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C2039820_CSP Case study 3 – The Business of Law

Please read the following statement:

“Alternative business structures have disrupted the traditional law firm model in new and innovative ways and will continue to do so in relation to future ways of working in law and the business of law firms.” Prepare a 3,000 word report. The report should contain the following sections. 1. A brief description of the current regulatory framework around Alternative Business Structures and how they are disrupting the traditional law firm models.

2. An analysis of the advantages and disadvantages of new and innovative ways of working in the legal sphere.

Consider some of the points below:

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What clients need and want from their legal advisers

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What are the business benefits for law firms in using these structures

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What future generations want from their careers, including agile working and alternative careers

You should refer to the wider literature, your own research and practical examples. 3. A synthesis of sections 1 and 2 which should comprise reasoned conclusions and reflections as to the future ways of working and business of law.

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C2039820_CSP 1. INTRODUCTION The provision of legal services, especially in recent years, has become an essential portion of the UK’s economy. Just last year, the legal services sector had a turnover of £30.82bn and employed 315,676 individuals1. The increased importance of the legal services market in the UK has led to the need to modernise the way law firms are structured and function, both to better cater to the needs of present-day clients and to remain competitive in the current economic environment2. The Legal Services Act 2007 (The Act) was enacted precisely to revamp both the legal profession regulation and the business structure of legal services. This was done, amongst other things, with the introduction of Alternative Business Structures (ABS)3. Part 5 of The Act came into force on the 6 th of October 2011, allowing the SRA to provide licences to Alternative Business Structures4. In essence, an ABS is defined as “a firm that has been licenced to carry on one or more specific legal activities that are regulated by the Legal Services Act 2007 and whose owners and/or managers are non-lawyers”5. The Act has been set out with the following objectives in mind:6 i)

Protect and promote public interest

ii)

Improve access to justice

iii)

Protect and promote the interest of consumers

iv)

Promote competition in the provision of legal services framework

v)

Encouraging independence and diversity in the legal profession

These objectives may appear quite idealistic and ABS licencing was slow to take off, however, it is now the preferred form of business structure for many firms all over the UK. The following case study report will explore and evaluate the way ABSs are disrupting the legal services industry, as well as the effect they will have on future generations of lawyers.

1 Keith Blakemore, 'Legal Services Sector Forecasts 2017-2025' [2017], The Law Society, 4 2 Stephen Mayson, IF ABSs ARE THE ANSWER, WHAT'S THE QUESTION? [2010], Legal Services Institute, 2. 3 Legal Services Act 2007, Part 5. 4 The law society, 'Alternative business structures' (Business Management, 22 November 2019) accessed 3 July 2021

5 Ibid. 6 Judith A. Mcmorrow, 'Uk Alternative Business Structures For Legal Practice: Emerging Models And Lessons For The US' [2016], 47, Georgetown Journal of International Law, 681.

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C2039820_CSP To ensure the correct functioning of ABSs, some safeguards were put in place. Namely, whenever a non-lawyer individual acquires an interest in the business, the SRA must be notified.7 It must also be ensured that the non-lawyer acquiring interest is unlikely to clash with the objectives of the act that were set out above or with the solicitor duties. 8 To ensure this is complied with, the licensing body (SRA) will have the authority to request the provision of documents and information as it may require before providing any sort of approval9.

2. WHY ADOPT AN ABS SYSTEM Whilst there may be many reasons for a law firm to set up or convert to an ABS, the main driving force will undoubtedly be the need to stay ahead in a commercial framework that is becoming more competitive by the day. According to Khiara & Jones in “The Legal Services Act 2007: the final countdown” 10, amongst others, there are two driving principles that affect the market of legal services. Firstly, globalization, caused by an improvement in quality and speed of communication, which has led to changes in how firms handle their work, pushed by the need to decrease costs and improve efficiency. A good example of this is legal outsourcing, a process that is becoming more and more common11. The second factor is the commoditization of legal services that has been happening in recent years. From a client perspective, law firms are being considered as almost interchangeable and difference in pricing becomes a driving feature when deciding the appropriate service provider12. The following chapters will show that, whilst the features of ABSs provide law firms with the flexibility necessary to remain competitive in the current commercial framework, new challenges must also be faced. 7 Legal Services Act 2007, ss.11, 21, 22, Sched. 13. 8 Ibid. 9 Ibid. 10 Khiara & Jones, ‘The Legal Services Act 2007: the final countdown’ (2011) 7 JIBFL 410, 411-412 11 BPO, 'Legal Process Outsourcing' (GSA-UK), accessed 3 July 2021 12 Russ Alan Prince, 'How Law Firms Can Overcome The Commoditization Crisis In Legal Services' (Forbes, 28 November 2017) accessed 3 July 2021.

