Floating legal practices

A law firm floating on the stock market? Blackstone would turn in his grave! "How do we insure that?" insurers ask.

An interesting concept you might ask yourself. Is it really the way forward for the profession or will it encourage firms already on the brink of financial collapse to use the idea to stay afloat? A contradiction in terms perhaps, but not an uncommon step - to hide behind the corporate cloak? Like ships at sea, where only a small change in the weather can mean catastrophe, is the sea change in the legal business now so sensitive that their insurers need to take special care before endorsing such a move?

The recent strategy paper published by the Legal Services Board (“the Board”) projecting legal changes from 2015 – 2018 illustrates a series of emerging issues which, are likely to have a fundamental effect upon both those operating within the legal profession and those investing in it.

The forecast is that by 2020, the legal landscape will have changed beyond all recognition. Four threads emerge from the Board’s paper which include; (1 ) the concept of “self lawyering”, (2) the influence of technology, (3) changes in consumer behaviour and (4) market changes. If correct, these changes could mean that the current firm structures will no longer be viable. We are of course a service industry but the tighter impartial checks and balances the corporate structure brings would perhaps be welcomed by insurers. So if asked to travel with an insured looking to change, ask that insured whether it understands the Board’s views. Is the insured intending to change not just their structure but also the manner in which they provide their service for the future? What is that service going to be?

If the Board’s projections are correct, the current business model for lawyers, whether as a partnership, an ABS or a PLC, cannot survive as a profitable entity without a radical rethink about how and what services it proposes to offer in the longer term.

The tide is certainly turning for lawyers and insurers alike. The old fashioned partnership may have stifled the expansion of the firm. The newly introduced provisions enable law firms to operate with non-lawyers and have seen changes in their make-up which include the status of limited liability Partnership (LLP), joining forces with non-lawyers as an ABS or, more radical still, flotation on the stock exchange as a public limited company(PLC).

It is a truism that historically the legal partnership structure brought with it a measure of stability, continuity and certainty. Yes, the business is run by individuals who come with their own idiosyncrasies. However, very often it is these very same diverse relationships which produce a successful business model when brought together. Many partnerships continue to operate “quite happily thank you very much” without the need for any outside non-lawyer intervention. However businesses need to heed the changes even if they chose to ignore them.

For Qualifying Insurers, a move away from the straight jacket of the solicitors’ Minimum Terms & Conditions while retaining their relationship with lawyers may well be attractive.

For example, Knights solicitors (2012) and Excello Law (converted to an ABS in 2013) both received injections of capital from the Dragon’s Den entrepreneur James Caan and have recently changed their make-up. Caan’s cash injection came from his private equity vehicle Hamilton Bradshaw. The investment was primarily made, so it is said, on the basis of Caans’ belief in an analogy between the operation of solicitors’ firms and the recruitment sector where Caan has much experience. For the firms, their rationale seems to have been a desire to increase capital and develop their national and international presence. Certainly, one of them recognised that “staying the same” wasn’t really a viable option in the “changing environment in which we operate”

This year also saw Birmingham law firm Gately float on the stoke exchange after its bankers, Canter Fitzgerald, valued it at £130 million. Gately had already taken advantage of the changes afforded in the ABS regime in 2014.

This aspirational “bigger is better” approach brings with it opportunities for insurers. A move by an insured to change status and managerial structure needs an insurer to go to. Insurers need to be involved from the outset in the re-evaluation of the product. Whilst the MTC cover will continue, the advent of these new business structures gives insurers flexibility. They need to get under the skin of their insureds and really understand their business. Ask an insured to explain the rationale for change and understand it.

One can see an increased need for D&O and EL/PL cover together with an extension of PI cover to those involved in the ABS structure including accountants, surveyors, architects and perhaps financial advisors.

One might have imagined that following the successful listing of personal injury firm Russell Jones & Walker and Australia's Slater & Gordon Lawyers, the world's first publicly listed law firm, in 2007, more would follow. However, whilst the tide is moving slowly, it is beginning to creep forward.

These changes afford insurers an opportunity to re-evaluate their offering to the solicitors’ business andto tighten their grip on the activities of their insured which for many will be published for the first time. The consequential effect upon claims is not yet known. Will it be less claims under the PI policy but more claims under the D&O cover? Would this be negated by an increasing risk of claims from third parties and/or shareholders against the directors individually? All questions to consider. However that protective corporate cloak doesn’t just cover its owner. Arguably it offers insurers greater protection too.

Insurers should take advantage of this new found freedom for their solicitor insureds while keeping a keen eye upon the way in which the legal profession is now moving. The results could be astonishing.