Closing time for accountant-only firms?

THOSE OF US with long memories might want to try to recall how long we have lived with talk of multi-disciplinary practices (MDPs). Crystal ball-gazers might care to speculate if a brave new world for MDPs beckons.

The potential big bang of the full implementation of the Legal Services Act 2007 is now just six months away and, with effect from October 2011, it will be possible for lawyers to use alternative business structures (ABSs) as a means of raising external investment as well as going into business with other professionals.

Part of this change began in 2009 with the introduction of legal disciplinary practices (LDPs), which allowed ownership of up to 25% of a law firm by non-solicitors. With a view to preventing the early emergence of MDPs, these firms may provide legal services only. The initial take-up of LDPs was limited but has now grown to over 250 firms, although only a small number of appointments have been made within the firms.

Increased flexibility

The Legal Services Reform factsheet, published by the Ministry of Justice over two years ago in relation to ABSs, cites one of the main benefits as allowing for increased flexibility “non-legal firms such as insurance companies, banks and estate agents [having] the freedom to realise synergies with legal firms by forming ABS firms and offering integrated legal and other professional services”.

The current Government has remained committed to the introduction of ABSs and appears to have no plans to delay them. In a speech given to the Law Society late last year, Justice Minister Jonathan Djanogly said that the “introduction of ABS in particular will allow for greater flexibility of professional services provision and businesses better equipped to respond to commercial pressures … there will also be more opportunities for firms of all sizes to work, partner and merge with other professional services firms to create multi-disciplinary practices. These MDPs may be complex global services firms or a local solicitor partnering with a local accountant”.

So will there be a real appetite for the creation of MDPs?

The Big Four have long harboured ambitions to build one-stop shop professional service firms for major corporate clients. Having built management consulting practices to sit alongside their audit, tax, corporate finance and insolvency practices, all but Deloitte then divested themselves of their consulting businesses. Over time, all have begun rebuilding management consulting offerings and the most recent major development was last year’s merger between Deloitte and the property advisory firm Drivers Jonas.

Previous attempts by the Big Four to build law firms were unsuccessful, at least partly due to client conflicts and culture clashes. In the post-Enron and Arthur Andersen era, they have been more reluctant to market legal services and the visibility of their legal offering has changed: the Big Four still have sizeable legal teams, though. Other large accounting practices already employ lawyers and large law firms employ accountants, the obvious area of overlap being employment tax and employee incentives.

What likelihood is there of a truly integrated firm comprising lawyers, accountants and others to provide combined services to their clients? Does the client demand exist?

One stop shop

Logically, there should be an attraction for clients – most obviously high net worth individuals or small businesses – to be able to search for a one-stop shop to buy legal, accountancy and possibly other services such as investment advice.

This notion might be subject to  challenge because larger corporate clients have moved away from the once-traditional approach of using one law firm and one accountancy firm; they are now just as likely to instruct a range of firms to provide specific services. It is questionable whether or not clients are looking for large scale, one stop, MDPs.

Arguably, Turcan Connell, a firm of solicitors and asset managers based in Edinburgh, London and Guernsey, is an example of the MDP of the future. The firm comprises lawyers, accountants, investment managers, financial planners and taxation specialists. This arrangement could prove attractive to more sophisticated buyers of such services.

The high street law firm has been under pressure for years with the conveyancing monopoly having been broken and new entrants to the market already challenging for their work, often offering a package that uses technology to provide a cheaper and quicker service.

There are challenges too for local accountants with rising overheads and increasingly fee-sensitive clients. As a result, such firms might not be the most obvious candidates to create MDPs, yet where there are dominant accountancy and law firms in a town, the formation of an MDP could create a business that is sufficiently well known and respected enough to succeed.

New MDPs are most likely to be created by merger or possibly the acquisition of existing firms. The typical aim of a merger is to increase income and reduce overheads to generate greater profit. Cost-cutting raises the negative aspects of potential redundancies and finding a fair way to deal with surplus office premises, issues that are possibly more sensitive in a local community.

Integrating pay structures

One of the challenges of any merger is the integration of different remuneration structures and profitability levels. This is difficult enough in the case of a merger between firms in the same profession and can lead to greater difficulty when bringing together firms that have operated in disparate ways.

Other key issues are likely to form around leadership and management of the merged entity, ensuring that two or more cultures can successfully be made into one. Typically, none of these issues has proved insurmountable in successful mergers but they  add to the challenge of creating a successful MDP. We have seen that defensive mergers have often failed and careful thought will need to be given as to the real benefits and possible synergy of merging to create an MDP.

Other potential pitfalls lie in wait: there is still uncertainty about how lawyer-accountancy MDP firms would be regulated. That might depend on whether a greater number of lawyers or accountants own and manage the business. Where lawyers retain at least 90% ownership and control, the entity will be treated as a low-risk ABS with a lighter touch licensing requirement. In truth, the licensing aspects of the Legal Services Act are not as developed as one might have expected, given that full implementation is only six months away.

The issues of legal professional privilege and the resolution of conflicts of interest will also need careful attention. Another uncertain area is what the requirements for professional indemnity insurance will be for any ABS licensed under the Legal Services Act.

One possible development could be the increased use of branding. This might appeal to accountants and lawyers, particularly those with a regional presence looking to jointly market their services across a number of offices.

The progress of the national brand QualitySolicitors has been an interesting development in the legal sector. It already has a sub-brand focusing on commercial work for SMEs with national and regional businesses, including independent financial advisors. Comprising a chain of 100 firms that are independent but trade under the same banner, its chief executive cites the example of the opticians’ market before its deregulation: a profession made up of thousands of local and regional companies with no national brands, whereas now three brands represent approximately 80% of the market.

The branding of other professional services could be the first step towards the creation of genuine MDPs. So who is to say who will make the first move? A merger with another professional practice does not encounter the same problems as a sale to a corporate vehicle.

Who will lead the revolution?

Who might the drivers be in any MDP revolution? Accountants have long recognised the need to give commercial advice with a view to adding value to a client’s routine requirements.

They have attempted to position themselves, with varying degrees of success, as trusted advisors rather than simply specialists in a given field. If MDPs are to become a reality then there is a danger of some law firms being sidelined if they do not provide clients with a broad range of commercial advisory skills that a certain type of client demands.

This could lead to accountants being the beneficiaries of the possibilities that ABSs offer. To compete in the future, firms could need to grow: achieving a certain size might enable firms to make necessary investments in talent, technology and infrastructure – MDPs might offer that solution.

Fergus Payne is a partner and joint head of the partnerships & LLPs group at Lewis Silkin LLP