Impact of the Legal Services Act 2007 on the Legal Services Market

A. Legal Disciplinary Practices

LDPs became operative under regulation by the SRA from March 2009 but were required to become ABS between October 2011 and October 2012.¹¹⁷ They were

¹¹² ibid, s 91.

¹¹³ ibid, s 92.

¹¹⁴ See (2004) 154 New Law Journal 947.

¹¹⁵ See (2006) 156 New Law Journal 694 and (2007) 157 New Law Journal 134; Law Society Gazette 2 November 2006.

¹¹⁶ S Mayson and O Marley, Reserved Legal Activities: History and Rationale (London, Legal Services Institute, 2010).

¹¹⁷ SRA, The Architecture of Change Part 2: The SRA's New Handbook (2010) at para 50. owned and managed by a combination of different types of lawyer. No more than 25 per cent of the managers (or shareholding) in an SRA-regulated LDP can be non-lawyers, and only non-lawyers who are managers can own a shareholding. By September 2009, 105 LDPs had been established, containing 125 non-solicitor partners.^[680] Of these, 98 were claimed as Chartered Legal Executive lawyers, the largest single group, licensed conveyancers, legal executives, accountants and a patent attorney.^[681] In November 2009, the Bar Standards Board allowed barristers to join LDPs.^[682]

B. Alternative Business Structures

One of the intended consequences of LSA 2007 was bringing more commoditised legal products to the legal services market.^[683] ABS are predicted to accelerate the domination of the private client market by commoditised solutions.^[684] This is because non-lawyer capital will be more motivated to build technological infrastructure and less inhibited by the professional assumptions of lawyers. ABS may encourage more self-help among consumers. Eventually, even corporate work may be susceptible to ‘un-bundling’.

Within a short time the SRA had granted 29 licences and the Council for Licensed Conveyancers, the other approved regulator for ABS, had granted nine.^[685] Among the leaders in offering ABS was Cooperative Legal Services Limited. The Co-operative Group Ltd, originally a grocery business which had expanded into different commercial areas, established a legal services division in 2006. Co-operative Legal Services was one of the first four ABS to be approved by the SRA in March 2012 and is a flagship for such entities. It offers legal services in conveyancing, employment law, family law, personal injury and probate and estate administration. At the end of 2012 it entered the top hundred law firms by turnover and announced plans to establish five regional hubs across England and hire 3000 additional staff. Other big brand retailers waited in a queue for licences.

The advantages of ABS include familiarity to customers, brand confidence and loyalty. Added to these market advantages is the power of large-scale advertising, capacity to invest in new technologies and economies of scale. There have been a range of reactions from traditional legal businesses. Some surprisingly small outfits had applied to become ABS so that family members could be partners, investors or managers in the business. Quality Solicitors, a marketing collective of 250 small firms designed to maximise the benefit of television advertising, aims to take on ABS by building its own brand.

Most ABS, unless they are converted solicitors’ firms, typically did not offer com­prehensive services. Many solicitors were nevertheless gloomy about the future of private practice in the wake of declining legal aid and increasing competition. Barristers were also unenthusiastic.

In June 2012, the BSB announced that it intended to apply to become a regulator of advocacy-focused ABS, LDPs and Barrister Only Entities, but not MDPs.^[689] BSB- regulated entities and self-employed barristers would be permitted to conduct litigation and provide the same services as the self-employed Bar. Under the proposals, owners of BSB-regulated entities would also be managers, with a 25 per cent limit on non-lawyer owners or managers of Alternative Business Structures. The majority of owners or man­agers of ABSs regulated by the BSB would be barristers or other advocates with higher rights of audience. BSB-regulated entities and self-employed barristers would not be permitted to hold client money and all managers of BSB-regulated entities (barristers, solicitors and non-lawyers) would be subject to the same conduct rules.

In 2013, research conducted for the LSB on changes in the legal services market since the LSA 2007 found the median amount of income generated per fee earner had fallen from £87,000 in 2010/11 to £85,000 in 2012/13.^[690] Turnover per fee earner was less among firms with a higher proportion of local clients. This was linked to less face-to-face delivery of services. Research found ABS firms were concentrated in the personal injury sector, taking up 20 per cent of the market share, split between new entrants and existing firms who converted to ABS status.

In 2010/11, there were 378 LDPs, 491 in 2011/12 and 429 in 2012/13, with 39 having closed and 23 LDPs converting to ABS.^[691] However, while this group of firms never represented more than 5 per cent of all firms, they accounted for 14 per cent of market share in 2012/13. Firms who were LDPs in 2012/13 were statistically more likely to have seen an increase in turnover in the previous three years; 57 per cent compared to 49 per cent for all providers. Under transitional arrangements, all LDPs will convert to ABS.

