PARTNERSHIP: An Introduction to UK-wide

Partnership Introduction  

by  

Fox Williams LLP 

Market Conditions 

One of the main concerns of the professional services sector at the end of 2019 was the potential impact of Brexit and the uncertainty of the UK's future relationship with the European Union. That remains a concern but was overshadowed by the COVID-19 pandemic, which is likely to have long term effects on the operation of business in the sector. Notwithstanding fears around Brexit, firms published encouraging results prior to the pandemic. Partner profits at major law firms enjoyed single digit growth while the second tier of the top 100 UK firms achieved partner profits growth at nearly 20% on average. The accountancy sector reported record fee income. Business confidence at the beginning of 2020 was at the highest level for years. The UK’s busiest litigation funder Augusta raised additional capital of $115 million from a US investment manager.

Mergers  

Dentons consolidated its position as the biggest employer of lawyers with a number of acquisitions worldwide. The sector has been busy buying and selling but this has been a steady number of deals without any disruption to market leaders. Accountancy consolidator Cogital Group broke into the top 10 UK accountancy firms with a number of deals including the acquisition of specialist adviser to regulated business Rees Pollock. There was growing consolidation in the conveyancing market. Market leader Simplify acquired Cook Taylor Woodhouse and there were also acquisitions by O’Neill Patient and Taylor Rose TTKW. The new law services sector saw international firm Axiom withdraw from an IPO route having acquired funding from new majority owner Permira. There were fewer large scale team moves but the boutique start-up was a popular exit route for some partners and the lateral hire market remained buoyant.

Listed firms 

There was a marked increase in acquisitions from listed firms, showing the attraction of listed status and the ability to enter in transactions which would be less easy for a firm in private hands. Many of these deals continue the pattern of listed firms expanding into non-legal businesses. Rosenblatt acquired a corporate finance firm for a mixture of cash and shares. Knights announced five acquisitions within a two month period. Gateley completed its sixth acquisition of a non-legal business, this time a property and construction consultancy. Law firm MJ Hudson, which with the benefit of alternative business structure status had become part of a specialist asset management consultancy business, listed on AIM. DWF acquired a managed service business and a major Spanish law firm both for a mixture of cash and shares. With the benefit of the public markets comes greater scrutiny, which has applied additional pressure to listed firms during the pandemic.

Regulatory Environment 

The reform of the audit market has begun without needing a competition authority ruling that it was necessary. The audit regulator, the Financial Reporting Council, which is itself being replaced by a new body with greater powers, has started by alerting the top audit firms to the changes needed in the regulation of audit practices. There will be an operational split between the audit business and the rest of the business. The FRC is aiming for as early as 2021 for reporting under the new rules. At this stage this is not being treated as a requirement for a change in ownership of the audit business. Audit fines levied by the FRC were at an annual high of £25 million.

US law firms have made steady inroads into the UK legal market and account for around one sixth of total UK legal services revenue. US law firms operate under a traditional regime of prohibiting non-lawyer ownership of law firms, although the US has its supporters of the benefit of non-lawyer ownership. The latest in the attempts to convince the doubters is the state of Utah, which is the first to allow non-lawyer ownership. This will be a two-year pilot scheme. One of the aims is to improve access to justice, which was also the motivation behind the UK introducing this change.

Culture  

There has been a marked increase over the last two years in the reporting to the legal regulator, the Solicitors Regulation Authority, of sexual misconduct involving law firm personnel. The regulator is investigating around 120 reported cases. Firms have taken steps to change those practices which, in the cases which have been reported, have been common in creating a situation in which the misconduct has occurred. With changes in the regulatory reporting regime in relation to misconduct, partners leaving firms for misconduct is now more likely to be a matter of public knowledge. This is part of the change in the way that firms are now focusing on their principal asset, their people.

One of the impacts of the pandemic has been the greater attention to the wellbeing and mental health of personnel. Some firms have gone public on targets for their partnership and workforce covering gender, ethnicity and sexuality. One major firm published an analysis of its stay gap, the length of time that black, Asian and minority ethnic lawyers stayed with the firm compared to their white counterparts. The Black Lives Matter movement has acted as a catalyst for firms to be more visible in their commitment to diversity and inclusion. This greater desire to be seen as addressing these issues is not solely a motivation to be proper corporate citizens. Clients are also imposing requirements on firms to reflect the client's commitment to their own diversity and inclusion targets. As professional service firms enter a new decade, the relationship between the firms and their people will be an area of major change.