Accountancy firms of all sizes are looking to build up their legal offerings. But will this challenge mid-sized law firms, or drive new ways of working together? And what effect will proposed regulatory changes have? Grania Langdon-Down investigates
It is nearly six years since accountancy practices made their first inroads into the legal market by carrying out probate work in their own right or by becoming Solicitors Regulation Authority (SRA)-regulated alternative business structures (ABSs).
There were plenty of doom-filled predictions of lost market share when the Institute of Chartered Accountants in England and Wales (ICAEW) became the first non-legal regulatory body to authorise a previously reserved legal service and license ABSs in December 2013.
However, the shift has proven less seismic than predicted.
While initial authorisations increased faster than expected, the number has now flatlined – at just over 300 firms and 400 individuals authorised to offer probate services, and just over 200 accountancy ABSs – with new entrants counter-balanced by firms coming off the register. Peter James, the ICAEW’s head of regulatory policy, says those coming off the register include firms moving to become SRA-regulated ABSs so they can offer more reserved services, ‘but some, mainly small, practices, saw this as a punt that hasn’t come off’.
‘While some practitioners have become reasonably smart in how they attract consumers, others haven’t a clue. We were surprised to find 15 per cent of the firms we license for probate don’t have a website.’
The changes could also present opportunities for law firms. James asserts that opening up the market is a ‘win-win’ for both sides. As soon as a matter becomes contentious, he says, accountants refer the work to law firms and, given accountancy practices generally have a wider catchment area, law firms are getting more business as a result.
And where there is a threat from accountancy firms, it seems likely that this will affect smaller and larger firms more than mid-sized ones.
Ann Harrison, chair of the Law Management Section committee and chairwoman of Stephensons Solicitors, says she hasn’t seen any aggressive marketing from accountants seeking to poach work from law firms. In the small to medium-sized enterprises (SME) market, she is seeing an ‘awful lot of collaboration’ between lawyers and accountants rather than mergers or joint ventures which could risk relationships with other work referrers.
‘But this is a big, untapped market and I don’t think medium-sized accountants going into the market will have a huge impact, apart from possibly on smaller local firms.’
Barry Wilkinson, a member of the Law Management Section committee, has been advising law firms on improving their business performance since he founded Wilkinson Read in 1993.
‘We work with firms which I would describe as local heroes, with strong relationships with their clients so they can fight off big local competitors,’ he says. ‘There is little evidence of the Big Four actively targeting this market – they target the corporate market. I have much more concern for the future of the firms in the bottom part of the top 200 than I have for good firms in the next tier down.’
But regulatory change and the ‘trickle-down’ effect of the Big Four’s legal offerings may present both more threats and more opportunities in the near future.
Although the impact may have been less than feared so far, regulatory change on the horizon could significantly alter how legal work is carried out in accountancy businesses in future.
Last year, the Legal Services Board (LSB) announced plans to change internal governance rules. It is currently considering the responses to its consultation and will be announcing the outcome in the spring. Chief executive Neil Buckley says the aim is to enhance regulatory independence to give consumers more confidence, while giving legal service providers the certainty they need to grow and innovate.
We could stay in the game or, depending on how the LSB views our compliance, we could walk away
Peter James, ICAEW
But the ICAEW’s James warns that the institute may have to pull out of the market if the rules are implemented as drafted in the consultation.
The new rules require independence between the regulatory function and the representative body. While the ICAEW’s professional standards unit is a separate unit, the institute is also the representative body and the licensing authority.
‘The implications are more important for us because accountancy isn’t a reserved activity,’ he explains. ‘Members agree to be bound contractually by our rules and professional regulations when they sign up – not because they are required to do so by law.
‘We could stay in the game or, depending on how the LSB views our compliance, we could walk away.
‘I don’t believe it will come to that. But we are the second biggest licensor of ABSs in the UK, and this would take 300 firms out of the market. I wonder what the board is trying to achieve with these governance rules if it is just going to regulate people out of the picture.’
Meanwhile, the SRA is launching its new regulatory model in November, which will create separate codes of conduct for firms and solicitors, and allow solicitors to provide reserved legal activities on a freelance basis.
Solicitors will also be allowed to carry out non-reserved legal services in businesses which aren’t regulated by a legal services regulator, raised by the SRA in 2017 and approved by the LSB last year.
The Law Society has raised concerns that this could weaken existing client protections around professional indemnity insurance, alongside concerns about conflict of interest and legal professional privilege.
