Posts Tagged ‘alternative business structures’
Research into Alternative Business Structures: the Legal Services Board
Since licensing began in 2011 there have been 950 ABS licences issued. As of March 2017 there were 892 active licences. In April 2017, the Legal Services Board published a significant report into ABS. It sought to address 4 questions, which I have adapted from the report and which I try to summarise here:
1.What kind of investment activity has there been in ABS?
These businesses are predominantly existing legal service businesses converting to ABS status, with one in five respondents to our survey being new firms. Three fifths of ABS have less than 50% non-lawyer ownership. Just under one in five ABS are wholly owned by non-lawyers, with a similar proportion being fully owned by lawyers but having some proportion of non-lawyer managers….
The research shows that the majority of ABS firms (66%) either have already invested or are planning to do so, since they gained their ABS licence. These investments have mainly been made to hire more staff, increase marketing activity or to purchase IT. The LSB sees this as evidence of the increased scale that allowing non-lawyer ownership was designed to enable.
2.Is the market attractive to all sources of finance?
The survey shows ABS firms accessing a wide range of sources of finance, and only a small proportion of ABS indicating difficulties in accessing finance. The most frequent source of funding for investments was business profits or cash reserves which were used by 49% of those who had invested in their business. Just over a quarter of investments were solely funded us ing a loan from a bank, and a quarter were solely funded using the business’ overdraft facility.
External sources of equity finance accounted for only a minority of investment funding sources either as the sole or joint source of investment funds, and only 12% of ABS had used any form of external finance. Partnerships are more likely to use debt funding for finance, with 55% using loans or overdrafts, but none had used external investment. Companies limited by guarantee had the highest proportionate use of any form of external funding, with 24% issuing shares, investment from private equity, or becoming a subsidiary of another company.
3. What do investors think of the legal services market?
According to the investors interviewed, the legal sector is seen as a ‘sleepy’ market with opportunities for investors to grow their investment capital by improving efficiency within the business itself. They appear to have concerns about the ability to exit the legal sector once their investment has matured, although there are some examples of private equity investors having sold on their investment and exited the sector.
Except perhaps in the personal injury sector, it would appear that bank lending is a substitute for external capital. For the firm this means they do not have to cede ownership control of part of their business. In addition, there is a view that many firms do not present financial information in the ways investors expect and/or have a weak grasp of the value of their businesses.
This might explain the investor’s perspective of the legal sector as being reluctant to seek investment from private equity firms, and reports of investors struggling to find appropriate firms in which to invest. While the overall size of the market and the scale of businesses operating may limit opportunities for some investors, the LSB thinks that cultural norms, governance, and non-commercial financial management practices in some businesses are likely to be more important factors.
4. Are there any regulatory barriers to investment?
Only 6% of ABS identified some aspect of legal services regulation that prevented them accessing finance. Nor does the cost of legal services regulation appear to be a barrier… However there is anecdotal evidence of some areas of regulation causing concern to investors. These includes restrictions on ownership and picking up liabilities for historic complaints and insurance claims.
Only 1.5% of ABS identified some aspect of wider regulation that prevented them accessing finance. The regulatory barriers to investment cited by the investor and investment consultant we spoke to relate mainly to wider regulatory and governmental activity, particularly in relation to personal injury reforms
Conclusion:
The potential link between investment and enabling better access to legal services is well–rehearsed elsewhere. However, investment remains an under-explored area of research and generally licensing authorities have not used their data to understand trends in investment and financing. [Overall it may be concluded that] levels of innovation are not increasing.
The dynamics of competition create incentives for suppliers to increase productivity through innovation, which lowers costs and hence prices through time. This is likely to involve taking a different approach to delivering a service, or developing new services completely. In the absence of strong competition, there is insufficient impetus for law firms to take the greater risks (and rewards) involved with using external capital.
Until these incentives change the LSB thinks there is unlikely to be significant growth in the use of external capital by ABS firms.
The report can bee seen at http://www.legalservicesboard.org.uk/news_publications/LSB_News/PDF/2017/20170613_LSB_publishes_investment_in_legal_services_research.html
Regulating Alternative Business Structures
One of the last Ministerial actions taken by Lord Faulks, before he decided to leave the Government, was to publish a very important consultation on how Alternative Business Structures (ABS) should be regulated.