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C2039820_CSP 3. ADVANTAGES OF ABS From a service provider standpoint, one of the most obvious advantages of ABSs presents itself in the form of financial aspects. It is common for law firms to finance their business through bank borrowing. 13 Whilst larger law firms may be able to receive investments from the partners and attain favourable interest rates, the same cannot be said for mid to small sized firms, which will need to rely on high interest rate loans in order to remain competitive in the industry. 14The issue is exacerbated when one considers that it is common practice for banks to require the firm owner’s personal guarantee to grant a loan, further increasing the lawyer’s risk.15 Traditionally, this has caused hesitation amongst professionals when deciding to open their own practice, due to the unwillingness to undertake such high levels of risk. This in turn leads to less overall firms and less competition for the existing ones. Ultimately, this hurts the consumer, because of the likely decrease in the overall quality of the legal services provided due to the lack of competition.16 The consumer will be penalized even further when one considers that having a smaller number of available firms leads the cost of legal services to an increase (higher loan interest rates will at least partially be transferred to the client).17 Because ABSs can be managed and owned by non-lawyers, there is now potential for outside investors to finance the firm that will find this form of investment attractive due to the traditionally high profitability margins of the legal sector 18, as well as by the prospect of holding management positions and an overall increase in control over their investment. Other external investors will see synergies with their existing business or potential to diversify. In other words, ABSs have high potential for non-lawyer+ investors.19 Obviously, private investors are a much more endearing form of finance for a law firm when compared to bank loans since they allow professionals to either start their own 13 Justin Schiff, 'The changing nature of the law firm: amending model rule 54 to allow for alternative business structures resulting in nonlawyer ownership of law firms' [2014] 42(1009) Capital University Law Review, 1034. 14Justin Schiff, 'The changing nature of the law firm: amending model rule 54 to allow for alternative business structures resulting in nonlawyer ownership of law firms' [2014] 42(1009) Capital University Law Review. 15 Ibid. 16 Ibid. 17 Ibid, 28. 18 Nick Jarrett-kerr, 'Alternative Business Structures – the Long Pregnancy' [2011] (11) Legal Information Management, 84. 19 Ibid.

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C2039820_CSP practice or further expand their current one without the worry of oppressive interest rates. This will ultimately also benefit clients, that will likely receive better services for a cheaper price. Another potential method of expansion that ABSs allow, comes in the form of becoming part of a larger brand.20 Being part of a franchise or umbrella organisation, such as Face2Face or High Street lawyer, allow for smaller firms to compete in this increasingly competitive environment, as well as providing marketing opportunities and reach that would otherwise be out of question.21 Another advantage of ABSs comes in the form of diversification. Law firms, especially small ones, are often unable to provide multi-faceted legal advice and for this reason tend limit their advice strictly to legal aspects22. With the introduction of non-lawyers as managers, it is likely that their business experience and expertise over non-legal matters will provide valuable insights to the solicitors. In other words, having highly specialised workers such as engineers, architects or traders as members of staff helps firms to be commercially minded when providing legal advice.23 The employment of non-lawyers as members of the team is also likely to make firms better equipped in the litigation process because, whilst the lawyers are well versed in the legal concepts, the non-lawyer manager/owner not only will have a better understanding of the issues but are also likely to know and be on good relations with experts in the field, that can then in turn be employed when expert evidence is needed.24 Simply put, having a non-lawyer on board will benefit both the firm and the consumer. The first will have a better understanding of the case and the issues at stake, the second will receive better legal advice. Another potential benefit of becoming an ABS comes in the form of more favourable taxation25. For instance, setting up a limited liability company with payment of both salaries and dividends is likely to have a more favourable taxation regime compared to a company that pays salaries alone26. 20 Nick Jarrett-kerr, 'Alternative Business Structures – the Long Pregnancy' [2011] (11) Legal Information Management, 83. 21 Ibid. 22 Ibid, 28. 23 Ibid, 29. 24 Ibid. 25 Andrew Hogan, 'Alternative Business Structures and Personal Injury Litigation' [2011] Ropewalk Chambers, 3 26 Ibid.