However, SRA chief executive Paul Philip says the new standards and regulations create a landscape where firms can offer legal services in new ways and solicitors have more flexibility about where they choose to work.
‘Law firms, accountants and other professional services can now choose the business structure that best suits them and their customers,’ he argues. ‘As a regulator with an obligation to increase access to justice, we need to make sure that we are not a barrier to change and that we create an environment where public protection, regulatory oversight and accountability co-exist with the freedom of the profession to be flexible and creative.’
PwC, KPMG, EY and Deloitte – which, in practice, have outgrown the label ‘accountants’ in favour of professional services practices – are starting to make their mark in law, according to recent research among 171 decision-makers in law firms and corporate legal departments in the UK, and another 346 in the US and Canada.
Nearly a quarter of large firms and a fifth of mid-sized firms said they have had a client use a Big Four firm for work they had expected to win, according to the report by Thomson Reuters Legal Executive Institute .
The four are making concerted pushes into the different areas of the UK legal market. EY expanded its global legal managed services offering last year with the purchase of Riverview Law, the in-house counsel service for SME businesses.
If someone at the top is losing work they will try to take work off the next tier down
Ann Harrison, Stephensons solicitors
Later this year, KPMG is launching a new UK legal consultancy as part of its ‘legal operations and transformation services’ offering. This, it says, will help in-house counsel identify ‘technologies, flexible resources and managed services that can support delivery of legal, regulatory and compliance services’. The UK branch of the service will be headed by Nicola Brooks, former operations director at Travers Smith.
Harrison says: ‘I have heard the Big Four at conferences say they are just feeding the needs of their clients, which sounds a sensible thing for them to do.
‘But it is bound to impact on the large commercial law firms which previously acted for their clients. And that will cascade down, because if someone at the top is losing work they will try to take work off the next tier down.’
KPMG announced revenue growth in 2018 of 30 per cent across all its global legal services, which now employ 2,300 legal professionals in 76 countries.
Nick Roome, UK head of KPMG’s legal services, leads a team of 130 legal professionals, mainly solicitors – the second largest in the network after Germany. The team covers four main areas: business strategy and transactions; tax disputes and investigations; employment and immigration; and ‘new law’, looking at legal consultancy, legal tech and alternative resourcing.
‘We differentiate ourselves in the market by having high-quality lawyers able to work on a multi-disciplinary, integrated basis,’ he says. ‘But there are also lots of areas of law we don’t plan to do, because they don’t offer the client that genuinely differentiated proposition.’
The SRA licensed its first ABS in 2012. KPMG became the first big, SRA-regulated, multi-disciplinary ABS in the UK in 2014, which allowed it to integrate the legal business into the UK partnership, rather than run it as a separate entity.
If we weren’t fulfilling a need, we wouldn’t be experiencing the levels of success we are
Nick Roome, KPMG
Roome, a former DLA Piper partner, highlights the main difference from a traditional law firm. ‘We are out in the market interacting with clients and looking for opportunities, but as part of the wider business,’ he explains. ‘There aren’t that many engagements where we are working on a standalone basis for clients, because the compelling aspect of our proposition is that we are part of a much wider team.’
He sees it as a ‘healthy evolution of what has been a very static legal market. We haven’t suddenly created more lawyers in the market, but an opportunity for lawyers to do what they do from a different place in the market. And if we weren’t fulfilling a need, we wouldn’t be experiencing the levels of success we are.’
KPMG also still refers work to external law firms. Being such a big organisation, conflict issues would outweigh the benefits of taking on contentious work. ‘There is absolutely no desire to have anything but strong relationships with law firms,’ he stresses. ‘We are just a very different animal to a law firm.’
Roome acknowledges that they do relatively small, discrete pieces of work which may previously have been done by a mid-market law firm, and some major pieces of highly strategic work that would have involved silver or magic circle firms.
‘But we do such a huge range of work I don’t think we impact on any one area of the market to create a ripple-down effect.’
