Alternative business structures – getting it right

Alternative Business Structures (ABSs) were brought in by the LSA 2007 as a way of modernising the legal market by freeing up law firms to attract external investment and develop innovative business models. It was a controversial step and, nearly ten years later, the legal sector is still debating the pros and cons.

The emerging evidence suggests that the impact of ABS has been positive. They have been shown to be more innovative, with no evidence of increased risks to the public -one of the main concerns when they were introduced.

Yet I am on record expressing disappointment that we have not seen ABSs deliver the scale of change that was envisaged. As I said in my letter to The Barrister in August, there are two key areas where I think more needs to be done.

Firstly, we took some time to get to grips with what is complex and restrictive legislation and rules around licensing. When I joined the SRA three years ago, I was reminded, at every meeting with the profession, just how difficult it was to be licensed as an ABS. In the beginning, many ABSs’ experiences of our approval process was poor – it was lengthy and unnecessarily cumbersome. That was to some extent a function of the legislation, but there is no doubt we could have been smarter in the way we applied the rules.

The good news is that since then, things have improved. Our target is to approve all new firm applications within three months, and many are turned around within a month. Our record to date is nine days from application to granting the licence. We have achieved this by really listening to what the profession and firms told us and working together to improve our processes. I am pleased to say that the tone of those meetings with the profession has changed, with good feedback on firm’s experience of changing their business model to become an ABS.

But, we have more to do. Ensuring swift turnaround for aspiring ABSs is good for business and good for the wider economy. So we are listening to customer feedback and will continue to refine what we do.

We hope to be able to improve further. The Ministry of Justice has recently made proposals to remove unnecessary restrictions for ABSs wanting to enter the legal services market. Currently there is a one-size-fits-all approach and we need to recognise that ABSs, as always intended, come in many forms. After all, around half of the 578 ABSs we have licensed have chosen that model as a route to bringing a spouse or partner into the ownership of an existing firm. And then there are the global players – including accountancy firms seeing opportunities to provide legal services as part of their wider business model.

The complexity of business models can vary significantly, and our processes should be tailored to accommodate that. Meanwhile, we also need to remove unjustified differences in the treatment of ABSs and traditional law firms. For instance, getting rid of the need for an ABS to have a practising address in the jurisdiction.

I believe that the Government’s proposals will allow us to be more targeted and proportionate, delivering an even better experience for law firms choosing the ABS model.

This is all good news. ABSs bring fresh capital and thinking into the market, and are good for competition and improving choice. Research shows that they are more innovative than traditional firms, being up to 15 per cent more likely to introduce a new legal service. That can only help to meet the demand for affordable services.

The second area where I think we need to do more, as a sector, is to really embrace the opportunities that multi-disciplinary practices (MDPs) can offer.

MDPs can give the public and small businesses the obvious benefits of accessing a range of related services – such as legal services, accountancy, or estate agency or even undertaking – from a single firm. I believe that brings huge opportunities for lawyers to, for example, sell into both the accountancy and legal markets.

We need a vibrant legal market, a market that gives business what it needs. Small businesses recognise the challenges, with 86 per cent saying legal services are essential for running their businesses. But only one in ten small businesses use a solicitor or barrister when they have a legal problem – yet almost half use accountants for advice.

Despite seeing some big players entering the market as MDPs, we did not initially see the  growth in MDPs that was anticipated. Why is that?

A key problem has been the extent to which the activities of non-lawyers within MDPs need to be regulated. The effect of our rules was that any ‘legal activity’ within a firm we regulated or a connected business, even if it was not a reserved legal activity, had to be regulated by us.

Under our old rules, if an accountancy firm wanted to add reserved legal activities to its services and applied to become an ABS, then all of that firm’s legal services, including the non-reserved activities carried out by accountants, would also have fallen under our regulation. And if that firm wanted to separate its reserved legal activities out, this was likely to have been prevented by our Separate Business Rule. In practice, that meant that a number of firms that applied had to go through protracted processes and be granted complicated waivers to achieve market entry.

Happily, we have been able to amend our arrangements so they are more targeted, and can make compliance more straight forward. That should encourage the development of MDPs, benefitting both customers and businesses. Several legal services/accountancy MDPs have told me how much they have learned from each other and the deepening of the client relationship.

And last year, we levelled the playing field by removing the Separate Business Rule, so traditional law firms can also offer non legal services, acting as ‘one stop’ shops, expanding their offer and competing with MDP ABSs.

I am positive about the future for ABSs. They are not of course a panacea – rather one part of our much larger programme of reform. ABSs and MDPs of every sort can improve access to affordable legal services for individuals and small businesses.

Changing our processes and reducing bureaucracy is key. We want to give the firms we regulate – many of which employ barristers – more flexibility. We want them to be able to get on with their own business, and focus less on the business of ticking regulatory boxes.

Making sure existing and new businesses can chose the right business model for them is fundamental. The future for ABSs is rosy, and as we all work towards a healthy, competitive legal market post Brexit, that is a win-win for everyone.

Paul Philip, SRA Chief Executive

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