On 30 November 2015, the Government published, ‘A Better Deal: boosting competition to bring down bills for families and firms’ which set out the Government’s approach to encouraging open and competitive markets, for the benefit of the UK economy and UK consumers. A key part of the Government’s approach is to ensure that the statutory frameworks underpinning regulatory regimes allow regulators to regulate in a way that is proportionate and promotes competition and innovation.
As the legal services market is not only an important contributor to the UK economy, but also to ensuring individuals’ and companies’ access to justice, the Government seeks to develop a strong, independent and competitive legal services market, which will promote consumer choice and quality services at lower prices, ensuring greater access to justice for all.
The Better Deal document included a pledge to consult on two particular matters:
- making changes to the regulatory framework for legal services to remove barriers to market entry, and regulatory burdens on, Alternative Business Structures in legal services, and
- making legal services regulators independent from professional representative bodies.
The second of these is delayed, pending the final report from the Competition and Markets Authority – about which I have written separately.
However on 7 July 2016, the Government published a Consultation Paper on what changes might be needed to the regulation of ABSs.
Background
Since 2010, when Alternative Business Structures were first licensed to provide legal services, over 600 ABS firms have entered the market. According to the Government:
The introduction of ABS businesses, particularly those that have access to external investment and business and commercial expertise, has benefited the market more widely. Recent research has indicated that ABS firms are more likely to be innovative than other regulated legal services firms. These new, innovative providers have increased competition in the market, which [the Government believes] encourages a wider variety of legal services in the market that are more accessible and affordable to consumers.
As a result of concerns raised at the time about the potential risks of new and unknown business models, the legislative framework for the regulation of ABS businesses, set out in the Legal Services Act 2007, is more onerous and prescriptive than that for traditional law firms.
Six years on, experience suggests that ABS businesses have not been shown to attract any greater regulatory risk than traditional law firms. In consequence, the Legal Services Board and front-line regulators suggest that the current statutory requirements act as a deterrent and an unnecessary barrier to firms wanting to change their current business model to a more innovative one, as well as to new businesses considering entering the market.
The proposals
The proposals set out in the consultation aim to enable legal services regulators to reduce regulatory burdens on ABS, while taking a more effective risk-based approach to regulation. The proposals are very technical in nature. The following summary is set out in Legal Futures.
- ABSs should not have to provide reserved legal activities from a practising address in England and Wales. The consultation said this restriction can prevent online businesses being licensed as ABSs, while traditional firms are not required to do reserved work.
- ABS licensing authorities should be able to make their own rules around ABS ownership, in line with guidance to be provided by the LSB. The consultation said the current “inflexible” rules on which non-lawyers need to be investigated before assuming ownership of an ABS leads to unnecessary checks on some people who have no real control or influence over an ABS, but others who should be checked fall outside the definitions set out in the Act.
- Abolishing the requirement to consider whether an ABS applicant explicitly meets the regulatory objective of improving access to justice. There is no equivalent on non-ABS firms or individuals, while all the regulators and licensing authorities are separately under an obligation to improve access to justice anyway. “We consider that this would save cost and time for applicants who wish to become an ABS as well as for regulators.”
- Amend the Act so that heads of legal practice and of finance and administration (COLPs and COFAs in traditional firms) only have to report ‘material’ failures to comply with licensing rules, rather than ‘all’ failures as now. This would bring ABSs into line with non-ABS firms.
The Consultation runs until 3 August 2016.
For Lord Faulks Ministerial statement, see https://www.gov.uk/government/speeches/legal-services-regulation.
For the Consultation paper, go to https://consult.justice.gov.uk/digital-communications/legal-services-removing-barriers-to-competition
For the summary in Legal Futures go to http://www.legalfutures.co.uk/latest-news/government-lays-plans-encourage-abss-enter-market#
Increasing competition in the legal services market
HM Treasury has just published (30 November 2015) a policy paper: A better deal: boosting competition to bring down bills for families and firms.
