Statute Check, Aisle Three

Legal advice is coming soon to a supermarket near you. No, seriously, it is — you could soon be picking your lawyer from among the cereals, says Sophie McBain
 
 
BUYING LEGAL SERVICES from a supermarket may be about as appealing as value baked beans to HNWs, but when ‘Tesco Law’ comes into force in October this year, it could have serious, far-reaching, even surprising, consequences for the wealthy.

Under Tesco Law (officially the Legal Services Act 2007, or LSA), law firms can be externally owned, by a bank or supermarket, say, and can form alternative business structures (ABS) offering both legal and non-legal services under one roof. This opens up opportunities for a range of private companies to offer legal services to their customers. Despite the nickname, Tesco is not yet opening legal offices somewhere between the deli counter and the frozen foods section, but the Co-op will be.

Depending on your perspective, Tesco Law couldn’t have come at a better or a worse time. The global recession and shaky recovery have left law firms feeling uncharacteristically vulnerable. In 2009/2010, revenues for the top 100 UK law firms declined by 4 per cent, meaning that lawyers are competing harder for business and the balance of power is (finally) shifting in favour of clients.

Wealthy clients have long been grumbling about the way law firms charge: in April 2010 a survey by Family Bhive, an online social network for UHNWs, found that 77 per cent of respondents disagreed that legal fees should be based purely on time spent, and 100 per cent wanted more reporting from their lawyer on how costs are building up. In more prosperous times, lawyers might have scoffed at polls of this kind, but no longer. Acting in combination, the straitened business environment and the LSA offer both an impetus for change and a range of new options for law firms willing to adapt. And for HNWs, this could mean changes to the services law firms offer and the fees they charge.

The chances are the Co-op isn’t expecting Spear’s readers to clog up its legal aisle, but HNWs might find the concept of ‘Hoare’s Law’ (for example — Hoare’s has expressed no intention in this direction) a lot more appealing. Caroline Garnham, a private client partner at law firm Lawrence Graham and the founder of Family Bhive, believes that traditional law firms will face stiff competition from banks looking to move from ledgers to legal pads. They could do this in two ways: by setting up their own legal arm or by buying up a law firm and acquiring its valuable client base.

Banks are already recruiting top lawyers, who offer private clients recommendations, or any service that just stops short of legal advice — and this hasn’t gone unnoticed (causing bad blood, Josh Spero finds). ‘Large providers of private client services are already facing acute competition from banks who perhaps don’t sign off on the legal documentation but have very sophisticated lawyers employed by them. Once banks are allowed to provide legal services as an ABS, I don’t think anyone is going to stop them,’ Garnham argues.

Were a bank to offer legal services, it would have several competitive advantages over the traditional law firm. For a start, banks can offer additional convenience. But on top of this, many lawyers have little more than a passing interest in PR, while top UK banks have serious commercial knowhow and brand power. In March a YouGov poll of 2,336 members of the public found that 19 per cent of respondents would consider buying legal services from Barclays.

These factors will put pressure on law firms to show value for money. For instance, with many clients unhappy with the billable-hour model, banks are far more likely to continue charging clients as a percentage of the value of a transaction. This has the advantage of being more predictable for clients fed up with nasty surprises on their legal bills and is to some extent fairer, because fees are linked to the value of the transaction to the client.

But, importantly, banks will not necessarily offer cheaper legal services. For instance, if a bank carrying out probate services charges 2 per cent of the value of an estate, then for large estates banks could be charging higher fees than law firms billing by the hour.

James Tsolakis, head of legal services at Royal Bank of Scotland, doubts that banks will step into the legal sector. ‘I can’t see that while banks are recovering from the financial challenges of the recession there will be an appetite to change the business model of the bank and diversify from traditional bank services,’ he says. But banks are not the only businesses that may look to expand into the high-end legal sector, and Tsolakis does foresee other players entering the market, including accountancy firms, because they are ‘similar service businesses: the values, the cultures, the business principles are more closely aligned.’

George Bull, head of the professional practices group at business advisers Baker Tilly, takes the idea a step further, arguing that law firms ‘may move more towards a private banking/family office model that offers a number of services’. He believes the LSA may herald the emergence of a number of ‘high-end, boutique, one-stop shops’ providing a range of services to HNW clients.
 

Illustration by Russ Tudor
 
 

INNOVATIVE CITY LAW firms are already looking to attract and retain clients by expanding their range of services, but they are proceeding cautiously. Mishcon de Reya has partnered with Quintessentially to offer a concierge service to its clients. But James Libson, head of Mishcon Private, made it clear that the firm will not be merging with ‘other professional services’, although it may look at adding other new services to its repertoire. ‘We would never do investment advice, but we might do other things, like for example working in parallel with investment advisers to provide analysis of investment advice, or to provide due diligence on investment advisers,’ he says.

Not everyone will be attracted by ABSs. As Libson points out, ‘Private clients don’t want to put all their eggs in one basket, and many do not want one firm to know everything about them.’ For the firms themselves, setting up an ABS can be riddled with potential difficulties. Nevertheless, time-pushed HNWs may be tempted by the simplicity of a one-stop-shop model, and Bull argues that rather than making one-stop-shop models unworkable, these factors will simply encourage the formation of small, nimble, boutique firms.

But Garnham has a more fundamental criticism of the one-stop-shop model, or indeed any moves away from the traditional, independent law firm. She is ‘deeply concerned’ that lawyers working for ABSs, whether they are owned by private companies or offer ancillary non-legal services, may have their independence compromised.

