LSB: City firms can overcome worries about international reaction to ABSs

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By Legal Futures

21 September 2011

City of London: partners don't want to cede control to outside investors

City firms’ concerns over the international rejection of alternative business structures (ABSs) can be overcome quite easily, a Legal Services Board (LSB) study has concluded – but they are not interested in ABSs anyway.

The danger of overseas regulators not permitting ABSs has been cited as one of the main stumbling blocks to large City firms adopting them, but the report by Charles River Associates says it may be possible for firms to be restructured into separate entities to avoid this.

“Many firms already have complicated structural arrangements for the international offices, hence this would not represent a step that is out of the ordinary,” it said. The report added that the fact most City firms are already structured with service companies which employ the staff and then provide services to the LLP “could also suggest that the service companies themselves could be used for ABS arrangements”.

The study – which looks at the risks presented by City firms to the regulatory objectives set out by the Legal Services Act 2007 and includes interviews with 21 firms – confirmed the findings of a host of other surveys and reports that interest in ABSs is low in the Square Mile.

“City firms do not generally see ABSs as attractive because they are reluctant to cede control of the firm for external funding which they do not currently need,” it concluded. “Neither do they see huge demand for providing a wider range of services beyond the experts that they are currently able to bring in-house anyway.”

Large firms believed they could easily fund their business plans through retained profits or through borrowing directly from banks if they had a particular need. “Furthermore, interviewees generally saw little advantage in seeking external investment for which a proportion of the future profit stream would have to be paid, preferring instead to maintain full ownership of that profit stream.”

Most interviewees said their firm would not move towards an ABS even if their closest competitors did.

The LSB also published a report by Frontier Economics on the risks involved in services provided to consumers by ‘special bodies’. These are not-for-profit organisations, community interest companies and some trade unions that benefit from transitional protection over their ability to conduct reserved legal activities without becoming ABSs. It is for the LSB to decide when this protection should come to an end.

The report laid out a wide range of regulatory risks posed by such bodies, as well as possible responses to them – Frontier was not asked to recommend which would work best.

The City report was the first of a series of LSB-commissioned studies looking at specific aspects of the supply of legal services in England and Wales.

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