It notes that 40% of the average persons post-tax income is spent on buying essential services, including
Housing costs including mortgage repayments: £4,880
Energy £1,280
Clothing £1,180
Insurance £875
Telecoms £725
Water £385
Health products and services £325
Legal and Banking £35
Total £9,685
The policy paper sets out its aim of ensuring that there os more competition in all these markets to drive down costs to the indovidual and small business. This is also part of the drive for increased productivity.
Although only a small part of the total, the provision of legal services is not going to be immune from scrutiny. In a Consultation paper, to be published in Spripng 2016, ideas will be set out on new business models, and independent regulators, for legal services.
The White Paper states:
2.10 According to a recent survey by YouGov, 62 per cent of adults have used a law firm or solicitor at some point in their lifetime and the cost of legal services is now considered the most important factor when searching for a legal representative. The government wants to ensure that innovative businesses are able to enter the market, providing greater choice for consumers. Alternative business models are around 15 percentage points more likely to introduce new legal
services than other types of regulated solicitors’ firms.
2.11 The government will launch a consultation by spring 2016 on removing barriers to entry for alternative business models in legal services, and on making legal service regulators independent from their representative bodies. This will create a fairer, more balanced regulatory regime for England and Wales that encourages competition, making it easier for businesses such as supermarkets and estate agents among others, to offer legal services like conveyancing, probate and litigation.
But that is not all. The policy paper promises other initiatives as well. These include:
Saving motorists money on their insurance policy
2.13 The government is determined to crack down on the fraud and claims culture. Whiplash claims cost the country £2 billion a year, an average of £90 per motor insurance policy, which is out of all proportion to any genuine injury suffered. As set out at the Spending Review and
Autumn Statement 2015, the government intends to introduce measures to end the right to cash compensation for minor whiplash injuries, and will consult on the details in the New Year. This will end the cycle in which responsible motorists pay higher premiums to cover false claims
by others. It will remove over £1 billion from the cost of providing motor insurance, and the government expects the insurance industry to pass an average saving of £40 to £50 per motor insurance policy on to consumers.
These changes are likely to have significant impact on those firms which specialise in providing legal services to the victims of road accidents.
Injecting innovation into the process of home buying
2.18 The government wants to inject innovation into the process of home buying, ensuring it is modernised and provides consumers with different – and potentially quicker, simpler and cheaper – ways to buy and sell a home. Encouraging new business models (for example, online only estate agents) is key to enhancing price competition in the real estate sector, but these have yet to penetrate the market.
2.19 In addition, emerging findings from government research suggest that consumers incur costs of around £270 million each year when their transactions fall through and they have already spent money on legal fees and surveys, and many more sales are subject to costly delays. Similar issues can affect businesses trying to buy or sell commercial property – the UK ranks 45th for registering property in the World Bank’s Doing Business index, and improving performance will help unlock additional economic growth.
2.20 The government wants to consider and address the way the real estate and conveyancing markets have developed around the existing regulatory frameworks, encourage greater innovation in the conveyancing sector and make the legal process more transparent and efficient. The government will therefore publish a call for evidence in the New Year on homebuying, exploring options to deliver better value and make the experience of buying a home more consumer-friendly.
The knock on implications for changes to conveyancing are also likely to impact significantly on law firms and conveyancers.
In addition, the Government has promised a further review of how the regulatory structure created by the Legal Services Act 2007 is operating, with a view to making it more efficient. Although nothing will happen immiediately, the legal profession faces considerable policy change which will require innovative and and imaginative reponses, which professionals need to start thinking about now.
The text of the paper is at https://www.gov.uk/government/publications/a-better-deal-boosting-competition-to-bring-down-bills-for-families-and-firms
Alternative Business Structures: keeping up to date
I’ve already noted that it is really hard keeping on track with the development of Alternative Business Structures. The Legal Futures blog (list in the right hand side of this page) is the best source of news and comment. I draw attention to two recent items which I think are important and interesting.
First is a piece by Chris Kenny, Chief Executive of the Legal Services Board, who argues that it is the market, not regulation, that is driving the development of ABS.
Second, is a really excellent survey by Neil Rose, founder of Legal Futures of where the ABS market has reached over the last couple of years.
