The new Alternative Business Structures (ABS or “Tesco law”) are shaking up the legal profession and have been called “Mafia Law” by some. But for SME businesses, the future looks bright
Legal profession traditionalists had been partially dismissive and considerably fearful of the beginning of this January – and some would suggest not without good reason. Lawyers’ fees for small and medium-sized enterprises (SMEs) both inside London and are likely about to get slashed, due to the recent implementation of the Legal Services Act 2007.
But there will be other profound benefits to business clients following what is being described as the legal profession’s ‘big bang’ – not least a move by innovative law firms and entrant providers of legal advice towards greater efficiency and transparency in the way they deal with their business clients.
The new model has at its forefront a creature described as an ‘alternative business structure’ (ABS) – the unofficial sobriquet for which has been “Tesco law”.
Observers of the legal sector are already predicting that the ABS model will encourage and make it easier for SMEs to seek reasonably priced and easily understandable crucial legal advice, filling a gap that has long existed in their business lives.
How did “Tesco law” come about, and why are the Co-op and BT using it?
Let’s backtrack to 2004, which seems as though it was a different eon for the legal profession. It was in December of that year that a bleary-eyed former Deputy Governor of the Bank of England, Sir David Clementi, stayed up until the small hours in London so he could be beamed by live satellite link to the annual conference of the International Bar Association. That’s the world’s biggest meeting of international business lawyers – and that year was held in Auckland.
Hovering over the gathering like Yoda from Star Wars, Sir David partially unveiled his imminent report into the regulation and provision of legal services in England and Wales.
He spoke somewhat obliquely, but unavoidably, about the creation of multi-disciplinary partnerships, and, perhaps more shockingly, about the investment of external capital into law firms.
For many in that New Zealand conference hall, such talk seemed at best to be academic star gazing, while at worst alarmist scare-mongering – done, arguably, for dramatic affect in a bid to justify a year-long, government-sponsored report. Both views were dead wrong, although it’s taken more than seven years for the fruit of Sir David’s report to ripen and fall from the tree.
Now that it has, the legal profession seems capable of talking of little else. From the beginning of this year, law firms and other entities aspiring to ABS status have been allowed to apply to various regulators for approval. In reality, for those looking to become full-service ABSs, there is only one regulator in the game: the Solicitors Regulation Authority (SRA).
“If I’m a small company, at the moment the last thing I want to do is instruct a solicitor, because all I’m going to get is advice that I don’t really understand and I’m going to pay a lot of money for it. ABSs will make the process of getting legal advice more customer-friendly and focused.”
As recently as a year or so ago many traditionalist lawyers were still pooh-poohing the advent of ABSs, claiming their introduction would be more damp squib than big bang. But in reality the SRA has been swamped with applications. Indeed, so much so – since the beginning of the year it has received more than 10 a week, with the total number now approaching 200 – that there is criticism the authority underestimated the demand so drastically that it is now unable to deal efficiently with the volume.
The big ABS application moves so far have included one major retailer: the Co-operative, announcing last November that it intends to launch a family law business from the middle of this year.
Likewise, telecoms giant BT announced only a few weeks ago its intention to apply for ABS status for its existing motor claims management function so that it will be able to provide that legal service to other businesses.
There have also been dramatic recent moves on the law firm side. At the end of January, London-based national practice Russell Jones & Walker – the 64th biggest law firm in the country with an SME, consumer and trade union client base – was bought by Australia’s Slater & Gordon.
While the Anglo-Australia link is interesting in itself, it is not unique. What is groundbreaking is the fact that the Melbourne-based firm was the first in the world take external investment when it was quoted on the Australian stock exchange in 2007. Therefore, pending SRA approval, Russell Jones & Walker will be come the first international English law firm to have an element of non-lawyer ownership.
It was a development that was unthinkable no more than a decade ago. When David Clementi first mooted the proposition, there were screeches of protest that allowing non-lawyers to own law firms would be tantamount to licensing Satan himself to practise law.
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Could “Tesco law” become “Mafia law”?
The main ethical concern – which still exists in the minds of many traditionalists – is that grubby, non-lawyer investors are not imbued with the same pristine high ethical standards of qualified practitioners. Money laundering was the big fear, with some suggesting that investing in law firms would be hugely attractive to organised crime and even terrorists.
So, far from “Tesco Law”, the doom-mongers suggested the reforms were far more likely to lead to “Mafia law” or even “al-Qaeda law”.
