What Effect Does Deregulation Have on The Market for Legal Services?

Uncategorized Aug 05, 2019

Although “deregulation” of the legal industry in the UK was initiated by the Legal Services Act 2007 the new laws didn’t come into effect until 2011, and far from the “big bang” that was anticipated it was a damp squid.

There was an air of anticipation around Alternative Business Structures which were the new vehicle introduced to implement Lord Clementi’s recommendations.  Some people believed that the ABS would cause a sea change in the way legal services were provided because for the first time non lawyers could own a stake in law firms.

However, to date the radical transformation of the legal services market that was envisaged from deregulation hasn’t happened - at least at the small business end of the market where access to lawyers is still costly for many.

In my view, the new regulations about to come into effect in November 2019 which relax the rules around how solicitors may practice will have a far bigger impact in opening up access to legal services than anything that’s gone before.

 

New Alternative To ABS

The problems the legal market suffers from are down to the high cost of being in business. Once you remove some of the significant overhead costs by allowing legal services to be provided within ordinary businesses by solicitors, then innovation is bound to follow.

You see the new regulations don’t attempt to regulate the businesses solicitors form to solve the problems they see in the legal market. By removing the need for their businesses to be regulated law firms, and in particular removing the need for them to carry the special type of professional indemnity insurance that adds a significant overhead cost and risk for solicitors, I believe solicitors will be freed to be creative and responsive to the market needs.

It’s an exciting time for lawyers to set up in business and become entrepreneurs.

In my experience, a reason the impact of the ABS has not been felt too profoundly is due to the increased costs that regulation as an ABS entails, and professional indemnity insurance is a significant component of that extra cost of being an ABS.

Removing the requirement for the “gold plated” professional indemnity cover that law firms and ABSs are required to carry, makes it possible for solicitors operating ordinary limited companies to offer their services cost effectively.

These overhead expenses and costs of regulation are ultimately only of theoretical benefit to the majority of consumers of solicitors’ services.

Solicitors themselves will still be regulated and so consumers can have the confidence of using a solicitor albeit without the gold-plated PI cover. It will also be possible for such businesses to have non lawyers involved.

Freelance lawyers will be permitted to offer certain “reserved” legal services too.  So, it will be interesting to see how the insurance market develops for freelancer services.  Essentially, insurance is only a problem in the solicitors’ market because of the way in which the requirements for the insurance have developed.

 

What is The Solicitors’ Professional Indemnity Insurance Problem?

For reasons which have a lengthy background, the solicitors’ profession has developed some archaic professional indemnity insurance rules which make it difficult, especially for smaller law firms, to run and grow their businesses with the confidence that entrepreneurs generally run their businesses.

There are various reasons for this. Insurance premiums are extremely high. For small firms, even those with good claims records, it’s possible to experience a sudden, inexplicable hike in the premium instead of a no claims bonus like insurance companies usually give you.

This has a worrying impact for smaller firms because a higher premium means a higher run off premium if the business wants or needs to close for any reason, such as to merge with another law firm.

It’s incredible that you can’t take it for granted that when it’s time to renew your insurance you will be able to affordably, and reliably access insurance. The market is extremely unpredictable and volatile with premiums fluctuating wildly from year to year, based on whether the insurers have faced claims in the legal industry or not. It’s quite unrelated to whether you as a firm have any claims.

Some years it can be impossible to get cost effective insurance.  The premiums are so high, or the availability of insurance is so precarious that firms have been forced out of the legal sector. These firms could include those with no adverse claims records. I’ve known of firms that were dropped by insurers who had insured them for years, just before renewal, for no apparent reason. Suddenly these firms found themselves without an insurer.

Some of them closed, some managed to get cover days before their insurance expired, some got insurance by reclassifying their work as ‘commercial’ rather than intellectual property because at one time the market for IP had hardened. It is often difficult to get accurate information about what is going on and why.

Other legal sectors such as the Bar and Intellectual Property Regulation board which regulates trade mark and patent attorneys seem to manage the twin requirements of providing their members with affordable and effective insurance and protecting the public without all the drama that law firms face. For example, PAMIA insures trade mark and patent attorney firms for extremely low premiums, while also offering good protection to clients who may suffer losses.

These professionals may retire or close their practices without having to pay the eye watering sums that solicitors have to pay as “run off” cover due to their premiums being so high.

 

Why ABS Was Not The Answer

Smaller law firms could not justify the extra costs of becoming an ABS on top of all the other expenses of being in business as a law firm.  In particular, the burdensome professional indemnity rules, combined with the competitive market is a disincentive to growth and a serious concern for lawyers contemplating exit or retirement.  The more your turnover goes up, the higher your PI insurance premium will be. This is a tax on success effectively.

Professional indemnity insurance cover is supposed to protect both the professional providing the service and their clients in the event of negligence, errors or omissions, breach of professional duty and civil liabilities.

For most professions the insurance aspects work without the sort of problems that the solicitors market experiences. People can secure affordable insurance which gives them confidence and peace of mind in having an insurer available to finance the cost of errors or omissions.  The client has the benefit of having an insurer to look to if problems arise. Solicitors operating ordinary companies will be able to enjoy cost effective insurance cover if they want it. There is no requirement to get cover even.

This isn’t the forum for examining why the solicitors’ arm of the legal profession has evolved to have such undesirable PI insurance rules which go over and above the normal aims of insurance.

Insurers don’t like the so called “gold plated” professional indemnity cover they’re required to provide to solicitors’ firms. Nor do lawyers like it either as it has such a negative impact on their business. Although in theory, the consumer has the ultimate protection, in practice more consumers lose out through having to pay higher legal fees to access legal services that the PI rules cause than the few consumers who might benefit as a result of an extreme situation occurring. The PI rules are the result of people without any real world understanding of business being in charge of deciding what insurance should cover.

Every law firm at some time or another has experienced the unpleasant side effects that PI renewal can entail. Inability to secure affordable insurance cover should not be an issue that businesses face for reasons that are outside their control. Hopefully, the relaxation of the rules allowing solicitors to offer legal services outside a law firm will therefore have a far bigger impact on opening up access to legal services than the ABS or anything before it.

 

The Future

Before these changes solicitors wanting to provide legal services without setting up a law firm could either do it by giving up their practising certificates and telling consumers that they were non practising solicitors, or they could operate as consultants attached to an existing law firm.

Now they will be able to offer their services as solicitors – except for a few “reserved services” such as probate, conveyancing, and litigation - and they will be regulated as solicitors even though their business is not a law firm.

As an intellectual property lawyer I’ve worked with clients include startups looking to position themselves and stand out with distinctive names and branding. Having run a law firm built from the ground up for the past 15 years which has many entrepreneurial clients I am keen to support lawyers wanting to explore the possibilities that the new regulations open up.  If you’re a solicitor, no matter what stage you’ve reached, you’ll want to explore the opportunities and risks of the impending regulations.

So if you want to set yourself up on the right path for 2020 register your interest

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