The Legal Services Board’s (LSB) annual report asserts that alternative business structures (ABS) continue to have a “direct and positive impact” on the legal market. They have provided an effective structure for firms who wish to take a different approach to meeting legal need. There are now more than 1000 ABS in England and Wales. Research conducted by the LSB in 2018 shows that ABS are significantly more likely to use new technology and are more innovative than other types of law firm.
Read the full report here
Regulators are poised to consider radical rule changes that could decisively open the way to allowing non-lawyers into the legal profession of the US’s most populous state.
The State Bar of California voted earlier this month to accept a report from legal academic Professor William D. Henderson calling for structural reforms to the way the market is regulated. The bar’s board of trustees further resolved to authorise a taskforce to study and come back with recommendations for reforms that balance the goals of public protection and increased access to justice.
The taskforce proposals – not expected until 2019 – could pave the way for a version of the alternative business structure regime in the UK and Australia, allowing a system where non-lawyers are able to own law firms and legal businesses are able to take on external capital investment. Despite repeated attempts to encourage liberalisation in the US – and not withstanding sporadic examples of legal markets opening to outsiders – the US profession has overwhelmingly resisted emulating England and Wales.
In his report, Prof Henderson cited the problem of ‘lagging legal productivity’ and that, in contrast to medical care and higher education, a growing proportion of US consumers are choosing to forgo legal services rather than pay a higher price.
Read the Full Article
Platform economy breaks into the legal profession by pooling lawyers with different specializations into a simple user-friendly platform, consolidating the lower-tier supply side of the legal market and generating economy of scale. This paper is the very first empirical piece looking into China’s online legal service portals. It is found that, the intermediary functions of the portals as the “matchmaker” between the supply and the demand side are often commingled with certain substantive legal services, which cannot be easily unbundled from each other. Given the grand information asymmetry in legal service provision and the potential importance the users may attach to the portals’ recommendation, the quality of such intermediation and matchmaking still leaves to be desired. This being said, because the portals help to improve the access to justice in China by virtue of offering an EXTRA channel for acquiring and comparing potentially useful information, which is made available at a much lower cost than visiting a physical law firm, the regulator should strive to improve the quality, rather than block up the source of the information. To that end, this paper proposes, based on the inspiration of the ABS regime, an alternative license for these online legal service providers, which imposes minimum regulatory and leaves room for new innovative business structures to evolve.
Full Paper Available Here
Jing Li, Tilburg University – Department of Business Law
Following the Legal Services Act 2007, which permitted the delivery of legal services through Alternative Business Structures (ABS), the Solicitors Regulation Authority required all regulated legal service firms to appoint Compliance Officers for Legal Practice (COLPs). COLPs are charged with taking reasonable steps to ensure that firms comply with their obligations, which entails interpreting what outcomes‐focused regulation (OFR) requires of the firm. Yet despite their importance, little is known about how compliance roles operate within legal service firms. We addressed this gap through a series of qualitative interviews that explored COLPs’ views of their roles, their attitudes to regulation, in particular to OFR, and to achieving compliance. We found that COLPs are a key regulatory mechanism in the context of firm‐based regulation and OFR and have a critical role to play in protecting and promoting professional values in both ABS and non‐ABS entities.
Full Paper Available Here
Sundeep Aulakh, University of Leeds – Work and Employment Relations & Joan Loughrey, University of Leeds
This report, produced by Hook Tangaza, was commissioned through McDowell Purcell Solicitors by the Legal Services Regulatory Authority (“the Authority”) in Ireland. It is intended to assist the Authority in fulfilling its obligations under section 119 of the Legal Services Regulation Act 2015 (“the Act”). Section 119 requires the Authority to make an initial report to the Minister for Justice and Equality (“the Minister”) on the establishment, regulation, monitoring, operation and impact of multi-disciplinary practices (“MDPs”) in the State. This initial report is required to include information on the operation of similar practices in other jurisdictions, the likely consequences for existing models of legal practice in Ireland and the likely impact of MDPs on legal costs, on the provision of legal services to consumers, on access to legal practitioners and on the regulatory objectives set out in the Act.
Link to full report:
From a global perspective, the composition of legal practice components is undergoing tumultuous change. The concept of multidisciplinary practice has been embraced in many countries, where lawyers partner with non-lawyers and offer both legal and non-legal services. Less well received are alternative business structures, where lawyers and non-lawyers are permitted to be partners, and outsiders are permitted to be investors, in entities that offer legal services. The move away from the traditional law practice has sparked spirited and diverse debate, especially in European Union [EU] countries where trade in services is an essential component.
A primary concern of the opposition was the compromise of the core values of the legal profession. However, while the debate on alternative business structures continues, it is of interest that in those countries where the practice is embraced, no adverse effect from outside investors has been reported. If this continues to be the case, and if these business configurations give lawyers a competitive advantage, it is likely that the naysayers may be more open to innovation and the development of these new paradigms.
Citation: Hill, Louise L., Alternative Business Structures for Lawyers and Law Firms: A View from the Global Legal Services Market (2017). Oregon Review of International Law, v. 18, 2017; Widener University Delaware Law School Legal Studies Research Paper Series No. 17-14.
