The introduction of the Government’s Legal Services Act 2007 (‘LSA’) is spearheading significant changes in the way legal services are delivered. Described as a Big Bang moment for the legal profession, the upheaval caused by the LSA could be nothing short of seismic with industry experts such as Professor Stephen Mayson predicting that as many as 3,000 high street law firms, or 35% of the total, may have to disappear in the subsequent upheaval.

The emerging legal landscape poses serious challenges for traditional providers, but also presents a wealth of opportunities for those firms who are willing to make the most of the changes. The impact of the reforms and the implementation of legal technology will allow forward-thinking firms to carve out an increasing share of the market as others succumb to increased market pressures.

The Legal Services Act

• The Legal Services Act brings a significant wave of change to the legal profession, and creates a markedly different landscape. It is the first attempt to bring the entire legal services market under one regulatory framework and departs significantly from the previous structure of the profession.

• It does this by creating what are termed Alternative Business Structures (ABS’s) combining the skills of a variety of professionals including lawyers, as well as current non-law businesses such as banking, insurance and financial services. Through this new legislation the Government is encouraging creation of ABS’s and the development of one-stop shops which deliver packages of legal services and other services that better meet the needs of consumers and will provide greater convenience for consumers.

• The Legal Services Act maintains the status quo in relation to “reserved activities” i.e. advocacy, conducting litigation, conveyancing and probate. It does not, at present, attempt to regulate unreserved legal activities e.g. Will writing, employment advice, health & safety.

• However, the Act does give the ability to quickly apply regulation to these unreserved activities. Before the Act was brought into law, there were already many instances in which non-lawyers could deliver legal services. The Act did not change this and extended the opportunities further in the interests of ‘promoting competition in the provision of legal services’.

Challenges for Law Firms

The scope of these changes should not be underestimated. In effect, the amount of competition within the legal services industry will increase, resulting in wider access to justice and a commercial environment more attuned to developing innovative and cost effective legal services and products. The new entrants to this market will have greater experience of operating in a public environment and will possess greater branding power, human resourcing and product development skills than small law firms.

• By allowing non-lawyers to own law firms, the LSA exposes high street firms to competition from all-comers, especially those with well-established brand presence, superior media exposure, IT capabilities, and existing retail muscle.

• The existence of the LSA publicised the radical changes the Government was proposing and the opportunities it would bring to the banking insurance and financial services industries.  As a result such organisations as MORE TH>N, RBS, the Co-op, HBOS, NatWest, DAS, Allianz and Abbey Santander have all launched legal services.

• The unambiguous conclusion of the most recently conducted market research at our disposal is that consumers would be highly receptive to alternate providers of legal services now that the market has been opened to competition.

• Research conducted by Finnacord in 2006 found that almost 50% of consumers would be open to considering new providers of legal services post-deregulation. In a subsequent survey by Which? 75% of consumers were found to be very receptive to the prospect of new entrants such as banks and supermarkets entering the legal services space. Other surveys have confirmed this view. An analysis conducted by CLT concluded that generation Y (those born from the late 1970s to late 1990) are increasingly accustomed to purchasing and communicating via the internet and future legal service provision would have to be electronic.

Opportunities for Law Firms

Commoditisation and IT will shape and characterise 21st century legal service and the use of disruptive technologies is at the heart of efforts to exploit the LSA. The future belongs to law firms that learn how to use Internet technology to disrupt their competition by offering a client experience that is both low cost and of high quality.

• New entrants and more progressive law firms will be providing legal services in a very different way to traditional high street firms. Instead of utilising the traditional model based on bespoke drafting and hourly billing they will invest in cutting edge workflow and knowledge management systems which will introduce economies of scale to many areas of law. They will be able to significantly reduce the cost of legal service by using document automation technology, paralegals and administrative staff to do the work that has traditionally been the preserve of qualified lawyers.

