UK Legal Sector under Financial Pressure

The UK legal sector has faced a series of challenges in recent years, which has resulted in several high profile restructures and mergers and some firms entering administration, according to the financial advisory and investment banking firm Duff & Phelps.

The recent merger of the firms of Pennington’s with Manches and the collapse this year of national law firm Cobbetts and US firm Dewey Leboeuf, are illustrative of widespread financial pressures on law firms big and small.

“Many law firms have had to find replacement professional indemnity insurance (PII) after the Latvian authorities recently withdrew the operating licences from insurer Balva, which has previously been a source of PII for many UK law firms,” said Jeremy Bennett, a partner at Duff & Phelps.

“For many small and medium-sized law firms there is now a real survival risk. The key to whether these firms survive in the future will be how they develop a sustainable business model and adapt to changing market focus.”

Law firms typically plan for the annual 1 October deadline for their PII renewals, which will have a natural impact on cash flow. Many turn to their existing lenders to secure funding for this expense over the year. However, some have had to consider applying for short term funding to meet their financial obligations. It has recently been reported that over 170 law UK firms have not secured PII for the current year.

“Factoring in provisions around PII, together with other liabilities such as quarterly rent charges and increased Solicitors Regulation Authority (SRA) regulatory requirements, it is not surprising that industry observers predict more failures in the sector, at least in the short term,” said Bennett.

The restructuring and turnaround of a law firm not only involves the practice, whether it be a limited liability company, LLP or traditional partnership, but also the individual partners or members themselves, who will have professional and partnership loans in use to fund their firms’ capital requirements.”

Recent legislative changes allowed the introduction of alternative business structures (ABS), which has enabled investment by entities outside of the legal profession into legal practices.

According to the Solicitors Regulation Authority [SRA], there are currently more than 180 registered ABS, which are licensed to the organisation. The potential impact of ABS on the legal sector should not be underestimated, given the size of the market, says Bennett.

“Once investment into the legal sector reaches critical mass, it is likely we will see a polarisation from which only two types of practices will survive in the long term: highly efficient practices selling commoditised law at a price set by the prevailing market conditions, and prestige practices selling bespoke legal advice for which they are able to dictate the price.”

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