Using a unique data set comprised of original research of both the corporate websites of the Big Four — PwC, Deloitte, KPMG, and EY — and their affiliated law firms, as well as archival material from the legal and accountancy press, this article documents the rise and transformation of the Big Four legal service lines since the enactment of the Sarbanes Oxley Act of 2002. Moreover, it demonstrates that there are good reasons to believe that these sophisticated players will be even more successful in penetrating the corporate legal services market in the decades to come, as that market increasingly matures in a direction that favors the integration of law into a wider category of business solutions that these globally integrated multidisciplinary practices now champion. The article concludes with some preliminary observations about the implications of the reemergence of the Big Four legal networks for the legal profession.
Link to the full article
Citation: Wilkins, David B. and Esteban, María J., The Integration of Law into Global Business Solutions: The Rise, Transformation, and Potential Future of the Big Four Accountancy Networks in the Global Legal Services Market (August 3, 2017). Law and Social Inquiry, 2017; HLS Center on the Legal Profession Research Paper No. 2017-2. Available at SSRN: https://ssrn.com/abstract=3013154
A major aim of the introduction of alternative business structures (ABS) in England and Wales was to allow new forms of capital into regulated law firms to improve market efficiency. Enabling external investment in law firms was designed to allow less reliance on short term sources of financing such as personal debt and overdrafts. The expectation was that the admission of new capital would increase competition and reduce the cost of legal services, to the benefit of the regulatory objective of access to justice. In turn reduced cost should improve access to legal services translated through lower prices, as cost –perceived and actual – is a key barrier to accessing legal services for individuals and small businesses.
However, investment in law firms remains an under-explored area of research. To address this knowledge gap, the Legal Services Board (LSB) commissioned a piece of research to identify current sources of capital and establish how the investor community views the market and any barriers to investment.
Key findings of the report
The research showed:
- The majority of ABS firms (66%) either have already invested (in themselves) 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.
- Overall, 52% of ABS had made an investment in their business since obtaining their licence, and 14% are planning to do so. Although only limited data is available about investment by non-ABS entities, where it exists it suggests that a greater proportion of ABS make investments than non-ABS entities.
- ABS firms access a wide range of sources of finance, and only a small proportion of ABS indicate 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 using 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.
- According to investors, 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. Investors appear to have concerns about the ability to exit the legal sector once their investment has matured.
- 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.
- 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.
- The low level of external investment seen to date may be a symptom of weak competition in the market overall, as found by the Competition and Markets Authority market study, LSB’s Market Evaluation and the joint SRA/LSB research revealing that levels of innovation are only increasing slowly. In the absence of strong competition, there is little impetus for law firms to take the greater risks (and rewards) involved with using external capital. Until these incentives change we may not see significant growth in the use of external capital by ABS firms.
You can read the full report on the LSB’s website.
In Australia, amendments to the Legal Profession Act require that incorporated legal practices (ILPs) implement ‘appropriate management systems’ to assure compliance with the Legal Profession Act 2004, and appoint a legal practitioner director to be responsible for the management of the ILP.
The new law did not define ‘appropriate management systems’ (AMS) so the Office of Legal Services Commissioner for New South Wales worked with representatives of other organizations and practitioners to develop guidelines and an approach for evaluating compliance. This involved the designated director completing a self-assessment process (SAP), evaluating the ILP’s compliance with ten specific objectives of sound legal practice.
To evaluate the new regulatory regime, Professor Susan Fortney conducted a mixed method empirical study of incorporated law firms in New South Wales Australia. In Phase One of the study, all incorporated law firms with two or more solicitors were surveyed. In Phase Two, legal services directors were interested. This article discusses the survey findings, focusing on the relationship between the self-assessment process and the ethics norms, systems, conduct, and culture in firms.
Fortney, Susan Saab and Gordon, Tahlia Ruth, Adopting Law Firm Management Systems to Survive and Thrive: A Study of the Australian Approach to Management-Based Regulation (January 22, 2013). St. Thomas Law Review, Forthcoming; Hofstra Univ. Legal Studies Research Paper No. 13-02. Read the article at SSRN
The Australian state of New South Wales (NSW) was the first jurisdiction to fully deregulate law firm structure and allow alternative business structures. At the same time it required that incorporated legal practices implement ‘appropriate management systems’ for ensuring compliance with professional ethical obligations.
This paper presents a preliminary empirical evaluation of the impact of this attempt at ‘management-based regulation’. We find that the NSW requirement that firms self-assess their ethics management leads to a large and statistically significant drop in complaints. The (self-assessed) level of implementation of ethics management infrastructure, however, does not make any difference. The relevance of these findings to debates about deprofessionalization, managerialism, and commercialism in the legal profession is discussed, and the NSW approach is distinguished from the more heavy-handed English legal aid approach to regulating law firm quality management.
Parker, Christine and Gordon, Tahlia Ruth and Mark, Steve A., Regulating Law Firm Ethics Management: An Empirical Assessment of an Innovation in Regulation of the Legal Profession in New South Wales. Journal of Law and Society, Vol. 37, Issue 3, pp. 466-500, September 2010. Read article on SSRN.