‘Say, for example, the transaction has a clause in it which an independent lawyer would bring to the attention of the client which as a result would mean that the client would decide not to proceed with that transaction. To what extent, especially if that lawyer is remunerated by some form of bonus as to the work that they bring in, will there be some pressure on the lawyer not to bring up that clause to the client?’ she asks.

The LSA may mean clients can expect more convenient services, but they could also be exposed to greater risks. The regulation of new ABSs will aim to preserve the independence and impartiality of legal advice, but given the complexity of regulating multi-disciplinary ABSs and the freshness of the regulation, HNWs should beware of false friends.

Garnham also cautions against the belief that certain legal services are ‘safer’ to buy from new providers than others. When DIY will-writing kits can be downloaded with a click, or bought along with the morning paper, it’s easy to start believing that wills are simple, fail-safe legal documents ­— even when large estates are involved.

But Garnham strongly disagrees: ‘It really worries me that people say, “It’s just a will, it’s just a conveyance.” It’s not — these are very complex transactions, and in among the details there can be many pitfalls and traps. I’ve come across several situations in practice where I’ve said to the client, “Do you realise that on your death the administration costs of your estate will cost 2 per cent of the value of the estate?” Now, if that estate is worth £100 million that is an awful lot of money, and they may say, “I don’t want to do that. That was never brought to my attention.” That really frightens me.’
 
 
WHEN LAW FIRMS take customers’ loyalty for granted, lawyers have little incentive to go the extra mile, but more competition doesn’t necessarily mean that clients can expect better service. Some HNWs have started asking law firms to bid for legal work on a job-by-job basis, provoking the irritation of lawyers who now have to prepare detailed quotations for an instruction that could go to a competitor.  But while lawyers sourced in this way may offer good value for money, they are unlikely to offer an exceptional service when they know that their client is not interested in any long-term arrangement with the firm.

Garnham believes law firms have powerful incentives to revise their fee structure. Charging as a percentage of the value of transactions could be popular, not least from a law firm’s perspective, because fees can be higher. According to Garnham, some private client law firms are investing in technology to make it easier for firms to charge on a variety of criteria, and other firms may respond to client demands to charge on a project basis.

New, innovative models may yet emerge in the space offered by the LSA. Last year private-equity lawyer Matthew Hudson set up MJ Hudson, a law firm specialising in providing advice to the fund-management industry. MJ Hudson will offer clients the option of being charged as a percentage of a successful transaction, and will invest part of its fees in its clients’ funds in order to ‘develop a long-term alignment of interests’. The success (or otherwise) of such firms may send out important signals to the legal profession.

Some firms may also look at ways of reducing their fees and undercutting competitors on cost. One option that James Tsolakis of RBS says may be attractive to large firms is investing in technology that will allow parts of legal transactions, where processes are simple and replicable, to be computerised. Tesco Law means that firms will be able to seek external capital to invest in cost-saving technologies, or to create economies of scale by buying up smaller law firms.

Tsolakis also foresees firms reducing costs by outsourcing, but this could worry some HNWs who will question whether outsourced work is as high-quality as work undertaken by in-house fee-earners, or who may worry about potentially sensitive information being handled by faceless back offices, whether they are in Manchester or Mumbai.

New entrants, some emerging from unexpected places, may offer alternative models and exert downward pressure on fees. Prolegal originally operated in the high-volume, low-cost end of the market as a personal-injury law firm, but Emma Porter, head of operations, describes the LSA as a ‘trigger point’ for its decision to reposition itself as a private client law firm, which aims to attract clients with a net worth of £2–£15 million. At the bottom end of the market, Prolegal felt under threat by new ‘Tesco Law’ entrants, but through recruiting top lawyers (and their client bases) it hopes to offer expert private client law services to HNWs, at more competitive rates.

Porter explains that through employing the cost-saving techniques they acquired at the volume end of the market, they are able to more than halve the hourly rates of their lawyers recruited from City law firms. ‘We’ve traditionally worked in efficient ways, by breaking down parts of the process,’ she says. ‘And, rather than having lawyers working on the administrative side, we make sure that appropriate work is done by lower-level staff, overseen by a partner.’

With a few months to go until Tesco Law comes into force, it’s not clear what impact newcomers such as Prolegal will have on fees, but their attitude towards the LSA is noteworthy, if only in contrast to that of many established law firms. George Bull of Baker Tilly, the author of several reports on the LSA, recommended Prolegal as a useful source of information on the impact of Tesco Law. Many more established law firms may well have given the LSA less thought. Garnham believes that the LSA is a ‘sleeping tiger, and when it kicks into action in October this year a lot of lawyers are going to be caught out’.

Well-positioned law firms may feel quietly confident in their ability to retain clients, but others may be mistakenly complacent, or alarmingly ill-informed. It is hard to tell whether City law firms are simply cautious or inert, but if they are the latter this will give space for a new generation of nimbler, more innovative firms to gain a strong foothold in the sector and offer clients greater choice. The next few years will be crucial, as lawyers and clients alike will watch to see how the first generation of ABSs fare.

At best the LSA will mean that clients can expect more convenient, client-oriented services, and legal fees that are both fair and good value for money. At worst, the reputation of the UK’s legal profession could come under threat, and clients will have to pay more for a service that is today considered the norm: independent legal advice. For both HNW clients and the law firms that serve them, Tesco Law offers both opportunities and new threats, and the ill-informed stand to be most easily caught out.