Alternative Business Structures: a blueprint for change?

The Legal Services Act is a blueprint for a revolution, providing the scope to fundamentally change the operation of a multitude of industries in one stroke - with the introduction of Alternative Business Structures.

While there was a lengthy lead up to the Act, first unveiled by the government in a 2006 bill, the Solicitors Regulation Authority, the body in charge of granting ABS licences, only started accepting applications in January.

However, ABS anticipation has been building since 2005, when the AA expressed an interest in taking advantage of the mooted ‘Tesco Law' and incorporating a legal arm.

The Act, which aims to liberalise the legal market and encourage competition, allows lawyers and laypersons to form legal partnerships.

The new structure presents two opportunities: the chance for a law firm to receive external investment; and for other sectors to offer legal services to consumers.

Three-stage process
However, despite high initial interest in the Act, there has been a muted response to ABSs thus far. In June, the SRA revealed that it had received more than 300 expressions of interest but, at the time, there were only 27 licensed ABSs.

"Around 70 of those 300 never turned into applications," explains John Withington, director of authorisation at the SRA.

"We are close to making a decision on about 20 firms and in the process of getting more information on 180 stage-two applications."

With a seemingly large number of firms awaiting decisions, could the SRA's application process be the cause of the relatively low number of licensed entities?

"It is a three-stage process," explains Withington. At the first stage, an applicant is asked to complete a "very straightforward" form online, provide details about the firm's current structure and its intentions under the Legal Services Act.

According to Withington, the second stage, where firms are sent an in-depth electronic application form, is where confusion might arise.

"People believe at this point that everything is OK and we can start making decisions about the application," he says.

However, stage two is still relatively early in the process and the SRA has additional information it must gather before the application can be authorised.

The speed of the process depends on the complexity of the proposed structure and the ability of the applicant to provide all the information required. But Withington is adamant that the process should be exacting.

"We are protecting two very important parties here: the public - the end consumer of legal services - and the legal profession," he says.

The process is certainly lengthy. The authorisation of Parabis' ABS application took eight months to complete.

"I made some comments about my frustrations earlier in the process," admits Tim Oliver, chief executive of Parabis.

"There are a lot of parties involved in these sorts of set ups, but I accept that the SRA has a job to do and did it fairly."

However, Jenny Screech, legal professions manager at Zurich, says that the ABSs "have transpired to be less attractive than was initially anticipated", arguing that this apathy, and the application process, is prompting firms to adopt the ‘wait-and-see' approach.

According to Screech, there has been a "measured move" in the insurance industry towards ABSs.

"This means the insurance market has been afforded time to properly consider the challenges and requirements of the new model to ensure it can deliver an appropriate solution," she says.

Process frustrations
Judging by the relatively low number of licences granted so far, the usefulness of the structures may begin to be questioned.

Tina Williams, senior partner at Fox Williams, says: "Every firm ought to be looking at its own strategy. ABS will not be right for everyone."

Williams believes there is a lack of understanding in the legal profession about the benefits of the new structures.

A Fox Williams report, published in June 2012, listed four possible motivations for ABS suitable for a range of different strategies: the ability to offer multiple services; the desire for a more recognisable brand; the attraction of external investment; and forming a collective network of firms with similar aspirations.

According to Williams, the emerging ABSs will be completed by firms prepared to innovate and will "stand out in the market".

Mohammad Khan, insurance partner at PWC, agrees with Williams that, when it comes to creating an ABS, the motivation is crucial.

"The key question for insurance companies is where they see the future, how they think they are going to get there and whether an ABS could be central to that."

However, Khan believes insurance companies are less interested in ABSs, and are unlikely to form an orderly queue at the SRA's doors.

Another reason for a lack of initial interest could be competition. According to Guy Stobart, chief executive at law firm Kennedys, many companies would shy away from using the commercial services of their rivals.

"Would one insurer use a department of another insurer? No," he says.

Insurance companies already employ lawyers, he explains. The only way insurers would catch ABS fever would be to offer services at cheaper rates.

For Stobart, the strength of ABSs is their ability to "bring in other skill sets", enriching the offering of an organisation.

Referral fee withdrawal
Despite naysayers, Williams stands by her assertions this time last year that the insurance industry would be heavily involved in the development of ABSs. Her belief is rooted in the withdrawal of referral fee income.

