Alternative Business Structures – Business Entity

Currently, a solicitor who is performing “reserved legal activities” (activities which only a solicitor is permitted to perform such as the key elements of a conveyancing transaction) for the general public is only permitted to practise in a firm wholly owned by solicitors. The Legal Services Act 2007 (“the Act”) however introduces a new type of business entity, the Alternative Business Structure (ABS).

Alternative Business Structures allow firms which provide legal services to be wholly or partly owned by non-lawyers. The section of the Act which brings them into effect is not yet in force.

What are Alternative Business Structures?

This is a new type of arrangement for ownership of a law firm which allows non-lawyers to own or part own the firm. It could take one of two basic forms, either it will be just like a traditional law firm but will be owned by non-lawyers, which will allow law firms to accept private investment, or else it will be a “one stop shop”. For example a property based ABS may provide estate agency, conveyancing, mortgages and insurance services all under one brand.

What are the Advantages of Alternative Business Structures?

For lawyers, it will allow them to provide services they are currently not permitted to provide such as insurance, mortgage and estate agency services. It will allow good quality employees of a firm who are not lawyers to be rewarded with partnerships and will allow firms to accept investment from non-lawyers.

For consumers it will almost certainly drive down prices for legal services by allowing economies of scale. It should also be more convenient, as everything can be made available under one roof. It is envisages that a firm will for example provide estate agency, mortgage, insurance and removal services as well as property conveyancing. This may also lead to cost savings in these areas.

Who Will Form Alternative Business Structures?

Tesco have already said they intend to provide legal services under the new format and no doubt other major retailers will follow suit. Presumably they will acquire a number of existing law firms and re-brand them.

It is likely that some existing law firms will also switch, for one of two reasons, either to enable them to provide other services or to enable them to accept outside investment to fund growth.

What are the Risks of Alternative Business Structures?

Several concerns have been voiced about the new system, some of which are valid and others which are unfounded. One of the main concerns is that it will lead to legal work being carried out by non-lawyers. There are two things that must be understood here. First, this is already routine in some areas of the law, particularly conveyancing, and has been for many years. Second, the changes only mean that non-lawyers can own law firms. They do not allow non-lawyers to perform “reserved legal activities” any more than they could previously so law firms will still need lawyers. For example a non-lawyer will not be permitted to represent a client at a trial, whether civil or criminal. In that respect very little will change for the consumer.

Another concern is that in areas such as conveyancing, where competition is at its highest and high turnover is required to maintain profit margins, excessive pressure will be put on solicitors to expedite cases which may lead to the cutting of corners. This will probably happen, but the truth is it already does. Large conveyancing firms usually survive on the referrals they receive from estate agents or mortgage brokers. Many firms are in a situation where the loss of a major referrer would lead to the collapse of their business and the referrers often use this in an attempt to exercise influence. This type of behaviour is very much against the rules, but it does go on. Nonetheless a fair balance is usually achieved that protects consumer interests. If anything, a company which owns a law firm is less likely to try to exercise undue influence since it risks damaging its own asset.

One legitimate concern is that smaller high firms will not be able to compete with the giants of the retail sector and will, much as happened with independent grocery shops when supermarkets took hold, fold (or be forced to sell to the large to the large ABSs). In the legal services sector this is potentially dangerous since it risks limiting consumer choice. One supermarket is much like any other so although there is an illusion of choice, that is not the reality. When it comes to food shopping this is not a serious concern for most people but legal services can play a much more important role in people’s lives.

The best new solicitors are likely to be attracted away from areas which are dominated by the massive ABSs and into areas, such as corporate law, which means the general public will be deprived of the opportunity to choose the best lawyer rather than the budget option.

Regulation of Alternative Business Structures

Alternative Business Structures will be regulated by a licensing authority, and will need a license from that authority before providing any legal services. Any regulator, such as the Solicitors Regulation Authority, can apply to become a licensing authority.

Any non-lawyer owner who owns more than a 10% interest in an ABS will be subject to a fit and proper person test before being allowed to take a share in the company. The licensing authority will have the power to suspend licenses for breach of the rules, much as the SRA can suspend a solicitor’s practising certificate now.

When Will Alternative Business Structures Start?

Although the necessary primary legislation for Alternative Business Structures was contained in the Legal Services Act 2007, the relevant parts are not yet in force. It was expected that they would come into force in October 2011 however the coalition government is known to have concerns over the system and there is some doubt as to whether it will go ahead at all in its current form. In a recent speech by David Cameron he stressed the government’s desire to open up markets to small and medium sized businesses. He was referring to public sector contracts but if he intends the same principles to apply to the private sector then ABSs would seem to be at odds with that. Watch this space!

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