In December 2013, the LSB approved the application of the Institute of Chartered Accountants of England and Wales (ICAEW) to become a regulator of probate activities. More activities are likely to follow as accountants, as predicted, enter the legal market.

C. Professional Monopolies and Competition

i. Monopoly

It continues to be an offence punishable by imprisonment and fine to carry on a reserved activity unless entitled to do so.^[692] Therefore, ABS must use approved persons and ensure that any non-lawyer employees do not cause breaches of the rules applying to approved persons.^[693] While a monopoly of legal work is preserved, there will be greater competition between law firms organised along traditional lines and new organisational forms like ABS. ABS are expected to cut the cost of delivering legal services by using unqualified staff for non-reserved activity such as advice giv­ing, increasing the leverage of qualified to non-qualified staff working on reserved work and by greater use of technology.

ii. Competition

a. New Technology

It was predicted that new technologies could reduce the cost of legal services by standardisation, systemisation, packaging, and commoditisation of legal services for the benefit of consumers.^[694] This has been demonstrated with the use of online, fixed costs regimes for litigation.^[695] Lawyers were seen to be reluctant to embrace the full potential of disruptive legal technologies, such as document assembly or online dispute resolution, because they prefer delivering more satisfying ‘bespoke services’.

Lawyers may fear that ABS will swallow up standard and lucrative legal work, leaving high street practices with only the low paid legal aid work, or the difficult non-standard client who is also unable to pay fully for the service required. While firms in cities may be most at risk of direct competition it may that those in rural areas will also find some areas of work affected. The Carter Review suggested that 400 legal aid firms could disappear in competition with retail legal services. The actual figure could be more. It may be that only ABS, with the backing and philosophy of supermarkets, could provide the infrastructure and support to make legal aid pay.^[698]

b. Business

The period since the enactment of the LSA 2007 coincides with a significant and deep economic recession. A large survey of solicitors found declining income among firms with repeat clients, suggesting negotiated reductions in fee levels.^[699] Approximately a third of firms specialising in legal aid work anticipated withdrawing from one or more areas within three years. It is not known how many lawyer-led organisations will fail in the coming years or what that will do to numbers of lawyers overall or to recruitment to different kinds of organisation.

One way in which solicitors have geared up to compete with ABS is to pool resources. Quality Solicitorshas located representatives in WH Smith, a national retailer, launched the largest national advertising campaign by a legal provider and entered a partnership with US online legal services provider LegalZoom.

c. Employment

ABS could prefer to use members of less prestigious professions in preference to solicitors and barristers. This could be achieved by using them for non-reserved activity or by deploying them, under supervision, for routine parts of reserved activity. One consequence is to create a more level playing field for lawyers outside the traditional professional elite. For example, Chartered Legal Executives are eligible to become partners in LDPs and ABS as well as advocates or judges. This may explain a 40 per cent growth of numbers of students taking Institute of Legal Executive Fellowships in 2010.^[700]8 This is the best established ‘alternative’ legal qualification, which can be taken at the stage equivalent to ‘A’ level.

The result of this ‘unbundling’ of legal services is unpredictable. Using para-legals for aspects of complex transactions, for example, may result in fewer lawyers, but release those remaining for direct contact with clients.^[701] More pessimistic analyses of the prospects for lawyers foresee pay reductions of up to a half for members of legal professions working in affected fields.^[702]

d. Regulatory Objectives

The provision of independent advocacy services by barristers has ensured that small firms can instruct the most eminent advocates for serious cases. This appears to be a good example of an efficient market. The effect of declining legal aid and erosion of barristers’ monopoly of higher court advocacy has been loss of work, forcing many barristers to consider moving in-house. This means that they less independent and not available to the general public.¹⁴¹

If independent advocates were eventually to disappear, small firms unable to sup­port advocates, and the general public, would lose an option for pursuing cases. The system would lose the benefit of barristers subject to the cab rank rule. Significant diminution of the pool of independent advocates would appear to be contrary to the regulatory objectives of promoting the public interest, improving access to justice and supporting the rule of law.

D. Regulation

The Law Society had longstanding regulatory powers over recognised bodies, but they were little used. The decision to pursue regulatory control of ABS led to the Code of Conduct 2007 being amended in 2009 to make this right explicit. The introduction of new business forms under the LSA 2007 necessitated a shift from the regulation of individuals to the regulation of entities, the organisations in which they work. Consequently, regulators of ABS exercise regulatory control of all those working in entities, professionals and non-professionals. An entity regulator, for example the SRA, could therefore be regulating an entity that may, or may not, include members of the profession of which it is also the approved regulator. These issues are consid­ered in more detail in part two.

VII.