To read these, go to http://www.legalfutures.co.uk/blog/time-turn-back-clock for the Kenny piece; and http://www.legalfutures.co.uk/blog/waiting-dyson-moment for the Rose article
Co-operative Legal Services: Podcast with Christina Blacklaws
Co-operative Legal Services was the first large organisation to be authorised by the Solicitors Regulatory Authority as an Alternative Business Structure. In this podcast, I talk to Christina Blacklaws, Head of Policy of Co-operative Legal Services.
She explains how the Co-op wanted to move into the legal services market by building on advice services they had for many year provided to their members. There is still a lot of emphasis on helping people to help themselves. But they wanted to be able to offer full legal services for members (and other members of the public) on issues that affect their daily lives, for example moving house, consumer matters, employment matters, family matters, housing matters, probate issues.
The new service is based in the fundamental values of the Cooperative movement.
3 hubs – in Manchester, Bristol and London – are supported by other staff in the Co-op – e.g. in their banks. They also work with other agencies, e.g. Shelter.
She argues that they key to their service is transparent pricing: each issue brought to the service is broken down into segments and clients pay for those segments of the service that they want.
She also argues that the structure of Co-operative Legal Services is an attractive environment for staff; there are opportunities for staff to develop legal skills to enable them to develop their full potential as lawyers.
To hear what Christina has to say go to http://fdslive.oup.com/www.oup.com/orc/resources/law/els/partington13_14/student/podcasts/Blacklaws.mp3
For more information about Co-op Legal Services go to http://www.co-operativelegalservices.co.uk/
Provision of legal services – expanding the roles of Legal Executives
Two decisions from the Legal Services Board (LSB), announced in December 2013, will – if approved by Government – have the effect of enabling legal executives to compete more fully in the legal services market.
The first decision approved at application from ILEX Professional Standards’ (IPS) applications to enable it to authorise members of the Chartered Institute of Legal Executives (CILEx) to practise independently in Probate and Conveyancing. This is likely to pave the way for CILEx members to practise independently in all areas of law. The decision goes to the Lord Chancellor, Chris Grayling, and for subsequent parliamentary approval, anticipated during the course of 2014.
See: http://www.cilex.org.uk/media/media_releases/lsb_approves_practice_rights.aspx
The second decision enables CILEX to regulate Chartered Legal Executives exercising litigation and related rights of audience independently, as well as new rules for regulating immigration advisers.
The ability for individual Chartered Legal Executives already working in a regulated entity to conduct litigation, exercise rights of audience and provide immigration services without supervision requires no further government approval. Thus IPS expects to begin accepting applications from CILEx Fellows in the Summer of 2014. This will benefit thousands of law firms who currently have unnecessary bureaucracies in place to sign-off on the work of experienced Chartered Legal Executives, including those working as fee-earners and partners.
IPS will be able to start authorising independent legal practices offering litigation and immigration services when Parliament has granted powers to set up a compensation fund and to intervene in practices. The LSB has confirmed it will approve IPS’s rules for establishing a compensation fund once Parliament has awarded the relevant powers. This is likely to be taken forward in 2015.
See http://www.cilex.org.uk/media/media_releases/lsb_approves_full_rights.aspx
Provision of legal services: accountants getting in on the act!
Competition in the legal services market will hot up even more in 2014, following the announcement that the Legal Services Board (LSB) has agreed that the Institute of Chartered Accountants in England and Wales (ICAEW) should be a regulator of probate services and also licensing authority for Alternative Business Structures (ABS), subject to approval from the Lord Chancellor.
This is an important step by the Legal Services Board in opening up the provision of legal services. In making this recommendation, the Legal Services Board has recognised that consumers can receive legal services relating to probate work from appropriately regulated ICAEW Chartered Accountants that are of equal quality to traditional legally qualified providers.
It has also recognised that ICAEW is a suitable body to licence ABSs which will facilitate the creation of new business structures between lawyers, accountants and other professionals (such as Independent Financial Advisors).
For initial information, see http://www.icaew.com/en/technical/legal-and-regulatory/legal-services-act/alternative-business-structures
Martin Partington: Introduction to the English Legal System 15th ed 2021
Oxford University Press Learning Link Resources
Martin Partington: Spotlight on the Justice System 