The not insubstantial intellectual capital that exists across the Scottish legal profession will be given the ability to demonstrate this very soon as the Law Society of Scotland finalises the governance for Licensed Legal Services Providers (LPs) and this long-anticipated seismic shift in the legal sector finally becomes a reality.

Longer timeline

You’ll have to cast your mind back over a decade to pinpoint the beginning of this process, when the creation of LPs was made possible under the Legal Services (Scotland) Act 2010. However, a lack of political will, debates around the most appropriate regulator and the formation of regulations have meant that the timeline to Royal Assent has been substantially longer than many envisaged.

The ‘Aberdein legal crystal ball’ foresees seismic changes ahead

Now, however, 13 years later, the Law Society have begun to release some information on how these new models will be constituted and with that, we are on the brink of a new era. So what do the details tell us and, dusting off the ‘Aberdein legal crystal ball’, what might the future have in store for the Scottish legal profession?

Under new ownership

An LP is a new type of business which is licensed to provide legal services to the public. It differs from a traditional legal practice because of who can own it.

Traditionally, ownership of legal practices has been restricted to solicitors who hold a practising certificate (and registered foreign lawyers), whereas LPs can be owned by other non-lawyers.

Rob Aberdein is Managing Director, Moray Group, which includes Simpson & Marwick

LPs aren’t the same as the Alternative Business Structures (ABS) that exist in England & Wales, where the ABSs can be 100 per cent owned by non-solicitors and can also be listed companies (which they cannot in Scotland).

Designated roles

There are two designated roles within an LP – a Head of Legal Service and a Head of Practice, which can also be a committee.

A Head of Legal Service must be a solicitor entitled to practise in Scotland, who will be responsible for complying with regulatory objectives and professional principles.

A Head of Practice is not required to be a solicitor or have legal training and will be responsible for ensuring compliance with the regulatory scheme and the terms and conditions of the LP’s licence.

Regulated professionals

LPs in Scotland will require at least 51 per cent of the ownership to be retained by ‘regulated professionals’, who are defined as Actuaries, Architects, Barristers, Chartered/Chartered Certified/Chartered Management/Chartered Public Finance Accountants, Surveyors, Licensed Conveyancers and Patent, Commercial and Registered Trademark Attorneys.

These ‘regulated professional investors’ must be entitled to practise under regulation by their professional association and are required to pass ‘fit and proper’ testing by the Society, who will consider “financial position and business record, regard for the law or authority and probity and character”.

The remaining 49 per cent ownership can be made up of ‘other investors’, who will also be required to undertake ‘fit and proper’ testing, although there will be discretion for the Society “as to the extent of that testing for those who hold less than a ten per cent share of the LP”.

Varied models

Ownership models will vary – some LPs might have solicitors retaining a majority stake, others might have solicitors with a minority stake, and, in some instances, the LP could have (gasp) no solicitor stakeholders at all.

The ‘solicitor investor’ can however be from outwith Caledonia, coming from England and Wales or Northern Ireland or being a registered European or foreign Lawyer. ‘Solicitor investors’ must be eligible to practise in Scotland and have a current practising certificate without restrictions.

Analysis and implications

What can we therefore expect the new landscape of the Scottish legal sector to look like and what opportunities and challenges will this bring?

The obvious ‘regulated professionals’ to make the early running might be the accountants and surveyors.

The large national surveying firms would logically want to control their pipelines. Irrespective of the strength of relationships and quality of service, they have always been dependent on the solicitor estate agent introducing the Home Report.

Sweeping up and consolidating would also allow them to realise economies of scale and instil that business with ‘buying power’ when dealing with larger corporates and lenders. Controlling an entire legal, surveying, mortgage and estate agency ‘eco-system’ at scale would bring great power.

Accountants might like the look of more corporate-focused legal businesses – controlling the pipeline and owning more relationships would offer another powerful eco-system play.

Whilst the ‘49 per cent rule’ might put off the large non-listed corporates from adding new verticals or from PE investing, the impending Legal Services Regulation Reform Bill will likely see the ceiling on non-lawyer/non-regulated professions ownership flying off.

The door will then be open to the Scottish legal sector for consolidation, tech or multi-disciplinary ‘plays’ and there will likely be those that want to go early and acquire in the current ‘49 per cent era’ in order get first mover advantage.

Major crossroads

I appreciate that news of this seismic shift might be slightly uncomfortable reading for much of the profession but the reality is that the barriers to non-lawyer ownership of law firms are seen by many outside of the profession as anti-competitive.

In any sector, the best businesses in a healthy, functioning market will generally rise to the top, but the legal market in Scotland doesn’t function normally. It is also starved of investment, suffers major structural issues in terms of succession, is significantly behind the curve when it comes to technology and lacks creatives, disruptors and innovators. This can lead to mediocrity in certain areas, with the ultimate outcome that consumers suffer.

Scotland’s lawyers are therefore at a major crossroads; those that embrace the opportunities that LPs bring will likely prosper, those that fail to do so will perhaps struggle to do so.

Rob Aberdein is Chief Commercial Officer at Progeny

Scotland’s lawyers are at a crossroads as LPs become a reality - Rob Aberdein