the Co-operative (supermarket chain), BT (telecommunications), leading insurers and two members of the ‘Big Four’, to name but a few. This proves that ABS are not restricted solely to law firms; thus far companies from other sectors have dominated the ABS market.
The Co-operative is one of the largest supermarket chains in the UK and was the first major consumer brand to be granted ABS status on 28 March 2012. The Co-operative’s legal division operates under the name of Co-operative Legal Services and specialises in delivering legal services to customers in the fields of consumer law and family law. With a network of 3000 shops, they intend to hire 3000 lawyers over the course of the next 5 years. The brand advertises legal services within their supermarkets in exactly the same way as all other ordinary products that can be purchased in their shops.
During the first half of 2013, the Co-operative’s legal arm brought a loss of approximately £3.4 million pounds. Despite this, the company still firmly believes in the success of their innovative business model. Alistair Asher, general counsel at the Co-operative, claims that once the group receive appropriate investment and raise awareness amongst customers, the legal services business will flourish.
BT – one of the world’s largest telecommunications firms – wants its legal arm, BT Law, to initially provide legal advice to corporate clients in the field of motor claims, and then expand into further areas of consumer law.
A few leading insurers such as Direct Line, Admiral and Ageas have also created ABS in co-operation with traditional law firms. Admiral acquired shares in two traditional law firms last year and is planning further acquisitions in the foreseeable future. The most recent addition to the list of insurers with an ABS license was Allianz in March 2014. Allianz provide legal services in the UK under the brand name ALP Law and guarantee their customers superior results if ALP Law handles the legal aspects of their case.
ALP Law co-operates with a law firm called Serious Law specialising in catastrophic injuries. Tim Walters, formerly the managing partner of Serious Law, became the head of the legal practice in the newly created entity. An important requirement was imposed by the Solicitors Regulation Authority, namely that the ALP Law branding logo has to be ‘sufficiently different’ from the Allianz logo to identify them as separate and distinct firms.
Notably, there are also two ‘Big Four’ firms with ABS licences, namely PwC and KPMG. They are both fairly recent additions to the list of ABS firms, the former having obtained their licence on 31 January 2014 and the latter on 1 October 2014. For PwC, the licence effectively means that PwC became the owner of PwC Legal. Prior to that, PwC Legal had to be a separate firm and could not receive investment from its parent company.
For KPMG, the ABS license has had a greater impact. The license allows KPMG to expand their current range of professional services through the addition of complex legal assistance. Despite receiving an ABS license, Simon Collins, the CEO of KPMG UK, assures that unlike PwC, KPMG will not operate a completely separate legal department. Instead, KPMG aims to differentiate itself from competitors through fully integrating legal services into other areas in which they already advise clients. According to the General Director of the SRA, the KPMG example perfectly illustrates the type of entity the legislature envisaged when drafting the Legal Services Act 2007. Under one brand, KPMG offers complex consulting, audit, advisory and legal services, making it a convenient and appealing choice to potential new clients.
Recently, Kingston Smith was granted an ABS licence becoming the first accounting firm to receive this privilege. This licence provides Kingston Smith with the opportunity of expanding their existing services, as can be seen through the introduction of notary services. The Institute of Chartered Accountants in England and Wales (ICAEW) estimates that there are approximately 250 accounting firms in the UK interested in following Kingston Smith’s footsteps in the near future. Granting an ABS license to Kingston Smith opens the door to a whole new sector, which will undoubtedly support their input in developing and innovating the legal services market.
The most significant risks to the legal profession through ABS:
Lawyers operating in ABS firms may no longer adhere to professional ethical standards to the same extent.
Bringing in strictly financial external investors may violate the fundamental principles governing the functioning of a law firm.
The primacy of profit within the ABS firm may have a negative impact on the quality of legal services provided by traditional law firms.
The prestigious law profession may be degraded as it joins the cluster of professional services.
The presence of non-lawyer managers and shareholders could have a negative impact on the culture and values in the firm.
ABS can cause a change in a firm’s strategy from a relatively predictable and stable one, to a more risky strategy.
Advantages of ABS to both lawyers and clients:
The legal services market is significantly expanding, providing consumers with greater choice.
Non-law employees can receive their salaries or bonuses in the form of direct shares in the firm which will attract the most talented and brightest university graduates to join ABS firms.
Capital can be raised from a wide range of entities, facilitating dynamic development of firms offering legal services
Law firms are becoming attractive investment targets for companies in different sectors.
Capital can be acquired from outside the legal sector, while the management of the firm can remain in the hands of qualified lawyers.
Increased diversity and competitiveness in the legal services market can work to the benefit of lawyers and clients.
Clients can be offered a much wider range of services through an ABS firm than a traditional law firm; an ABS firm can offer insurance, consulting, accounting, audit and advisory services alongside legal services under one brand or one parent company.