Professional service firms have on the whole fared well in 2017/18. Economic statistics have not been attractive but the volume of mergers and acquisitions has remained high. The impending impact of Brexit has led to slowdowns in certain sectors. The UK has lost ground to other European countries, notably Germany and France, in terms of investment into financial services businesses but foreign investment into UK financial services shows that the UK continues to be an attractive market. Many law firms have again announced record profits. Growth in the accountancy sector has been steady but without the striking growth in profits achieved by some law firms.
In the legal services sector, Brexit has the ability to disrupt the UK’s position as one of the best venues in which to conduct litigation. Litigation has become a separate asset class for investors offering the opportunity of better returns than traditional investments. Litigation funders raised hundreds of millions of pounds in 2018 and the biggest litigation funder, Burford Capital, has billions of pounds available to invest in litigation. Funding is facilitating more class action litigation. Some law firms are benefiting from funders looking for a portfolio of cases with a single firm. This is likely to become a route for more firms to attract litigation business. There has been a welcome return of claimants in employment tribunal cases following the abolition of the tribunal fees introduced in 2013.
Following significant merger activity in recent years there has been a distinct drop in the number of mergers between firms. The transatlantic merger between Bryan Cave and Berwin Leighton Paisner (BLP) was the standout transaction in the UK legal sector. This created a new Global Top 50 firm which, unusually for recent large mergers, will be a financially integrated firm. The merger coincided with Bowmark Capital becoming the majority owner of LOD (previously known as Lawyers on Demand) in place of BLP. There was merger activity at the regional level and team moves where firms had decided to discontinue a business stream. Hill Dickinson sold part of its insurance business to Keoghs with 17 partners and over 300 staff moving. In the accountancy sector private equity-backed Cogital Group continues to be active with the acquisitions of Shelley Stock Shutter and Top 20 firm Wilkins Kennedy with around 700 employees and 74 partners transferring.
Law firm IPOs
There has for some time been the view that the public markets were appropriate only for specific types of law firms, essentially those which could easily commoditise their service offering and needed the capital resources of a public market to pay for the technology investment required to make the business successful. Gateley listed on AIM in 2015 and was considered by many likely to be the exception that proved the rule. A number of firms including Gordon Dadds, Keystone Law, Knights and Rosenblatt have now listed and it is expected that others are in the planning stage. As with Gateley, these firms do not fit the expected profile. If this trend continues, it will represent a significant change in the approach to ownership of a law firm.
All the big four accountants are now licensed to operate law firms, Deloitte having received its licence in 2018. At much the same time Deloitte announced its acquisition of the non-US business of law firm Barry Appleman & Leiden in order to provide a global immigration service delivery model. The message from the accountants is largely that their legal offering will be part of an integrated service for their clients. The growing introduction of artificial technology as part of legal services will play to the strengths of the big four in organising and operating their service offering. There has been growth in the number of law firms operating a consulting arm alongside their main practice, but the recent focus of interest away from mainstream business is investment in future legal technology, through incubators or start-up businesses.
In the battle of the regulators, the application by the Institute of Chartered Accountants in England and Wales (ICAEW) to become a regulator of more legal services was turned down. This was a surprise given that this extension was restricted to matters relating to tax. The regulation of legal services is set to become more flexible with the Solicitors Regulation Authority (SRA) proposing to introduce a new Handbook in 2019 to encourage changes in how legal services are delivered. Part of these changes will be a mandatory disclosure of certain price information by all law firms. The ICAEW’s approach for the firms it regulates which provide legal services is to leave price disclosure as a matter for the firm to decide.
This has been a period of yet more record fines from the regulators. PwC were hit with a fine of £10 million and an individual partner £500,000 in relation to the audit of the BHS and Tevata Group prior to the sale of the high street chain for £1. Both fines were reduced by 35% for early settlement. The level of fines reflects the recommendations of an independent review of the sanctions issued by the Financial Reporting Council for poor audit work. The BHS fine follows an earlier one for PwC of £6 million (reduced to £5.1 million on settlement) relating to misconduct over the audit of RSM Tenon Group. If fines continue at this level, this may lead to even less competition for big audit work if firms pull out of this part of the market. The Solicitors Disciplinary Tribunal levied its largest ever fine against a law firm. US-headquartered Locke Lord were fined £500,000 for not having systems and controls to prevent a rogue partner engaging in transactions which bore the hallmark of dubious investment schemes.
In 2018 the Law Society reported figures showing that the number of working women solicitors in England and Wales had exceeded men for the first time. This puts into greater perspective the reversal of that ratio in terms of partners in law firms, where women account for less than a third of law firm partners. The gender pay gap reporting requirement has given greater exposure to the male/female divide. Gender pay gap does not require partners figures to be included but peer pressure forced some firms which had originally published data without partner figures to republish figures including partner data. In an environment informed by the #MeToo movement and including a warning by the SRA not to use gagging clauses which would prevent reporting misconduct to a regulator, there have been a number of male partners in senior positions at law firms who have resigned over misconduct issues, suggesting that it is not only in terms of pay where law firms have awkward questions to face.