Looking ahead, he says they aren’t ‘turning off the recruitment tap’, but plan to strengthen existing teams in London, Reading, Birmingham and Manchester, rather than broaden out into new areas.
|2013||Price Bailey becomes the first accountancy practice to be licensed to set up a specialist legal services firm within the group as an SRA-regulated ABS.|
|2014||PwC obtains an ABS licence to establish PwC Legal as a standalone legal firm. KPMG becomes the first big multi-disciplinary partnership to be licensed as an ABS so it can offer legal services.|
|2017||ICAEW applies for its tax practitioner members to be able to offer the other five reserved legal activities.|
|2018||The ICAEW’s application is approved by the LSB but refused by (then) lord chancellor David Liddington for five reasons, including concerns over governance and independence.|
|2019||The High Court decides against the ICAEW in its judicial review of the lord chancellor’s decision.|
So what models have the big regional accountancy businesses adopted for their legal services offerings?
When Kreston Reeves registered to do probate work and become an ICAEW-licensed ABS in 2014, chair Clive Stevens and two partners were accredited, and 16 people undertook the training course.
The firm subsequently merged with Spofforths to become the largest regional firm in the South East, with 500 staff and £35m turnover.
Spofforths already had a lawyer partner, so the merged firm built up its probate and will-writing offering by taking on six solicitors across Sussex, London and Kent.
So far, Stevens says that being able to offer probate services has proved a ‘great success’, with turnover this year of nearly £1m.
The work comes from the firm’s existing client base and it deliberately hasn’t marketed itself for new clients or tried to take work if a client was already working with a law firm.
‘If I was having lunch with a lawyer client,’ he says, ‘their emotional response would be that they are unhappy about us doing probate. But, in reality, we haven’t been aggressively competitive, and we haven’t disturbed existing relationships.’
‘What we are finding is that lawyers who don’t do probate are referring the work to us rather than a rival law firm, because they don’t see us as competitors.’
Founded in 1938, Price Bailey was a traditional East Anglian partnership until it converted to an LLP in 2004 and opened new offices in London, Guernsey and St Lucia. It has 400 staff and £27m turnover.
Managing director Martin Clapson says the firm wanted to be able to offer legal advice that complemented its existing services, so chose to set up Price Bailey Legal Services as an SRA-regulated ABS.
Having started with an employment lawyer, the firm now has five solicitors, and has added probate, immigration and commercial disputes to its services.
We marketed our employment lawyer and legal services within our existing client base. We didn’t go out externally, knowing that would upset people
Martin Clapson, Price Bailey
‘We chose to start small and learn from our own mistakes, rather than buy a law firm and have to merge the different cultures and work practices.’
Clapson is disappointed that the ICAEW’s push to extend rights to other reserved legal services has been rejected. ‘I have heard lawyers argue strongly that what they do is different, but I don’t really get it to be honest,’ he says. ‘Purely for fairness’ sake, either they should lose the rights, or we get should get them as well.’
He says the ‘vast majority’ of Price Bailey’s clients and contacts were comfortable with the firm becoming an ABS.
‘We marketed our employment lawyer and legal services within our existing client base,’ he explains. ‘We didn’t go out externally, knowing that would upset people. We do now advertise Price Bailey Legal Services, but we still don’t shout it from the rooftops.
‘I can’t see why other accountancy firms wouldn’t do the same, unless they don’t want the extra regulator. It does make the business more complex and they may feel “why go out of your comfort zone?”. But you need to offer these services, either through your own firm or through a referral network.’
Martin Muirhead is senior partner of 600-strong Kingston Smith. The firm has nine solicitors, who provide legal services to its existing clients. Since it became an SRA-regulated ABS in 2015, its legal services side has grown to between 2.5 and three per cent of the group’s £52m turnover.
But being a multi-disciplinary practice brings multiple regulators – alongside the SRA are the ICAEW, the Financial Conduct Authority and the Financial Reporting Council. ‘If there is a regulator, I have got them,’ Muirhead says wryly. ‘It is a fact of life in professional services – it can’t be avoided.
‘I suspect a number of accountancy practices have been waiting to see if the ICAEW becomes a regulator of the other reserved legal services, so they can train their accountants to provide them rather than go the SRA route.’
Becoming an ABS hasn’t damaged relationships with law firms, he stresses. ‘We aren’t here to do big legal work – contentious issues or intellectual property – but the bits that complement the holistic service we offer. What has surprised us is that, by offering these services, we are now referring more work outwards to other law firms than we anticipated.’
MHA Moore and Smalley, with more than 300 staff, took a different tack. Karen Hain, head of professional practices, says they felt it would be ‘foolish’ to register to undertake probate in direct competition with the majority of their legal sector clients.
Instead, they chose to set up a service to assist probate lawyers by doing, for instance, sets of trust accounts. Sitting alongside solicitors as a team is generating work for their trust tax team.