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C2039820_CSP When considering consumers of legal services, other than the above-mentioned advantages of cheaper and better advice, ABSs pave the path to the idea of one-stop shops, multidisciplinary practices. This type of business is generally disliked by solicitors due to the fear of losing control over the way the profession handles legal advice to clients, since lawyers in a multidisciplinary practice will forcibly need to interact with non-lawyers27. However, this practice would greatly benefit many clients.28 Most consumers (by volume, not necessarily by value) are only occasional buyers of legal services29, since it is unlikely for this type of client to have the market knowledge, the time and general sophistication to resolve each separate aspect of the issue they face, a single place of business to solve the entirety of the issue is an attractive proposition.30 Looking from the point of view of law firms in the fast-growing world of globalisation, it is essential for firms to expand into foreign markets if they are planning to stay competitive. Using an Alternative Business Structure will benefit the firm’s ability to take advantage of recent advances in technology and the way information is shared, allowing for law firms to work more efficiently in the international framework 31. However, while an ABS opens to the possibility of foreign investors as well as the ability to collaborate more closely with firms overseas, as it will be explained later, it is also possible for an ABS to be disadvantageous for certain markets where there is hostility towards the implementation of this type of business structure.32 In summary, even if not suitable for all, one should keep in mind that utilising an ABS can be a great opportunity for law firms to adapt to the competitive pressures of the market and differentiate themselves from the mass, providing tangible benefits and a unique skillset to consumers that few other competitors can provide.33

27 Stephen Mayson, IF ABSs ARE THE ANSWER, WHAT'S THE QUESTION? [2010], Legal Services Institute, 7. 28 ibid 29 ibid 30 Stephen Mayson, IF ABSs ARE THE ANSWER, WHAT'S THE QUESTION? [2010], Legal Services Institute, 7. 31 Ibid. 32 Jakob Weberstaedt, 'English Alternative Business Structures and the European single market' [2014] 21(1) International Journal of the Legal Profession, 109.

33 Nick Jarrett-kerr, 'Alternative Business Structures – the Long Pregnancy' [2011] (11) Legal Information Management, 84.

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C2039820_CSP 4. DISADVANTAGES OF ABS The evaluation of ABS would not be complete without an analysis of the potential disadvantages and challenges caused by this business model. The most popular concern of those who oppose ABSs is that non-lawyer partners are likely profit motivated, do not fully comprehend the work of solicitors and the type of relationship they establish their client, so there is potential for partners to trade off quality of client services for profit maximisation.34 This criticism however does not take into account that law firms have essentially become profit motivated just like in any other industry so, whilst it is a valid issue to keep in mind, it is not as critical as one may think.35 It is also important to highlight that the above concern does not extend to a risk of solicitors breaching their duty to the client because, thankfully, the Legal Services Act 2007 provides the following safeguards under S.176: “a regulated person in relation to an approved regulator has a duty to comply with the regulatory arrangements of the approved regulator as they apply to that person”36. Non-authorized investors are under a similar duty following s.90 of The Act. However, in practice, solicitors might be influenced by the non-lawyer managers when making decisions for the client 37, since they are on a position of power over them. Duplicity of regulation could also be an issue for ABSs, sice they are essentially hybrid business models. If, for example, a firm is both an ABS and a registered audit by the Institute of Accountants, it is likely that both regimes of regulation will apply, potentially causing uncertainty on the regulatory context38. As mentioned before, when looking at the framework of international legal services market, particularly in Europe, there has been some level of reluctance towards ABSs, so some issues arise when considering the interactions of ABS with foreign practices and

34 Justin Schiff, 'The changing nature of the law firm: amending model rule 54 to allow for alternative business structures resulting in nonlawyer ownership of law firms' [2014] 42(1009) Capital University Law Review,1041.