The reality comes partially in the form of the far more benignly named Riverview Law, another high-profile applicant for ABS status announced only a few days ago. Its structure is arguably the most important for SMEs as it specifically aims to cut fees, as well as provide ironclad certainty in billing.
Cutting fees and improving services for SME businesses
The Riverview Law practice – which along with nearly 150 other businesses is still awaiting ABS approval from the regulator – brings together solicitors and barristers and offers businesses advice on an exclusively fixed-fee basis. As they wave good-bye to hourly billing – a traditional feature of law firms that has given countless SME businesses a shock when they receive their law firm invoices – the firm’s founders released a statement saying the legal profession has been “protected from real competition for too long”.
Over at Russell Jones & Walker, chief executive Neil Kinsella is equally succinct in his assessment: “What ABSs are really about are bringing the legal profession into the 21st century.”
For Mr Kinsella, the crux of the issue around
ABSs “is that the legal profession is being opened up”.
That will have a direct impact on smaller business clients – some of whom might have been deterred in the past from seeking legal advice – as “some smaller law firms will now have the opportunity to get themselves together to offer their services to SMEs from a much lower cost base than the big firms.
“There will be players who enter the new space who consolidate and make better use of technology to interact with the needs of SME clients. For example, we envisage being able to offer a range of more efficient services to owner-managed businesses – services around property and organisational contracts.
“Lawyers have traded for many centuries on their ability to make things look complicated, and this will simplify the way in which advice is given and delivered.”
“And others will come into that space as well to challenge the cost base of the bigger practices.”
Others applying for ABS status agree. Tim Oliver, chief executive of the Parabis Group, which includes the law firms Plexus Law and Cogent Law, led his outfit to the front of the queue for a licence, making an application at the beginning of January.
“The key for me,” he comments, “is to make the legal profession more commercial in its outlook and more commercial in the way that it can transact business. That will then filter through to the way legal services are delivered and the costs of those services, particularly to the SME community and to individual consumers.”
Oliver maintains that the traditional structure of the legal profession has significantly deterred SMEs from seeking much needed advice. “If I’m a small company, at the moment the last thing I want to do is instruct a solicitor, because all I’m going to get is advice that I don’t really understand and I’m going to pay a lot of money for it. ABSs will make the process of getting legal advice more customer-friendly and focused.
“For SMEs, this is a bit like what the government has been saying regarding health and safety – make it simple, make it understandable, and make it relevant – and make it cost effective.
“Left to its own devices so far, the legal profession hasn’t done that, which is why there is legislation allowing external investment. It is not designed to give lawyers a big pay-day, it is designed to bring in other types of commercial influences and experiences.”
For Oliver and other proponents of the ABS regime, the mantra is demystification. Legal services, they say, will be much more transparent and delivered in plain English. Comments Oliver: “Lawyers have traded for many centuries on their ability to make things look complicated, and this will simplify the way in which advice is given and delivered.”
That view wins strong support from other sectors of the business community. James Tsolakis is head of legal services in the corporate and institutional banking department at the Royal Bank of Scotland. He predicts the advent of ABSs will trigger the growth of “law firms that are challenging the conventional models of providing legal services and the way they do business.
“We will see new business models and new forms of delivering legal services to SMEs – lower cost delivery models and service providers that are more user-friendly.”
Also key for Tsolakis is recognition by the more forward-thinking players of the role of technology. “That will become increasingly important in the delivery of legal services to SMEs,” he argues, “especially as it relates to higher volume, replicable legal services.”
Long-standing observers of the legal profession are also convinced that ABSs will have a profound effect on lawyers and their SME clients.
Professor Stephen Mayson is a former senior City tax lawyer who now runs a highly respected legal sector consultancy. He points to the increased certainty over billing that will be engendered by ABSs as having the biggest impact on SMEs. “Not being able accurately to forecast the amount of a legal bill has in the past prevented a lot of smaller businesses from seeking legal advice,” he explains.
“ABSs encourage providers to think about the cost base of the business so they can offer fixed prices on a commercial basis. That is something that law firms have struggled with in the past.”
Even concerns around the hoary old chestnut of ethics are beginning to fade. Indeed, Prof Mayson suggests alarmist references to organised crime and terrorists were a red herring borne more out of protectionism and resistance to change than a realistic view of what might evolve.
“If you look at the business world,” he reminds lawyers, “it’s not true that every intervention of external capital gives rise to unethical behaviour.”
London’s SMEs will be anxiously anticipating that ABSs give rise to cheaper and more efficient legal services.