UK Legal Services Market Set For Shake-Up

by Jason Gorringe, for LawAndTax-News.com, London

23 May 2007

Australian law firm Slater & Gordon has become the first in the world to float on a public market.

The firm listed on the Australian Stock Exchange on Monday May 21st, after the offer closed earlier this month fully subscribed. The firm is taking advantage of recent changes to Australian law allowing non-lawyers to invest in law firms for the first time.

Business advisory firm Deloitte say this is an indication of things to come in the UK legal market if the Legal Services Bill is enacted.

Jeremy Black, Director in the Professional Practices Group at Deloitte, explained that: “Traditionally, the idea of lawyers raising funds in exchange for a proportion of the equity has been likened to selling off the family silver. However, the legal industry is changing around the world. An Australian firm may be the first to float, but it is highly likely a UK firm will follow in due course.”

In the UK, the Legal Services Bill is currently before the House of Lords, and is expected to receive Royal Assent later this year. Black added: “In short, this will result in the UK having the most open legal market in the world.”

The removal of restrictions will have wide ranging implications and could allow law firms to raise funds in exchange for equity in the firm, and to float on public exchanges. The new laws could also allow non lawyers to become partners in law firms, and facilitate the setting up of Multi Disciplinary Partnerships. Corporate entities, such as banks, insurance companies and supermarkets, may also be able to provide legal services.

At the upper end of the market, there are a number of reasons why larger firms might want to raise funds in exchange for outside ownership, according to Deloitte. Firstly, it will provide a new source of finance to aid domestic and international expansion plans or to invest in new IT systems. Secondly, it can enable the firm to take on riskier projects, as portfolio investors have a greater capacity for higher risk. Thirdly, it allows the owners of the firm to realise its value. Finally, it can be an attractive recruitment tool, allowing a firm to offer share option schemes and enhance employment opportunities for non-legal staff.

Deloitte says that the availability of external capital could also pose a threat to the major law firms, as individual teams may be encouraged to break away and form their own company with the backing of an external investor.

Deloitte anticipates that a number of mid-tier firms would float in the UK, most probably on London's small-cap Alternative Investment Market (AIM). Black said: “If you look for precedents, we have seen accountants, management consultants, patent attorneys, architects and chartered surveyors float. I see no reason why law firms are so different from these organisations. AIM is the more likely market as a firm would need a market capitalisation of around GBP200m to list on the full market."

At the smaller end of the market, the impact will likely be even more noticeable. Black added: “There is likely to be significant consolidation and aggressive competition from well known brands. We expect to see the number of sole practices and small partnerships currently in existence decrease significantly.”

Deloitte believes that opportunities will exist for major companies to start legal businesses from scratch or acquire existing law firms. These businesses will be able to exploit their brand and existing customer relationships. They will also be able to operate with economies of scale that the high-street firms cannot compete with. Finally, they will have access to capital, allowing the investment in IT and other processes to drive down the costs of their services.

“The UK high-street legal market will change beyond recognition," Black concluded.

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