• For traditional providers and law firms alike, the key is investment in systems that will in turn allow them to drive down the internal cost of production. This will drive commoditisation because once legal services can be highly automated internally using IT, it is a very short jump to providing that service directly to clients via the internet. Epoq’s DirectLaw Platform and Rapidocs LawDraft have been designed specifically with these purposes in mind.

• We believe that the Institutions entering the legal services market will be interested in working with firms who can meet their service standards and deliver a standardised legal product to their large customer base at low cost, enabling the firms to pick up the more complex and lucrative work. For firms who can meet the standards of these new entrants and would be willing to work in collaborative relationships with them, the possibilities are limitless.

It is now beyond doubt that the LSA will usher in a ‘brave new world’ in which outdated and outmoded business practices will be swept aside by the entry of new providers. But the LSA will also be a catalyst for change amongst traditional providers. It will offer scope for some real innovation, affording law firms the opportunity to build greater relationships with Institutions, generate new revenue streams and tap into a latent market. Those who move with the times can look forward to the reforms, those who do not have every reason to be worried about the LSA’s implications.

As Professor Richard Susskind warned in an article in the Times ‘We will indeed witness the end of outdated legal practice and the end of outdated lawyers.’

According to Quality, the plan is to establish a branch in every town and city in England and Wales by October 2011. Where possible these will be placed in shopping centres and provide extended opening hours.  The Law Society Gazzette reports that :

Well-established practices such as Bristol firm Burroughs Day, Lockings in Hull and Howlett Clarke in Brighton are among 13 firms to have totally rebranded. They now trade under the QualitySolicitors name, branding and logo. Two firms, Morrish in Bradford and Stephensons in Wigan, have rebranded one and two of their branch offices respectively.

The announcement has not gone without controversy in the profession with a heated discussion breaking out in the comments section of this article. One QS member writes:

Reading some of the comments on here has made me realise just what easy pickings the legal services market could be for the new players.

Outrage at the use of the term ‘customer’ for instance. For the benefit of any solicitors who have not moved from behind their desks for several decades clients do not have to use us. The image of the high and mighty solicitor who may deign to do something every few weeks on a file to the eternal gratitude of the grovelingly grateful client will be consigned to the history books. They can go wherever they like. Being a solicitor no longer gives people a divine right to receive a high income forever.

If we want to attract future business we have to be approachable, visible and exceed customer expectations. My suspicion is that many of the new players will offer a poor quality call centre type service and next time the unfortunate customer needs legal services he/she will not want to go anywhere near those types of organisations. What Quality Solicitors is about is giving them a highly visible alternative where they know that not only will they be dealing with an organisation they recognise but they will be looked after by proper lawyers. The best of both worlds.

A large number of firms I deal with locally are extremely good at what they do but for many that will not be enough when the largest, most successful businesses in the country get their teeth into legal services. We can either sit around moaning about how unfair it is or take the initiative. Quality Solicitors are the first organisation to offer high street firms the chance to benefit from a national brand…….And yes we do have QS jackets for our reception staff with name badges to follow.

Commentators are divided on the effectiveness of this type of response by law firms. Professor Stephen Mayson for example has described the Quality Solicitors bid as the ‘possibly the strongest “home grown” response from within the profession to the need for a brand presence in the retail legal services market’.

Conversely, earlier in the year Neil Kinsella the Chief Executive of Russell Jones and Walker warned that ‘it’s more complicated than just creating a brand. If solicitors are banding together to take over a market that they have already got, all they’re effectively doing is scrabbling for market share and then paying somebody in the middle to do the marketing’.

Whatever the verdict, it is clear that parts of the profession are being pro-active in responding to the challenges and that the kind of models that we are used to seeing in other industries are beginning to establish a presence in the legal services market.

It was rumoured that the new Con-Lib coalition government did not have the same appetite for reform as the previous administration, and were looking to derail ABSs before they could see the light of day.

