Property Focus | The new generation

Alternative business structure (ABS) law firms will revolutionise the legal services industry in England and Wales, amounting to our 'big bang'. The doom-mongers (such as a member of the American Bar Association who recently described ABS as the 'lowest common denominator') are just wrong.

The starting point is the Legal Services Act 2007. That law had, at its heart, a desire to apply a greater degree of market forces to the legal services industry, which has been seen as monopolistic and restrictive, with the aim of providing a better service and lower cost to the consumer. To explain why I think ABS can achieve that goal, imagine the following scenario.

A client instructs a lawyer to enforce the terms of a restrictive covenant, including applying for an injunction. The litigation partner tells his client that it could take anywhere between 50 and 75 hours for him to deal with the matter at an hourly rate of £400 per hour (albeit 'that rate could increase during the course of the litigation') and barrister's fees of anywhere between £35,000 and £50,000. Oh, and further, this was just an estimate and could well change depending on how the matter progressed.

This leaves the client flummoxed: 'But, how much will it cost?'. The client also feels that internally the lawyer was punching the air with delight at the thought of a protracted dispute. Whereas the client wanted the dispute resolved as soon and as cheaply as possible, the client couldn't help but think that the lawyer wanted the complete opposite: a protracted dispute, generating significant legal fees.

An ABS is, by its very nature, owned partly by a lawyer and partly by a non-lawyer. The advantage of having a non-lawyer's input is that, as a consumer of legal services, they challenge the legal norm. For example, by asking why on earth lawyers charge in such an uncertain and archaic way? I defy anybody reading this article to persuasively argue that hourly rates and wide estimates suit anybody, apart from the lawyer who is giving the estimate.

Further, how can it be in the client's interests to have a charging model in place that means the less efficient a lawyer is the higher his or her fees and the more efficient he or she is, the less he or she is paid? Or, as Lord Neuberger said recently, the concept of hourly billing 'at best leads to inefficient practices, at worst it rewards and incentivises inefficiency', and 'fails to reward the diligent, the efficient and the able', adding ABS may 'sound the death knell of hourly billing, as it will lead to more positive and market-orientated practices'.

So, in designing my ABS with my non-lawyer partner, we decided to ring that knell and provide a product that suits our clients. We only charge upon a fixed-fee or conditional-fee basis. We also offer periodic contracts for the provision of litigation services. So, for example, an annual retainer is agreed and paid on a monthly basis in exchange for my firm undertaking all litigation that arises. Yes, there is a risk that in one year there may be more litigation than expected but by working with the client during the course of the year we try to ensure that disputes are avoided, rather than brought and defended. For example, in the heavily legislated area of residential landlord and tenant, making sure that all procedures are legislation compliant.

As an ABS we also offer different distribution channels. My non-lawyer partner and I have often considered it odd that most lawyers offer regimented hours that don't suit most working individuals. Accordingly, my firm offers early morning, late night or weekend appointments.

?Mutual benefits?There is also much to be said for the synergy between an ABS law firm and its non-lawyer owner. As Sir David Clementi said 'many consumers have a set of related legal and non-legal needs', and if different professionals (such as estate agents and surveyors) work together in the same business, each may benefit from new sources of work and the speed and efficiency of transactions may be improved.

In my example, my non-lawyer partner will often refer its clients and contacts to my firm. This provides advantages for those clients and contacts. From the client's point of view, a more seamless all-round service is provided (the client's legal and non-legal needs can be dealt with by two related entities). There is also a physical efficiency of instruction and ease in obtaining relevant documentation. From the law firm's point of view this is also a significant advantage as it also benefits from having a ready-made potential client base. This in turn lessens the risk facing most new law firms of not having enough work.

There are also advantages to the non-partner. For example, a reduced legal spend. If a non-lawyer company part owns a law firm, then they can agree reduced rates with that law firm. Further, the non-lawyer can also turn volume referrals into fees. For example, imagine an estate agency. Such an estate agency may often be asked by a purchaser or seller to recommend a conveyancing solicitor. If that estate agency also part owns a law firm it could refer that purchaser or seller to that law firm, thereby turning such referrals (for which it historically receives nothing) into fees.

I also cannot stress how much value I put on having a management team that comprises non-lawyers. It is still usually the case that most law firms, no matter the size, are run by lawyers. While such a lawyer may, say, be an expert in employment law that does not necessarily equip a lawyer to run a business. So, while an ABS law firm will always need a compliance officer for legal practice, that doesn't preclude it from benefiting quite considerably from having the experience of its non-lawyer partners.
?Commercial pressures?ABS has also succeeded elsewhere. For example, the Australian legal market opened to incorporated legal practices (ILPs) in New South Wales in 2001, and then progressively spread through the other states. Overall, ILPs have proved to be very popular in Australia; this is attributed to their ability to raise capital more efficiently and cross-sell other products.

Of course, there are also risks that need managing. In his report, Sir David Clementi discussed the risks of an outside owner exerting 'unreasonable commercial pressures' on lawyers and conflicts of interests. He proposed various ways of reducing these risks, such as not allowing the owner access to clients' files and requiring firms to refuse instructions in cases where the owner has any conflicting interest. For example, a firm owned by a bank should not be allowed to advise a client on a loan document to which the bank is a party. Also, non-lawyers may not be familiar with the professional and ethical standards governing the legal profession. This means that more thorough risk assessment, training and supervision may be necessary.

There is also the application to be licensed as an ABS, itself. In my case, the application took more than six months to be determined. Understandably, the SRA are very thorough in their investigations. While I found the SRA to be very accessible and professional, there is no getting away from the fact that it is a very difficult application to make and takes a lot of time and thought.

I believe that ABSs will benefit consumers, lawyers and non-lawyer owners. The change in law firm management will result in legal products that suit clients, not lawyers. ABS will hasten the demise of ancient practises and help deliver the objectives of the Clementi report and the Legal Services Act 2007 and that can only be a good thing.