This article was written for and first featured on AccountingWeb

In a recent letter to the Financial Times, Felicity Banks, Head of Business Law at the ICAEW, offered the view that “a way forward for high street solicitors” would be “small legal and accountancy practices to merge, thus retaining a high street presence for both while providing a wider range of services to clients…”.

This view was given in response to a comment that the Legal Services Act would benefit individual partners by permitting an IPO of a law firm as well as benefitting the Tesco law organisations as new entrants to the legal services market.

All these new arrangements will be possible when the Legal Services Act permits unlimited non lawyer ownership of law firms.  This is expected to be in place on 6 October 2011. The primary motivation behind the legislation is not that it will be a benefit for owners of law firms, whether they be current owners or new non lawyer owners. The new regime is for the benefit of consumers on the basis that more competition brings lower prices, more choices and new services.

Non lawyer ownership will permit multi disciplinary practices between lawyers and accountants and other professionals. Accountants are not strangers to extending their service offering. Many firms provide consultancy services in some shape or form. Operating with an associated law firm is not a new concept for accountants. At various stages the Big Four accountants all had pan European law firm networks. The Sarbannes Oxley Act in the US restricted the ambition of international firms to provide legal services to audit clients. PwC legal is the only Big Four branded law firm operating in the UK.  The Legal Services Act is not EU driven legislation so the restrictions on non lawyer ownership of law firms in other parts of Europe and in the US will remain an obstacle to firms wishing to combine with an international legal practice.

Will presenting a “one stop shop” service be an attractive proposition to clients? A firm with an extended range of services gives greater scope to wrap up a client. Even within the current separate offerings of legal and business services, larger clients already select different advisers for particular services even though any of those advisers could provide all the services which the client needs. A one stop shop may be more attractive to consumers, particularly high net worth individuals and to SME’s. For any firm considering taking this route, canvassing the appetite of their existing clients for a combined service offering would be essential planning.

There would be a number of challenges to overcome in going down this route. Lawyers are, despite what some of them may say, generally conservative in adopting new business ideas. Legal disciplinary practices have been available to law firms since 2009.  These allow for up to 25% of the firm to be owned by non lawyer individuals. As at March 2011 out of the 10,927 solicitors firms registered with the Solicitors Regulation Authority (SRA), just 377 were legal disciplinary partnerships. Part of the reason for the low uptake is that these practices will be subject to new rules in October 2011 so some firms have been adopting a wait and see position. In a similar show of conservatism, the reasons given for failed mergers between law firms are often different cultures or an inability to make the numbers work. These difficulties will be multiplied when the merger party is carrying on a different business. These are not barriers to those determined to achieve a new business but they will test the resolve of those involved to make it happen.

If the multi disciplinary practice is attractive to smaller firms, the regulatory position is not yet clear. In the past the ICAEW has stated that it would not be happy with accountants being regulated by a legal regulator, such as the SRA. None of the accountancy regulators eg ICAEW/ACCA have announced their intention to become a regulator under the Legal Services Act. Where the new combined firm is regulated by a Legal Services Act regulator, eg the SRA, there is likely to be a regulatory conflict for the individual accountants between their obligations to their home regulator eg ICAEW/ACCA and the firms obligations to its Legal Services Act regulator, eg the SRA. Typical problem areas would be the solicitors accounts rules, different anti money laundering and other compliance regimes and the professional indemnity arrangements for solicitors.

The solution is likely to be that each part of the practice will have to operate as a separate body under the ownership of the joint firm. A further complication with this arrangement is the separate business regime under the Code of Conduct for solicitors applying after October 2011. There are limits on what kind of services can be provided by a business where solicitors have more than a 10% ownership interest. The Code would prevent solicitors owning a separate business which provides legal advice as one of the main services. Most accountants provide tax advice as a main service. Tax advice is legal advice, so the ownership position of the solicitors in the new group will need to be sorted out with the SRA.  

The regulatory position would be greatly simplified if an accountancy regulator was to become a regulator under the Legal Services Act. Even if this does not happen, there will be a way through the regulatory maze for firms who have recognised the rewards available to them from combining with a legal practice.

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