35 ibid 36 Legal Services Act 2007, S.176. 37 Justin Schiff, 'The changing nature of the law firm: amending model rule 54 to allow for alternative business structures resulting in nonlawyer ownership of law firms' [2014] 42(1009) Capital University Law Review,1040.

38 Jeff Triggs Slaughter and may, '' (ABS’s – The Future for Law Firm Investment?) accessed 3 July 2021.

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C2039820_CSP individuals from countries reluctant to implement or unwilling to harmonise with this new system. A perfect example of resistance to ABS by continental countries is a letter by the president of the German Federal Bar (BRAK) to the UK parliamentary Joint Committee where it was stated that “German Rechtsanwalte as well as solicitors and barristers established in Germany would infringe German professional rules if they became a member of such type of an ABS”39. Further to this, The Council of Bars and Law Societies of Europe released a statement expressing the likelihood that most European jurisdictions would apply Article 11 of Directive 98/5/EC, with the effect that advocates, barristers and solicitors practicing within ABS could not provide legal services under their professional title40. As one can imagine, this greatly undermined the confidence of many firms that were interested in becoming an ABS41. When considering article 6(1) of the Lawyers’ Establishment Directive, a lawyer established abroad will be required to serve the professional regulations of the host state, irrespective of the rules of professional conduct of the home Member State 42. It is therefore unlikely that European lawyers will not be able to work under lawyer capacity of UK based ABSs. However, based on the opinion of the CCBE, it is also unlikely that ABSs will be able to provide reserved activities in continental countries. What a reserved activity is will depend on the way each jurisdiction defines it, but essentially, they consist of legal services.43 It is important to note that, since the time ABSs were introduced, Brexit has taken place. Whilst there is no certainty, it is unlikely that the position of European nations is going to change regarding the implementation of ABSs. On overall, the legal uncertainty that surrounds the introduction of ABSs to the European market is likely to put off more than a few potential investors.

39 Jakob Weberstaedt, 'English Alternative Business Structures and the European single market' [2014] 21(1) International Journal of the Legal Profession, 106.

40 Ibid, [107]. 41 Ibid. 42 Ibid, [112]. 43 Ibid, [113].

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5. ABS IMPACT ON LEGAL SERVICES When ABSs were initially conceived, one of the biggest fears was that “banks, insurance companies and supermarket chains”44 would begin to offer legal services45, causing legal services to be treated like a trade, instead of a profession. Thankfully, this is far from what has happened in the UK. Whilst out of the first three ABS licences granted by the SRA, one of them was to CoOperative Legal Services (subsidiary of the Co-Operative Group), it has not developed to become a much feared form of “Tesco Law”. Instead, the development of ABSs appears to have acquired the interest of companies in the likes of LegalZoom, the US’s leading legal document creation provider. The company recently became an ABS to overcome the US ban on non-law firms practicing law by employing US lawyers through its UK subsidiary46. LegalZoom recorded revenues of $471M in 202047. Whether this practice is viewed as morally adequate or not, it is a clear indicator of the potential ABSs have in bringing large injections of capital into the UK legal services market, whilst also displaying the great flexibility ABSs provide in allowing parallel markets to work in harmony with the legal services provision market. This new business structure can be used for much more than simply amoderise the business model of traditional firms48. When looking specifically at the UK’s domestic framework, the 2014 Qualitative Research into ABA49, must be considered.

44 Jakob Weberstaedt, 'English Alternative Business Structures and the European single market' [2014] 21(1) International Journal of the Legal Profession, 109.

45 Ibid. 46 Neil Rose, 'LegalZoom uses ABS to bypass US ban on employing lawyers' (Legal Futures, 8 June 2021) accessed 3 July 2021. 47 Ibid. 48 Jakob Weberstaedt, 'English Alternative Business Structures and the European single market' [2014] 21(1) International Journal of the Legal Profes...