The man assigned to deal with the Legal Services Act 2007 at the Ministry of Justice is Jonathan Djanogly. Djanogly was said to be against external investment and the introduction of ABSs but he has now had the chance to put the record straight. Over at ‘Legal Futures’ Neil Rose reports that:

Speaking to reporters yesterday for the first time since being appointed legal services minister, Jonathan Djanogly (pictured) said he was “very pleased” to have the opportunity “to set the record straight” after reports last week that he was opposed to ABSs.

“I think it’s important that the legal profession engages with the concept of ABSs to look to see how they’re going to apply them to their own situations, because that is the way that law in our country is moving,” he said.

‘Austerity’ and ‘cost saving’ being the new bywords, Alternative Business Structures seem to have gained added favour due to the prospect of ‘generating savings to the legal aid fund’. Conversely, scrapping ABSs and the new legal regime would not generate cost savings for the government since the cost will be bourne by the profession. Tesco Law looks set to stay.

It had previously been feared that referral fees might have been declared by the panel to have no place in the market and caused  a disadvantage to consumers. However these fears were eased considerably after the Legal Services Board published it’s own economic analysis.

This showed that there was no evidence of consumer detriment in either the conveyancing or personal injury market. The LSB concluded that the fees neither increase the prices consumers pay for legal services, or reduce the quality of work.

Key Points

• The panel has called for more disclosure of fees paid and better regulation in order that consumers know the arrangements that have been made, i.e ‘who is paying who’, and are given the opportunity to approve of the payments

• The panel’s analysis said there was no evidence that such fees caused consumer detriment in either the conveyancing or personal injury markets (Apparently conveyancing prices are on average nearly £150 cheaper among firms paying referral fees compared with those that do not – £543 compared with £687.)

The panel highlighted four particular problems which need to be addressed:

• Closed bids and auctions mean that work is referred to lawyers paying the highest referral fees, not the best quality lawyers;

• Pressure-selling tactics by estate agents and insurers to accept recommended lawyers;

• High levels of non-compliance by conveyancers and estate agents with transparency rules; and

• Competition concerns raised by the trend for introducers to refer work to a small number of large law firms.

Non-compliance with disclosure rules has also been rife. In 2007, up to two-thirds of firms inspected by the SRA were not compliant with its Rule 9. For example, 43.2% failed to disclose to clients its financial arrangements with its introducers, 58.9% failed to obtain an undertaking from its introducers that they will comply with SRA rules and 66.4% failed to give clients a statement that they could raise questions on all aspects of the transaction

• The panel is calling for the current ‘hotchpotch’ of rules to be replaced with a consistent set of regulatory arrangements for lawyers and introducers; improved transparency requirements including the idea of consumers giving written consent to be referred for a fee; and ‘mystery shopping’ and other enforcement action to tackle breaches of transparency rules. There is also a call for referral fees to be openly factored into the calculation of fixed-fee regimes and the guideline hourly rates as “business acquisition costs”.

• The panel has recommended that the Legal Services Board should review the market again in three years’ time.

Alternative Business Structures

• The panel says that a key outcome of the introduction of ABS’s is that legal services could be more internalised within businesses, with consumers referred to in-house services, rather than to separately operated law firms on an introducers panel. This would reduce the need for referral fees as everything from introducers to lawyers would be handled within the same organisation. Minster Law are quoted as saying: ‘ Alternative Business Structures will arguably not require the sophistries of referral fee arrangements having instead the ability to co-own or profit share’

• The panel remarks that ‘given the importance of reputation to national brands, this [ABS arrangement] would seem particularly feasible for banks, insurers, supermarkets or motoring groups’.

• Nobody knows what will transpire when the ABS regime starts, but 25% of licensed conveyancing firms have chosen ABS models under the existing CLC rules and a survey in the legal professional press indicates that around 40-50% of solicitor firms are considering changes that would result in them becoming ABS.

• The panel believes that the key risk from ABS is that they may provide a mechanism for legitimate but less transparent referrals. It recommends that licensing rules be introduced to prevent conflicts of interest and ensure transparency.