This time last year I predicted that we’d continue to see large scale activity in the legal sector with high volumes of mergers and acquisitions over 2019 as firms look to reposition themselves across locations and sectors.
This rang true as early as the first few days of January 2019 as Andrew Hosking and I were appointed as joint administrators to high profile law firm Ince & Co. This set a precedent for the remainder of the year.
I anticipate 2020 will be no different from 2019; large scale activity will prevail as firms continue to seek to secure their long-term future and claw back market share in what is a very crowded and competitive landscape. I expect to see continued consolidation and M&A activity to continue at pace. As a related note, I also expect a continuing trend of stressed legal firms failing to take adequate steps to address the root cause of their difficulties, instead viewing mergers and acquisitions as a way to address the underlying difficulties.
2019 also saw the introduction of the New SRA Standards & Regulations (STaRs) which came into force on 25 November 2019. The new STaRs have sought to simplify the legislation and reinforce that every employee of an SRA regulated entity is now a regulated individual, and therefore further moves the onus on regulation to all individuals as well as the firm. The new STaRs also allow for the deregulation of legal services whereby unless you are undertaking litigation or probate services (or one of the other four reserved legal activities), there is no requirement for the firm to be regulated by the SRA. It remains to be seen if and when existing legal entities will demerge and split regulated and non-regulated services into separate entities in order to obtain the obvious cost savings that this will bring.
One such example being that there is no longer a need for unregulated firms to obtain Professional Indemnity Insurance (PII) with the required minimum terms, instead it is expected that those firms will source insurance that is reasonable for the work they are carrying out. This could also be sourced from outside the ever-decreasing list of qualifying insurers specialising in solicitor PII. This legislation further opens up the landscape for new incumbents to provide legal services outside of the scope of the SRA and allow industries such as the accountancy sector, and other entities to further expand into the legal sector with relative ease and outside the usual restrictions on structure, regulation and ownership as is required from SRA regulated services.
The environment therefore remains very challenging and highly competitive and I expect to see a range of challenges and trends emerging right the way across the legal sector.
It remains to be seen what the outcome will be of the Civil Liability Bill. Much of the legislation is relatively draft though the Government's stated intention is for the reforms including the increase in the small claims limit, proposed to come into force in April 2020. Despite the intention for April 2020, these reforms are unlikely come into force until the necessary infrastructure is fully operative so this could be pushed back until much later in 2020. However, with the election now out of the way and a political landscape that seems able to resolve Brexit (like it or loathe it) more time is likely to be devoted to implementing these reforms within 2020. Whilst many firms have adapted to the expected changes, there will be some who will be unable to adapt and will some form of restructuring.
A key trend over recent years which is likely to continue represents the age profile of the partners in traditional regional mixed practice firms and the exit to retirement. The next generation are not as keen on the traditional partnership model and therefore the expected exit by way of the sale of capital is losing momentum thus raising challenges for an orderly exit regardless of value. Both private equity investments and considerations around IPO’s are also in vogue amongst professional practice in general and present new opportunities for partners to extract value if the firm has scale and a model not over-reliant on a few key work winners.
US law firms also pose a challenge to UK practices. The US dollar buys more than GBP, they have heightened ability to poach key staff with the promise of higher salaries and different markets to gain experience in. They’re also not dependent on the UK economy and Brexit.
It isn’t however all doom and gloom. Opportunities are rife for those who are positioned to take advantage. The rise of private equity interest in the professional services market at large present an opportunity to firms seeking growth. The rise of the ABSs and the new STaRs offers opportunity with non-regulated entities and non-regulated owners of regulated firms for those that are willing to embrace the reforms, more away from the traditional model and invest in people and IT.
Recent research indicates that there are over 3000 firms challenged as we enter the final few weeks of 2019. If your firm is one of these please do contact our industry leading legal sector advisory specialists, Sean Bucknall and Andrew Hosking, who will be pleased to discuss the challenges you are facing and the options which may be available to you.
Sean Bucknall and Andrew Hosking are leading advisers to the stressed legal sector. Recent assignments have included breakups, going concern sales, re-banking arrangements; and general advisory. No other team in the UK has had more exposure to the distressed legal market than Quantuma, which now acts for a range of clearing Banks in respect of distressed legal practices as well as acting for second tier lenders, insurers and creditors specific to the legal sector.
Quantuma have acted on a large number of high legal sector matters including Cubism Limited, Ince & Co LLP, Roberts Jackson, Burroughs Day, King & Wood Mallesons (KWM) LLP, Carter Law Solicitors Limited, Linder Myers LLP, Jeffrey Green Russell Limited, Challinors Solicitors