For sale signs will soon be hanging outside solicitors' practices. Owning a law firm can be satisfying but why would anyone want to buy one? The answer is one dimensional: to make money.
The Government will start pushing the Legal Services Bill through Parliament next month and one of its key features is that, by the end of 2008, non-lawyers will be able to take a stake in a practice. Regulated buyers – surveyors, accountants, actuaries – will be allowed a small holding to begin with, but in time anyone will be able to buy a law firm. Private equity, corporate financiers and flotation-merchants have been drumming up interest for the past 12 months. And the word is that many firms are already a long way down the track in grooming themselves for a sale.
Until now, you've had to be a solicitor to own a stake in a law firm, and the Government doesn't like this. Against consumer interests, the argument goes. It stifles competition, and the level of complaints against lawyers is proof positive that the closed shop works against the consumer. Be that as it may, our legal system is much admired, is probably better than in most other countries and solicitors have to some degree helped create this international reputation. Of course, everyone has some horror tale about fees or delays (or maybe just about losing), but to sweep away the current regime and replace it with something new, based only on an assertion that things will be better, seems a high-risk strategy.
Why take the risk? Cynics might suspect the Government sees a chance to undermine the independence of lawyers, with the siren call of consumer interests providing an excuse. Independence in this context arises out of solicitors having duties to others – to the courts, for example – that override personal business interests and sometimes the short- term interests of a particular client. It need not follow that diluting ownership of a firm by allowing outside interests will mean professional duties become less important. But those obligations that distinguish a profession from something that is just a business sit uncomfortably with the sole aim of outside investors – making money.
It is this that will drive consolidation. Tesco, the Co-op, the Halifax and a few others have the financial power and the brand values to buy or build firms, providing services that are process driven – consumer complaints, debt collection, immigration, employment, per-sonal injury. And in a few years we might have just four or five law firms in England, most probably serving the public from call centres. "Press 1 for a broken leg, 2 if you want to sue your employer, or hold while we connect you with an adviser. All calls are charged at a premium rate".
What about the City law firms? Between them, the 10 largest turn over more than £6bn and their average profit margin will be well north of 30 per cent – a very tasty morsel for someone with money to invest. And should we worry about City firms changing hands? Their role is irrelevant to the average consumer. Those who use them are sophisticated buyers of legal services and can look after themselves.
The consultation that led to the Legal Services Bill made no analysis of the impact of outside investment in City law firms or the ramifications of their selling out. It's a pity that this was not looked at.
Investors are licking their lips at the prospect of a whole new industry becoming available. And it's a sector that has enjoyed unbelievable growth over the past decade. Add the prospect of lawyers being able to sell out for a multiple of earnings and apocalyptic change to the City legal landscape looks inevitable.
We have a world-beating legal profession in the City. Competition is intense between firms. Should we risk damaging this by allowing its future shape to be determined by money men? Or concern ourselves that further consolidation might result in a legal "big four" dominating the world?
Self-interest suggests selling out would be great – the current partners would trouser millions and the future could go hang. Among the leading firms, the opposite view prevails: there is a natural reluctance amongst the partners to sell the family silver.
But if one firm sells out, its investors will want growth through acquisition, so every decent firm and individual will become a target and will eventually succumb to temptation when the price is right. Top talent – from trainee down to senior partner – will want equity.
Alasdair Douglas is senior partner and head of corporate tax at City law firm Travers Smith alasdair.douglas@traverssmith.com
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