Solicitors - Alternative Business Structures - Where are we now?


On 7th October 2011, the Legal Services Act 2007 came into force. Only now are the effects starting to be seen on the legal sector. Legal services accounting expert Mike Buxton examines how this new legislation could impact your practice, particularly the provision for Alternative Business Structures (ABS) and outlines the challenges your firm will have to face in 2012 and beyond as a result.

Finally, the Solicitors' Regulation Authority (SRA) is ready to start processing applications from firms wanting to become an Alternative Business Structure (ABS).

This new law prescribes several key changes to the legal profession:

1. It will de-regulate the provision of legal work, such that companies who do not offer legal services as their primary business can now undertake legal practice. This has also been called 'Tesco-law' because technically supermarkets would now be able to offer legal services and purchasing legal services will now become as simple as shopping for everyday items.

Legal Services Act 2007

2. There are significant changes to the rules concerning Incorporation and Alternative Business Structures. For the first time, anyone can own a legal firm, even if they do not have a legal background. This opens up the possibility for private equity backing flotation on the stock market.

3. As a result of the changes to the Alternative Business Structures regulations, law firms can also add non-legal activities to their practice and become a 'one-stop shop' for professional services.

4. New Solicitors' Accounts Rules are published by the Solicitors' Regulation Authority (SRA) which will have a major effect on your accounting function. The principal purpose of these new accounting rules is to protect clients' money that law firms might be holding on their behalf.

5. The SRA has stated that every legal firm must appoint a COLP (Compliance Officer for Legal Practice) and a COFA (Compliance Officer for Finance and Administration) under the new Act.

After two years of preparation, the SRA is now a licensing authority "ready and waiting" to accept applications from new entrants to the legal services market. Thus far, the largest name to have undertaken such an application is the CO-OP who appears to be taking a "leading role" in this new era.

The effect on the market place of the ABS legislation is yet to be seen, but from my in depth discussions with solicitors and other members of the sector, it should be the "shakeup" that the legal profession has been waiting for and will provide both challenges and opportunities for established solicitor firms.

One group who may face particular challenges are those "old fashioned" solicitor practices who have become stuck in their traditional ways. A typical firm of this nature may consist of a group of Partners backed by an outdated finance team. A practice of this kind will typically be individually focused on profit shares rather than being firm focused, which has led to stagnation, a lack of internal investment and an inability to evolve and gain market share.

Fundamentally, a combination of the economic downturn and the changing market place, as a result of the ABS legislation, will force Partners to become more business focused and less focused on the law. As such, the ABS rules can create significant opportunities for those practices willing to adapt.

So what does running a firm 'like a business' actually mean in practice? Legal Practices always need to be looking for the next opportunity, trying to make financial savings and synergies where appropriate. Firms will be required to become focused on future performance rather than satisfied with what has happened in the past. Under the new ABS legislation, firms are now able to employ finance and marketing partners who can run the finance side of the business and advertise the firm to new potential clients, while not diluting the time of the solicitor Partners. This leaves them to concentrate on the law and the provision of legal services, the reason they joined the profession in the first place.

The large firms that have indicated an interest in ABSs such as Tesco, the AA, Saga and the CO-OP alike are national firms with large advertising budgets and qualified finance teams with operating systems already in place. The main aim for these firms is likely to be profit and market share growth. This should be a real concern for established legal firms as this will inevitably lead to a fall in market share for them.

There are, however, some sources of solace for existing law firms. It must be remembered that many law firms are already established in the market and recognised as experts in their field.  This goodwill and trust with cliental and users of their legal services is something that will take many years for new entrants to establish. It should also be noted that applications for ABS could take up to nine months to process. This will give already established legal firms an opportunity to be proactive and negate some of the dangers to them that may arise out of the ABS process.

Crucially, Firms need to act now to ensure that this new era does not pass them by, leaving them stuck in the past instead of striving into the future. Those firms who do not adapt, may struggle to survive due to increased competition in the marketplace.

It is far from the truth to say that all established legal firms need to become alternative business structures. However, they need to be ready for the challenges that lie ahead. Legal firms need to invest internally in financial systems to keep their profits growing, enabling more internal investment and to ensure they stay competitive. They also need to work on their overall image via clever and imaginative marketing which can help grow their presence in the market place.

Mitchell Charlesworth can aid legal practices to embrace the opportunities and face the challenges of the ABS legislative changes.  Specialist services to solicitors include; cash flow and financial projections, bank presentations for extra finance, along with all the financial accounting aspects a legal firm requires. For more information, contact Mike Buxton on tel: 0151 255 2300 or email mike.buxton@mitchellcharlesworth.co.uk.

An in-depth guide to the legal services Act 2007 can be found at: www.mitchellcharlesworth.co.uk/sectors/legal

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