The legal year ahead

With just a matter of days left before we draw 2014 to a close, there are probably many who might say ‘goodbye and good riddance’ to the year nearly behind us, whilst others within the legal sector have experienced dramatic growth and good fortunes.

So during this festive time of mulled wine and minced pies, here is a look ahead at what 2015 may have in store for law firms and the legal market more widely.

The tipping point for ABSs? Not quite yet…

Heralded as the single greatest change to the legal market in a generation, the introduction of alternative business structures (ABSs) in the UK has proved to be more of an evolution than a revolution. True, we have seen a number of new players enter the legal market, none more attention-grabbing than three of the Big Four accountancy firms. We’ve also seen some interesting new business models and new external investors, but the progress to date has been more tortoise than hare.

There are currently just 339 licensed ABSs in the UK, according to the latest figures from the SRA. Compare this with an estimated 11,000 law firms of all shapes and sizes. 

That’s less than 3%, really a proverbial drop in the ocean.

To date there has been little sign of the once much-heralded, multi-disciplinary practice emerging. So will this year prove to be the tipping point for conversions to an ABS, as we saw with the volume of conversions from partnerships to LLPs just a few years ago? Not likely just yet, in my view. Converting to LLP status offered some very real and tangible benefits for even the most ‘normal’ of law firms, financially and otherwise, so it was just a matter of time before large numbers of them did so. 

Not the same when it comes to ABSs, so the journey is likely to be quite a bit longer this time around.

Fewer walks down the aisle?

Over the past year, it seemed like merger talks between firms – either marriages of convenience or necessity – made the headlines on a weekly basis. Charles Russell Speechlys, Blake Morgan, BLM and Squire Patton Boggs all emerged from their walks down the aisle last year, and, according to stats produced by Altman Weil, the first three-quarters of 2014 saw more mergers than in the same period of any year since their records began in 2007. 

But will this continue? Yes, but likely not with the fervour we’ve seen. A recent survey from an accountancy firm, Smith & Williamson, of law firm managing partners and senior management indicated that only 21% of firms expected to merge, down from nearly 30% last year. This, coupled with the fact that some 96% of firms were ‘confident about the next 12 months’, means that more will likely try to keep living the single life. 

Here come the zombies

As the economy continues to recover, the era of low interest rates from the Bank of England is likely to come to an end at some point in 2015. That’s not just bad news for mortgage-holding homeowners, it will also likely cause firms which have barely held on during the recession to topple over.

These so-called zombie companies will have significantly negative balance sheets and have survived thus far mainly because of the low cost of borrowing or servicing existing debt. New figures recently published by Company Watch estimate that there are more than 339,000 of them in the UK alone, an increase of 5.5% since 2013. 

Historically, there is a sharp rise in insolvencies when the UK economy recovers from a recession. So the chances are that there are a number of law firms which fall into this category, and as interest rates rise these ‘zombies’ are likely follow the path of the firms which we saw go bust in the past year (Tods Murray and Davenport Lyons among them).

‘Groundhog day’ for professional indemnity

2014 was supposed to be the year of much-needed reforms to the market for professional indemnity insurance, a reality of operating in the legal marketplace and a requirement (and cost) which has felled more than one decent firm over the years. This is no more true than for firms focused on the conveyancing market, which bear the largest burden when it comes to professional negligence.

Well, reforms were indeed proposed and debated, but things haven’t improved much. The row between the SRA and LSB – particularly around proposals to lower the minimum required thresholds for indemnity cover – rages on, and a recent media report documented that actions against solicitors have nearly tripled in the last year alone. To the casual observer, this might perhaps seem a bit like the regulatory version of the film Groundhog Day.  

Amidst the increasingly boisterous calls for greater flexibility in the market, here’s hoping that – at some point in 2015 – we wake up and don’t have to live the same day over again when it comes to PII.

There are undoubtedly many uncertainties about what the immediate future and the longer term have in store for the legal sector. If there is any certainty, it’s that change in various forms is inevitable. Firms will need to find their own way to adapt and prosper. So there’s much to look forward to in the new year.

Fergus Payne is a partner and joint head of the partnerships and LLPs team at the Lewis Silkin LLP