This document was prepared by the OECD Secretariat to serve as an issues paper at the 61th meeting of the OECD Working Party No. 2 on Competition and Regulation (13 June 2016).
This paper introduces recent disruptive innovations in legal services markets, as well as the overarching trends giving rise to them. The role for competition authorities in the face of legal services disruptive innovation, particularly with respect to competition advocacy, is also identified. The rationale for legal services regulations and the composition of these regulations is then briefly summarised. It is hoped that this will provide a starting point for the discussion that follows of the impact of disruptive innovations on the motivations for, and design of, current regulations.
Link to full report: OECD disruptive innovation and legal services
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.
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.
The month of May saw two technology and legal regulation issues come to light in the US.
Cyber security and client communications
The changing technological landscape and rising incidence of “cyber intrusion” prompted the ABA’s ethics committee to update an 18-year-old opinion on whether lawyers must use encrypted e-mail when communicating with clients. Technologically, much has changed in the past 18 years regarding how lawyers and clients communicate. Unfortunately lawyers are often the weak link in the cyber security chain making them an obvious target for cyber criminals. Read more…
Florida Supreme Court rejects proposal to regulate online ‘legal matchmakers’
The Florida Supreme Court on May 3 rejected a controversial proposal—supported by state bar leaders but opposed by some of the most successful legal technology startups—that would have subjected companies in the burgeoning “legal matchmaking” industry to regulation by state bar authorities. The proposed rule changes could have subjected some of the most disruptive industry startups—including LegalZoom, RocketLawyer, UpCounsel and Avvo—to a host of regulatory requirements that may have increased their operating costs or required them to revise plans to plow resources into the legal matchmaking sector. Read more…
London, United Kingdom | 15 July 2016
In a fast-changing marketplace, how do regulators build public confidence and balance public protection with the need to support an open competitive market that provides high-quality, affordable services? Trust and the market: Rethinking regulation addresses this question. Chaired by broadcast journalist Krishnan Guru-Murthy, experts from several sectors share their views on the UK regulatory landscape.
- Rethinking regulation, Paul Philip, SRA Chief Executive
- A question of trust, Crispin Passmore, SRA Executive Director of Policy
- The importance of trust, Ben Page, CEO of Ipsos MORI
- Panel discussion: Professionalism in practice
- Chair – Krishnan Guru-Murthy, broadcast journalist and specialist news presenter
- Simon Howard, Head of Professional Standards at the Architects Registration Board
- Ben Page
- Crispin Passmore
- Mike Petrook, Director of Communications and Corporate Affairs at the Institute of Customer Service
- Hugh Simpson, Director of Strategy at the General Pharmaceutical Council
- Caroline Wallace, Director of Strategy at the Legal Services Board
Open data: The building blocks of trust
- The role of open data in public interest regulation
- Open data and informed consumer choice
- Modern professional registers
- Matthew Briggs, CEO of The Law Superstore
- Elisabeth Davies, Chair of the Legal Services Consumer Panel
- Jane Malcolm, SRA Executive Director of External Affairs
- Regulation in a modern marketplace, Chris Jenkins, Economics Director at the Competition and Markets Authority
- Panel discussion: regulating the modern marketplace
- Chair – Krishnan Guru-Murthy, broadcast journalist and specialist news presenter
- Glyn Gaskarth, Head of Crime and Justice policy at Policy Exchange
- Chris Jenkins, Economics Director at the Competition and Markets Authority
- Dame Janet Paraskeva, Chair of the Council for Licensed Conveyancers
- Paul Philip, SRA Chief Executive
- Cathryn Ross, CEO of Ofwat
In January 2016 the UK’s Competition and Markets Authority (CMA) began a market study on the supply of Legal Services in England and Wales, to see whether the market is working sufficiently well in the interests of consumers. The CMA is the UK’s primary competition and consumer authority.
In its statement of scope, the CMA observed:
- perceptions that demand in legal services is ‘unmet’
- concerns about the affordability of legal services
- concerns about service standards by both regulated and unregulated providers
- concerns about the complexity of the regulatory framework
- ‘markedly different’ views on how the current regulatory framework could be further reformed
- relatively low levels of consumer empowerment in the sector
- new developments in how legal services are provided to consumers
- concerns about how effective the redress mechanisms for legal services are and whether there are gaps in the current redress framework
For the timetable, statement of scope, responses and report read the legal services market study page on the gov.uk website