She says some accountants are picking up probate work, but she hasn’t seen many firms outside the top 10 advertising the fact that they have entered the marketplace. ‘None of my legal clients have complained about losing work locally to accountants,’ she adds.
Leonard Curtis Legal (LCL) is an unusual model. It is part of the Leonard Curtis Business Solutions Group, which focuses on restructuring small to medium-sized enterprises (SMEs), including law firms. Initially set up to be the group’s in-house legal team, LCL is increasingly attracting external work through referrals from accountants.
Set up as an SRA-regulated ABS in 2016, it now has eight lawyers and two support staff, based in Manchester.
Andrew Gregory, former DWF partner, is director of LCL, and owns 25 per cent of the shares, with the remaining 75 per cent owned by the group.
Gregory says they initially thought that if they got 10 to 15 per cent of their work externally, that would be ‘a bit of icing on the cake’. Less than three years on, the external work – including employment advice, managing disputes and lower-level litigation – accounts for 60 per cent.
The legal division’s combined turnover is over £1m.
He says LCL effectively acts as an in-house resource to smaller accountancy practices which don’t have ready access to law firms. ‘Probably 80 per cent of our introductions to businesses and work come from accountants,’ he explains. ‘We don’t charge for initial advice, which really adds value for the accountants, and they are increasingly calling us about clients who have work to give us.’
Recent work has included a £3m refinance of a major retailer, and large corporate acquisitions. ‘We definitely see ourselves as disruptors in the market,’ he says. ‘We are getting work which even larger national firms would like to get their hands on, and we are certainly competing head-to-head with small to medium-sized law firms.
‘But we aren’t trying to do everything. The business solutions group has 18 offices around the country, and we tap into the established relationships they have with local law firms.’
While some law firms were initially ‘quite hostile’, he says ‘most got the idea that we wanted to do something with the referrals we were getting from accountants, and they were better off working with us.
‘As an example, an accountant rang about a client who was dying of cancer and needed a will drafted urgently for an estate worth around £1.5m. I can’t do that, so I referred him to a former colleague. We do this without charge, because the accountant sees us as providing a solution.’
Viv Williams, consulting director with Symphony Legal, says law firms should look to adapt their services to compete with accountants – but few have done so. ‘Lawyers are more concerned with some key stable activities being eroded, such as crime and personal injury work,’ he says. ‘Couple that with a succession crisis, and law firms are not looking to compete with the accountants. But, once accountants can employ a solicitor to deliver non-reserved activities, I suspect we will see this change in due course.’
One key area where law firms can learn from accountants is around client relationships, says Ian Bond, chair of the Law Society’s Wills and Equity Committee, and head of trusts and estates at Midlands solicitors Talbots. Solicitors tend to be a ‘distressed purchase’ for clients, whereas accountants have a ‘stickier’ relationship with their clients, because they meet regularly.
It is about getting the services the client needs in one place
Ian Bond, Wills and Equity Committee
‘So, when a client’s relative dies, it is natural to ask the accountants to administer the estate,’ he says. ‘If I write a will for a businessman, he probably won’t see me again for three years. But making it easy for your client to instruct you is the holy grail, so, as legal professionals, we need to build relationships in the same way.’
Law firms also need to keep an eye on the opportunities offered by the upcoming regulatory changes. Career options will widen. Bond has solicitor friends who don’t want to follow the traditional route to partnership in a law firm. ‘They see being able to keep their professional standing as a solicitor while working in another profession, such as accountancy, as an exciting opportunity.’
Opportunities to go into joint ventures with accountants may also increase. ‘I know law firms which have accountants who sit behind the scenes as an in-house resource, and solicitors and legal executives who are working in accountancy firms,’ remarks Bond. ‘It is about getting the services the client needs in one place without having to merge two professional practices, with all the logistical and regulatory issues that involves.
‘The ABS option hasn’t matured into a marketable proposition yet, though it will come in time. But it needs the SRA to lighten up some of the regulations and for the accountancy profession to come towards the middle ground, so we can talk about “professional” regulation rather than legal or accountancy regulation.’
Overall, Bond says there is growing recognition that competition shouldn’t be feared. ‘The key is to embrace change and learn from your competitors by taking the best bits they do to enhance your own offering, and we will all make money.
‘Firms must change from within rather than defend the status quo. If we stay as we are, we are only going to be going downwards fast. But those willing to adapt will have a fighting chance of being here in 20 or 30 years.’