RegulationAccounting StandardsThe great professional services shake-up

The great professional services shake-up

Accountancy has now moved one step closer to becoming a formal piece of the legal services furniture. How far will the boundaries be pushed, and how will law firms respond?

The legal sector is undergoing a significant shake up. Following the expansion of myriad non-legal firms into the sector – notably the “Big Four” with, for instance, EY Law claiming 2,000 professionals in its global network – accountancy has now moved one step closer to becoming a formal piece of the legal services furniture.

The Legal Services Act 2007 reserved six areas of legal practice that only authorised or exempt individuals could carry out. These areas are ultimately regulated by the Legal Services Board.

On 20 July 2016, the ICAEW applied to the Legal Services Board to be designated an approved regulator and licensing authority extended across all reserved legal activities. This application was approved by the Legal Services Board on 23 June 2017, who subsequently issued their recommendation to the Lord Chancellor.

The Lord Chancellor’s response is anticipated towards the end of September and, assuming approval, the ICAEW will become the first non-legal professional body to become a regulator and licensing authority across all six reserviced legal services: conduct of litigation; rights of audience; reserved instrument activities; notarial services; and administration of oaths; as well as probate (which it has had authority over since 2014).

The march of the accountants has been a disrupting force, bringing increased competition and forcing traditional firms to innovate. But how far will the boundaries be pushed, and how will law firms respond?

Seizing the opportunities

Accountancy practices are facing cost pressures on their general audit work, and so are looking to diversify into more general business advisory practice. This is particularly true in areas of high technological disruption. Some accountancy firms hope that provision of taxation related reserved legal services will allow them to become a one stop service for clients.

Accountancy firms are likely to target expansion into mid-market legal work, largely due to a desire not to alienate larger law firms with whom they routinely cross-refer. Some accountancy practices see provision of legal services related to tax as a way to regain lost revenue, particularly with fears that the Making Tax Digital (MTD) initiative will hit their profitability when it comes full on stream.

Providing reserved legal services in the taxation sphere will allow opportunities for the Big Four to capitalise on economies of scale; accountancy practices have already invested large sums in document review software and other technology that could be leveraged towards conducting data heavy, cross-border legal work at a lower cost than traditional law firms. The fact that accountants have adopted AI more rapidly than law firms, and that the Big Four have greater resources than most law firms may mean that tax practices within accountancy firms develop a technological edge over their rivals in law firms.

Meanwhile, the changes to the legal regulatory regime may mean that accountants who are qualified to exercise higher rights of audience will have the ability to take advantage of legal professional privilege. This has the potential to further undermine the role of solicitors and barristers as key professional advisers. The key barrier to expansion into the tax litigation arena, at least for the Big Four, is likely to be the fact that they are conflicted in many cases.

Consultation documents suggest that the ICAEW may try and develop a new style of accountancy training that incorporates the skills necessary to advocate on taxation matters. ICAEW envisage using an existing BPTC/LPC provider as a partner in this venture.

The lawyers’ view

There is justifiable concern amongst legal professionals that the move to allow ICAEW to regulate its members devalues the role of solicitors, and will lead to a dip in revenue.

Further, whilst the ICAEW is currently self-limiting the licensing of reserved activities to taxation matters, it is considered likely that this remit will be extended over time. There is no provision within the Legal Services Act 2007 to designate a regulator for part of the reserved legal activities and ICAEW has therefore submitted an application to become a designated regulator for all remaining reserved activities.

Law firms fear that accountancy firms may push for the right to undertake insolvency and debt-recovery cases as a natural progression of their expanded tax practice. This has the potential to further squeeze the revenues of traditional law firms.

For law firms, greater competition for business will mean a greater emphasis on alternative fee structures, and will necessitate further utilisation of technology to meet client’s demands whilst keeping costs down. Additionally, firms will need to think about complimentary services they can offer to add additional value to the client’s business.

Fergus Payne is partner and head of the Partnerships and LLPs practice group at law firm Lewis Silkin.

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