Ann Morgan: private equity remains 'a genuinely popular source of funding'
Experimental feature

Listen to this article

Experimental feature

Britain’s shake-up of the legal profession could lead to the failure of a legal services provider but the solicitors’ regulator says it is not its duty to impede market forces.

Ann Morgan, who heads the team granting approvals to new forms of law firm at the Solicitors Regulation Authority, says that more traditional law firms could also see their business models threatened by the Legal Services Act, which makes Britain’s £23bn legal market one of the most liberal in the world by permitting firms to accept external investment and allowing companies to start offering legal services. Traditionally law firms are owned by their partners, the most senior solicitors in a firm, who share in its equity rather than take a salary.

The SRA cannot “say this firm isn’t a suitable firm because it may fail in the future. It is for us to challenge the firm, and for them to come up with appropriate arguments”, she says. “If in time a firm does fail – and I’m sure there will be an ABS that fails – we’ll get looked at to see whether or not we could have prevented it, but I don’t think that’s the nature of the market.”

An ABS is an alternative business structure permitted under the new legislation, conceived in order to demystify the law and make it more accessible. The idea was to make the purchase of legal services as easy as buying a tin of beans, hence the moniker “Tesco Law” that the legislation attracted – much to the chagrin of the Co-operative Group, which aims to be the country’s biggest provider of legal services by 2022 and was one of the first three ABSs to be approved. Tesco, meanwhile, has not expressed an interest in moving into legal services.

Law-firm failure is a particularly sensitive topic this year in the wake of the fall of Dewey & LeBoeuf, the largest law firm to collapse by any measure. Former partners at the US firm, which admitted liabilities of $315m in May, have agreed to pay at least $70m into a settlement plan. A criminal probe by the Manhattan district attorney into Dewey’s former chairman is ongoing.

For its part, the SRA has begun an investigation into Dewey’s collapse – the firm’s London office, structured as a separate LLP, was guarantor to the global firm’s bank debt and private placement – not least to see whether the regulator’s own checks were rigorous enough.

The SRA must “actually determine whether there’s any aspect of our process which should change or whether we could have identified anything or whether it’s just one of those issues that isn’t likely to show itself at an authorisation process,” Ms Morgan says of Dewey.

Ms Morgan’s team of 10 has received 267 applications since the beginning of the year. About 60 per cent are from existing law firms seeking to broaden their services or capital. “Private equity remains “a genuinely popular source of funding,” says Ms Morgan.

The SRA has yet to reject an application and has so far approved 20, with a further 19 entities so far receiving their invoice from the SRA – meaning their approval is all but finalised.

Those final bills will total at least £2,000 per firm plus £150 for every individual that needs to be screened. There is then an extra £600 a day for more complex structures, with the costs of hiring external forensic advisers passed on to applicants.

Questions have been raised over the length of time it has taken for firms to get approval: Irwin Mitchell, which became the largest approved ABS on Monday, was one of the first applicants in January, while Parabis first disclosed that it would receive £50m from Duke Street Capital in February.

“While at times we have felt frustrated at the time it has taken to secure our licence, we are very pleased with the robustness of the application process,” says Parabis’s group chief executive, Tim Oliver.

That robustness can only be welcome for consumers buying the new form of legal services.

Copyright The Financial Times Limited 2017. All rights reserved.

Follow the topics mentioned in this article