Article reference: UK-IA-COM08

Alternative legal business structures under Legal Services Act

This article explains how alternative business structures enables both lawyers and non-lawyers to form legal partnerships and companies as vehicles for the provision of reserved legal services.

 
 

 

The Legal Services Act brings a significant wave of change to the legal profession and creates a markedly different landscape. It is the first attempt to bring the entire legal services market under one regulatory framework and departs significantly from the previous structure of the profession.

Historically, there have been a number of statutory restrictions on the type of business structures through which legal services may be provided. Some existing regulators have also prohibited lawyers from entering into partnership with non-lawyers. Certain regulators have also placed restrictions on the ways in which non-lawyers can participate in the management of firms. In other cases, regulators do not have the powers they need to regulate a more diverse range of business structures.

Where non-lawyers are managers of, or have an interest in, such a body, the body must become a licensed body, licensed and regulated by a licensing authority, in accordance with the provisions of Part 5 of the LS Act. Existing regulators of legal services may apply to the Board to become licensing authorities. If there are no other appropriate licensing authorities, the Board itself can act as a licensing authority.

Aims of the Legal Services Act

The Act aims to provide benefits for consumers that include:

  • more choice: consumers will have greater flexibility in deciding from where to obtain legal and some non-legal services.
  • reduced prices: consumers should be able to purchase some legal services more cheaply. ABS firms should be able to benefit from economies of scale and reduce transaction costs in situations where different types of legal professionals are part of the same firm.
  • improved access to justice: ABS firms might find it easier to provide services in rural areas or to less mobile consumers.
  • better consumer service: consumers may benefit from a better service where ABS firms are able to access external finance and specialist non-legal expertise.
  • greater convenience: ABS firms can provide one-stop-shopping for related services, for example car insurance and legal services for accident claims.
  • increased consumer confidence: higher consumer protection levels and an increase in the quality of legal services could flow from ABS firms that have a good reputation in providing non-legal services. These firms will have a strong incentive to keep that reputation when providing legal services.
  • allowing new providers into the marketplace should lead to innovation and price reductions. This should result in more people being able to access legal services.

There are also potential benefits for providers:

  • increased access to finance: at present, providers can face constraints on the amount of equity, especially debt equity, that they can raise. Using an alternative business structure will allow a firm to expand (including into international markets) and to invest in large-scale capital projects that increase efficiency.
  • better spread of risk: a firm could spread its risk more effectively among shareholders. This will lower the required rate of return on any investment, facilitate investment and could deliver lower prices.
  • increased flexibility: non-legal firms such as insurance companies, banks and estate agents will have the freedom to form ABS firms with legal firms and offer integrated legal and associated services.
  • easier to hire and retain high-quality non-legal staff: ABS firms will be able to reward non-legal staff in the same way as lawyers.
  • more choice for new legal professionals: ABS firms could contribute to greater diversity by offering those who are currently under-represented more opportunities to enter and remain within the profession.

Becoming an ABS

The ABS regime is facilitative. There is no obligation for a firm to become an ABS, although there may be some pressure from competitors who might influence whether or not a firm decides to become one.

A firm:

  • must have at least one "manager" who is authorised to provide the reserved legal activity delivered by the ABS; and
  • must have at least one non-lawyer "manager" or owner

The LSA requires all ABSs to have a Head of Legal Practice (known as the HOLP) and a Head of Finance and Administration (known as the HOFA).

The HOLP must be a lawyer and is responsible for ensuring compliance with the terms of the ABS's license and for reporting to the licensing authority any failure to comply with the terms of the license.

The HOFA (who does not need to be a lawyer) is responsible for ensuring compliance with the licensing rules that relate to the treatment of money held by the ABS, and for keeping of the firm's accounts, and is also required to report any breach of those rules to the licensing authority.

Potential models for law firms

The potential models for different ABSs are therefore very wide-ranging.

An traditionally structured legal disciplinary practice with even one non-lawyer manager needs to be licensed as an ABS.

At the other end of the scale, major commercial organisations could buy a law firm or set up a subsidiary to provide reserved legal activities.

There are many models in between: private equity can invest in law firms; law firms might float on the stock market; lawyers and other professionals could come together to provide a range of services through one business.

Generally, there are probably three broad types of model in place.

The first model is a firm that acts like traditional law firm or legal disciplinary practice, but with the involvement of one or more individual non-lawyer managers (which is no longer limited to 25 percent ownership and control), without external ownership, and providing solicitor-type services only.

The second model includes complete or partial external ownership with the legal services being operated through a ring-fenced entity. If a high street store were to set up a legal services division, it is likely to set up a separate subsidiary, ring fenced from the rest of its activities, so that only the ring fenced company will be regulated as an ABS.

The third model would involve combinations of different services within one entity - the multidisciplinary practice model.

The previous basic framework of regulation, adapted to focus upon outcomes and intelligent supervision, is relatively easily applied to models one and two, with some additional provisions to deal with risks associated with external ownership. The third model presents more of a regulatory challenge, although not necessarily additional risk; in that it would not be appropriate, for example, to apply rules relevant to legal work to a completely different service.

Even with the advent of ABSs, certain arrangements remain prohibited because they are contrary to the public interest. For example, any arrangement which compromises a firm's ability to give independent advice to clients, directly or indirectly; or that allows a third party to access confidential information concerning clients.

Regulation

Regulators such as the SRA are empowered (subject to approval by the LSB) to regulate such firms and their external owners and investors in the public interest.

The LSA contains a number of regulatory safeguards to ensure that ABSs and their external owners and investors behave appropriately. It is clearly Parliament's intention that practices which have the features of an ABS should only be permitted when they can be properly regulated in the public interest.

Summary

There is still uncertainty at this stage about how the legal services market will develop.

The purpose of the introduction of ABSs is to improve consumer choice and value, bringing benefits for disadvantaged sections of the community. But there are possible negative impacts for some sections of the community as well. For example, there may be access problems if the geographical spread of law firms changes significantly, although this might be offset by the development of alternative means of accessing legal services.

Please note that the information provided on this page:

  • Does not provide a complete or authoritative statement of the law;
  • Does not constitute legal advice by Net Lawman;
  • Does not create a contractual relationship;
  • Does not form part of any other advice, whether paid or free.
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