Why the Boston Consulting Group is wrong about the Legal Services Act

A guest post by Alison Hook, a director of legal consultancy Hook Tangaza

Hook: Report based on some wrong assumptions

As reported yesterday on Legal Futures, the Boston Consulting Group (BCG) has published a study into the effects of deregulating the legal services market in England and Wales

This report drew some conclusions which are designed to influence the debate in various Scandinavian countries about opening up the legal market to non-lawyer ownership.

It will be a great pity if any policymakers are influenced by this report because it suffers from some serious flaws and misinterpretations of what is going on in England and Wales.

Firstly, it is based on some wrong assumptions. For example, the report judges the entire concept of deregulating a legal market by the results of the Legal Services Act 2007 (LSA).

This would be a hard test for any piece of legislation but the LSA was never intended to carry the burden of reforming the legal market on its own, nor was it thought at the time that it was the last piece of legislation that would be needed in this area.

The LSA must therefore be seen as only one small step in a process of attempting to reform the English and Welsh legal sector.

Although the BCG report references the fact that it is widely acknowledged in the UK that the LSA has only been partially successful, it then implies that this in an argument against the liberalisation of ownership structures, when the conclusion we have reached is that we need more reform, not less.

Secondly, the analysis uses a half-baked selection of partial competition indicators which do not amount to a coherent economic model. It then proceeds to judge the impact of the introduction of alternative business structures (ABS) by the LSA against these indicators, despite the fact that these were not the metrics against which ABS were designed or implemented.

Thirdly, the report uses the wrong data to draw conclusions about how well ABS are working. The authors repeatedly use top 100 law firm data to make arguments that ABS have not had any impact (see, for example, the arguments on profitability and market share), without mentioning that ABS barely figure in these top 100 firms.

A quick review reveals that, although there were 24 firms in the top 100 which had adopted the ABS structure by December 2020, they generated only around 8.5% of the total turnover of this segment of the market. So, the market served by the 1,000+ other ABS firms is simply ignored in this analysis.

I am unclear how you can draw conclusions about the impact of a regulatory change by looking at a segment of the market in which those affected by that regulatory change are not operating.

A better analysis would surely be to look at a segment of the market in which ABSs are more common and may actually have shaped the market – family law or personal injury for example. A better analysis might also look more deeply at the unregulated market and at the ABS equivalents that have chosen to remain unregulated because they don’t want to offer reserved legal activities.

Fourthly, not only is the English and Welsh legal market not segmented in the analysis, but there is also no acknowledgement that the concept of an ABS embraces many different things.

The authors appear to be working under the misconception that every single ABS is going to be a large-scale new entrant full of non-lawyers. But even amongst the top 100 firms, there are only three or four firms amongst the 24 ABSs which could be classified as new entrants.

The others are all firms which have adopted the ABS regulatory vehicle for different reasons. There are some larger firms, that have done so, for example, in order to allow a finance or HR director to be made an equity partner.

And whilst there are a few important examples of accountancy firms with legal licences, or consumer-facing new entrants like LegalZoom, most ABSs are small law firms in which an existing lawyer or group of partners has decided to share equity with a non-lawyer. This could be with a spouse in order to save tax, or with another business like an estate agency, in order to provide a one-stop shop.

Any genuine attempt to understand the difference the ABS structure could make to a market really needs to explore these various types of ABS in order to work out whether, and where, there are genuinely new entrants in the market.

Lastly, there is no acknowledgement that, when looking at the impact of ABS, the report is assuming that everything else remains the same (ceteris paribus, in economist-speak). This might matter less had the period under review not included the worst post-war, financial crisis-induced legal sector recession in 2011-13, compounded by brutal, government deficit slashing legal aid cuts which removed 25% of the public funding for legal cases and closed half of the courts in England and Wales.

In comparison, any positive impact ABS might have on consumer access to legal services will barely register.

So, perhaps not surprisingly, I would draw some very different conclusions from BCG, based on my own experience over the past decade.

There is no evidence of any harm from the introduction of ABS. Whilst the LSA may not have unleashed the revolution in the legal market that was hoped for, it has sown some seeds of change which are slowly germinating.

More detailed work than BCG has done is needed to explore what has happened, and is now happening, in specific segments of the market in which ABS have been concentrated, if we are to understand this fully.

Ownership reforms are a necessary, but insufficient, condition for improving the functioning of a market. As a fuller analysis of the composition of ABS firms would have illustrated, most are simply traditional law firms that have changed their structure, in the same way that many law firms adopted a limited liability form when that first became possible.

Ownership reforms on their own give those already in the market some extra flexibility, and make it possible for new entrants to come into the market, but they will not necessarily have a huge impact on their own.

Freeing up ownership is only one part of the overall competition equation – entry and exit conditions also need to be improved, as does the transparency of the market’s operations.

The ABS measures contained in the LSA should therefore be seen for what they are – only one small part of an overall drive for reform. It should therefore not come as a surprise that the functioning of the legal market is now the focus of regulatory attention in England and Wales.

Legal markets are complex and sophisticated. Conclusions cannot be drawn without proper segmentation – there is a huge difference between the legal needs of a major corporation, which may be prepared to spend millions on court proceedings or on an international arbitration, and the needs of an individual with a minor consumer complaint that might be settled through some online process.

In between there are a myriad of other sub-markets, types of legal product and services. Policymakers need to be thinking about the legal market and their objectives for different segments of it in much more sophisticated ways than in the past. But they also need to think about how their actions across the board impact on a market.

Finally, it does need to be acknowledged that although legal systems around the world are different, lawyers everywhere tend to be conservative and reactionary. When left in charge of reform, or allowed to shape it, the organised legal profession will generally attempt to neutralise and undermine it.

In England and Wales, it was no different. The lobbying by the legal profession leading up to the LSA was highly successful and watered down the Act significantly from its original reform concept.

If policymakers in Scandinavia are going to take any single lesson away from the England and Wales experience, this is the most important – if you want anything to change, never let the organised legal profession set the agenda on reform.

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