"This will result in a loss of income for insurance companies and they may try to make up for that by moving legal teams in house," she says.

Due to be implemented in April 2013, the referral fee ban for personal injury claims could boost the number of ABSs and is likely to have "a serious impact on many legal expenses insurance firms' revenue streams", says Helen Withers, managing director of Arc Legal.

"By becoming an ABS, a law firm and a legal expenses firm effectively become a partnership. While referral fees will not be paid, the profit generated from personal injury cases can be shared, and this could replace the income lost by the legal expenses firm from the referral fee ban," she explains.

Withington adds: "Whether it's ‘getting around the referral fees ban' or whether it's just about restructuring so that you no longer have to rely on that sort of income, is an issue the firms have to deal with."

However, while some believe that the ban on referral fees may boost the ABS application numbers, other market commentators argue that using the structures purely as a replacement for lost income will not benefit consumers.

"In theory, ABSs are a good idea, but in practice it is not helping to resolve issues around the compensation culture and claims farming generally," says Martin Milliner, technical claims director at LV.

Milliner believes ABSs could create further commercial advantages that are not in the best interest of the consumer, potentially fuelling the compensation culture and the claims farming epidemic that the industry believes it is suffering from today.

He continues: "Essentially, ABSs provide an opportunity for the legal services profession to be more commercial and attract more investment but also able to join up with claims farmers, claims management companies, credit hound organisations, medical legal services and rehab services."

However, Phil Dicken, strategic partnership director at New Law, disagrees: "We see no conflict in an insurer-owned ABS carrying out claimant work, either from a liability or quantum aspect.

"As a claimant firm we have no interest in pursuing fraudulent or spurious claims - they are morally and commercially repugnant.

"As all involved share a common motivation, insurer investment will support our efforts to remove spurious claims currently clogging the legal system."

Start to finish
While the industry argues over the merits of ABS, some interested firms are still undergoing the application process.

David Simon, Triton Global director and partner at Robin Simon, is in the midst of creating a multi-disciplinary ABS designed to reduce insurers' legal costs.

He says: "What we are trying to do is put all of those expensive processes into one and create an entity that insurers can then contract and get all their services in one go for one price."

Simon claims that the service will ensure there is no duplication and no waste, with the same team seeing a case from start to finish. He estimates this could save up to 20% on the overall cost to insurers, if not more.

"In these days of Solvency II, being able to have a certainty about the costs is pretty important," he says.

Be it the economic climate, the application process or the ban on referral fees, it may still be too early to say whether the predicted influx of ABS will come to pass.

But judging by the early responses from the legal and insurance sectors, the building of a potential new sector will continue to be watched with great interest.

Alternative Business Structures: In numbers

27
Number of successful ABS applications processed by the SRA between January and August 2012

50
Percentage of firms believed to have begun, and failed to complete, ABS applications

54
Percentage of law firms that believe extra investment is a ‘compelling' or ‘very compelling' reason for ABS conversion

300
The number of ABS applications received by the SRA between January and June 2012

2007
The year the Legal Services Act gained Royal Assent. In 2012, the Solicitors Regulation Authority began to authorise ABSs

Sources: Fox Williams, SRA

Tales from the archive: 2008
While some law firms welcome the Legal Services Act as an opportunity to gain investment, others believe that the advent of ABS could bring challenging times for the industry.

A legal expert has warned that the profession faces a challenging future when non-lawyers are given the opportunity to take control of law firms under the so called ‘Tesco Law'.

Professor Stephen Mayson was speaking about the ramifications of the Legal Services Act 2007 at the Association of Personal Injury Lawyers' annual conference in Brighton.

The Act makes it possible for alternative business structures to be established, allowing lawyers to form multi-disciplinary practices with other professionals, such as accountants. From 2012, non-lawyers will be permitted to own legal services firms.

Professor Mayson, director of the Legal Services Policy Institute at The College of Law, said that lawyers would need to embrace an entrepreneurial spirit when it came to business.

As well as ABSs, which can be wholly owned by non-lawyers as part of the Act, legal disciplinary practices will be introduced early next year, allowing firms to have up to 25% of the business owned or controlled by non-lawyers.

Professor Mayson also described the challenges posed by well recognised brands entering the market.

"New business models will lead to new buying behaviour," he said. "People could buy legal services from a big brand rather than a law firm they have never heard of."