It is rather fitting that Tesco has shown no interest (yet) in profiting from the industry-changing legislation that bears its name. The Legal Services Act, dubbed the Tesco Law for its liberalisation of ownership rules, is to the UK legal profession what the Big Bang was to the City 25 years ago; or so the government hopes. But so far it has been a slow start.
Tesco isn’t biting. In fact, few organisations have shown much appetite for muscling in on the legal scene. The Co-op banking group has made its intentions clear, and will look to increase its legal businesses by offering in-store support to customers. Insurance companies AA and Saga have also hinted about a move. But it’s hardly a rout.
The main thrust of the reform is to allow non-lawyers to own and run businesses providing legal services. It means that supermarkets, insurance companies and automotive groups can offer routine legal advice – back-office claims handling and the like.
Conveyancing – the legal work involved in property transactions – is first up for the chop. A new licensing board has already accepted applications from non-lawyers. Other practice areas might take a little longer to get the all-clear.
Tesco Law has other implications. It could lead to online advice clinics and low-cost legal chains. Larger firms might consider a stock-market listing, and no one is safe from private equity firms’ ownership. Palamon Capital Partners has been quick off the blocks, buying QualitySolicitors (QS) for an undisclosed sum.
QS is not an upstart seeking to subvert the legal establishment. On the contrary, the company is there to keep the barbarians at the gate: “We are sponsoring the legal profession’s reaction to the impending changes,” says Jonathan Heathcote, a partner at Palamon.
Formed in 2009 to consolidate the high street legal market, worth around £10bn (€11.5bn) every year, QS is designed to give existing law firms enough bulk to protect themselves from the new entrants that everyone fears. The company has signed a national agreement with retailer WHSmiths to provide legal access points in stores run
by local firms in the QS network, who decide whether it should be manned by solicitors, paralegals or “sales agents”. The group hopes to sign up as many as 1,000 branches.
High-street firms are most at risk from the new models that the legislation allows. There are 10,000 firms in the UK, and competition at this end of the market is gentlemanly at best. For the humble client, it is hard to differentiate between firms for humdrum services. Lawyers are rarely used, and firms don’t compete on price.
A shot across the bows
And then there’s the remuneration. Clients are suspicious of billable hours, and the lack of transparency leaves a bad taste in the mouth. Freeserve founder Ajaz Ahmed has set up Legal365 to disrupt the market, providing an automated online legal advice system. The company is also setting up stores around the country. Ahmed claims they are very different from the drop-in centres offered by QS. He points out that in the WHSmiths in the centre of Leeds – the largest financial and legal hub outside London – staff at the legal access point can discuss their services, but have to travel seven miles to a firm in Pudsey to talk to clients. At Legal365, all stores will be manned by lawyers.
Ahmed thinks that law firms are still in denial about the implications of the new law. Market research indicating that clients would be reluctant to pay for legal services online is misleading.
“It’s an absolute waste of time,” he says. “You should never ask customers whether they’ll pay for things online. If you’d asked someone 15 years ago if they’d do banking at Tesco or Sainsbury’s, they would have said ‘no’. They’re doing it now. And they’re now some of the biggest banks around.”
High-street firms are in for a shake-up, but experts doubt that the reform will have an impact on high-value corporate work. Heathcote says that magic circle and elite city firms operate under different competitive pressures, and have less scope to gain efficiencies from standardising grunt work.
That might be changing. A survey by legal research business Sweet & Maxwell revealed that 13 per cent of finance directors at the 100 largest firms thought there was a high risk that the Tesco Law would dampen profitability. With a freer hand to seek external capital, competition will increase for commercial work. Mid-tier firm Irwin Mitchell has appointed Espírito Santo Investment Bank as a financial adviser for its fundraising efforts as it seeks to boost revenues from £157m to £200m. Meanwhile, Pannone is looking to set up a white label arm, partnering with retailers, insurers and utilities to market its services; while the UK office of US firm Greenberg Traurig Maher is also sniffing around for opportunities to take advantage of the Tesco Law.
It may not be as explosive as the City’s overhaul in the 1980s, but change is coming to the legal profession.
The big bang
In the early 1980s, the gilt market in the City of London didn’t open until 10am and closed mid-afternoon. Electronic systems had not been introduced and the trading floor was a den of sweaty old boys. One trader remembers blowing his nose and inadvertently releasing clumps of brown wood dust from the wooden floor. The Big Bang in 1986 changed all that. Boozy afternoon meals were replaced with Gordon Gekko’s refrain that “lunch is for wimps”.
The reforms liberalised the market, enabling foreign ownership of City institutions and allowing brokers and stock-jobbers (who executed transactions based on advice from brokers) to combine in a dual-capacity role. Perhaps the most significant impact was indirect. By making London attractive to finance, banks brought their proprietary trading operations – the hedge funds, private equity funds and other over-the-counter financial services – which have far outstripped the market for quoted companies.