SNP victory ushers in new look at legal services market reform

by Ian Fraser
© The Herald
Originally published: 28.05.2007
Justice Minister Kenny MacAskill has said that the new Scottish Executive is prepared to implement a version of the Clementi reforms that would remove ownership restrictions on law firms.

His comments come as an Australian law firm last week pioneered a potential new funding avenue for solicitors when it became the first to float its shares on the stock market.

In England and Wales, the Clementi report has looked at how best to reform the legal services market - including the way in which law firms raise capital. Its findings are due to be enacted through the Legal Services Bill in December 2007.

The reforms will benefit larger England-based law firms by enabling them to raise external capital to fund their expansion or systems development, as well as making it possible for their partners to benefit financially from the goodwill wrapped up in their businesses.

However, the reforms were not on the agenda in Scotland until the SNP's recent election victory.

While "Tesco Law" the part of the Clementi package which allows businesses such as banks, supermarkets and insurers to have lawyers on their payrolls and provide commoditised legal services to their customers is not on the agenda in Scotland, MacAskill said he does not believe Scottish-based firms which may require capital to fund expansion should be discriminated against.

MacAskill, who was confirmed as cabinet secretary for justice on May 17, again said that the new government will draw the line at introducing Tesco Law.

He told The Herald: "There's probably an opportunity for a middle way that is not Tesco Law and which preserves the integrity of the profession and avoids high street law firms being decimated, but which allows the larger firms to raise outside capital to pursue their global ambitions."

MacAskill was speaking following the flotation of the Australian law firm Slater & Gordon, which made history last week by becoming the first law firm anywhere to list its shares on a stock market.

Taking advantage of changes to Australian legislation, the class action specialist listed on the Australian Stock Exchange on May 21. Its shares surged by 40% on day one, valuing the firm at $150m (62m).

It is a move that could offer a template for UK firms seeking to raise much-needed capital.

Accountant Deloitte said Slater & Gordon's initial public offering is likely to trigger many more.

Jeremy Black, a director in Deloitte's professional practices group, predicts that several mid-tier law firms in the UKwill seek to float on the Alternative Investment Market.

He said: "If you look for precedents, we have seen accountants, management consultants, patent attorneys, architects and chartered surveyors float. I see no reason why law firms are so different from these organisations. AIM is the more likely market, as a firm would need a market capitalisation of around 200m to list on the full market."

However, Black warned that Scottish firms look likely to lose out, despite MacAskill's remarks.

He said: "It sounds to me that law firms in Scotland are going to be denied that choice, which could to some extent be considered a disadvantage."

Black admitted that the Clementi reforms represent a real threat to "high-volume, low-value lawyers" such as small high-street operators and sole practitioners. He says this is because supermarkets such as Tesco, banks such as HBOS, and insurers such as Aviva/Norwich Union are likely to eat into their territory, winning clients on the strength of their brands.

He said: "There is likely to be significant consolidation and aggressive competition from well-known brands. We expect to see the number of sole practices and small partnerships currently in existence decrease significantly. The UK high-street legal market will change beyond recognition."

However, he believes that the Clementi reforms will also present opportunities for "low volume, high-value lawyers" including the mid-tier firms such as McGrigors and Dundas & Wilson and Magic Circle firms such as Freshfields and Linklaters.

However, even here, the availability of external capital could also pose a threat. He said: "Individual teams may be encouraged to break away and form their own company with the backing of an external investor."

Alistair Morris, chief executive of Pagan Osborne, accused MacAskill of "protectionism" in his desire to buck the market over Tesco law.

He said: "The horse has already bolted on Tesco law. Commoditisation is already happening, with organisations including Halifax offering legal panels for conveyancing work, to whom they dictate very tight terms.

"The future is already looking very bleak for the traditional high-street solicitor. Whether alternative business structures happen or not, the commoditisation of certain types of legal services is already under way."

Morris believes that MacAskill ought to go further and usher in the full suite of Clementi-style reforms, which he believes would revolutionise the legal profession for the better.

"The law remains a cottage industry with an anachronistic culture, and it is ripe for consolidation. If law firms were permitted to raise equity from external investors, it would hasten that process."