The Legal Service Act received Royal Assent this week and the insurance industry is gearing up to take advantage of it. Sarah Kennedy reports
Insurers and brokers hungry for acquisitions can set their sights on law firms now that the Legal Services Bill has been given Royal Assent. The Legal Services Act paves the way for non-law firms to partner with or purchase law firms.
Until now, the insurance industry was limited in terms of the regulated legal services it could provide.
In the past, only qualified solicitors could make money from a law firm. The Legal Services Act enables insurance businesses to take a financial interest in a firm of solicitors and broaden their product range.
For the past three years, insurers, brokers, legal expense insurers and loss adjusters have explored opportunities for developing new business models with law firms, called alternative business structures.
There has also been speculation that supermarkets would look to offer legal services, prompting the Legal Services Act to be called the ‘Tesco law’. But given the insurance industry’s ongoing obsession with acquisitions one could question whether this will be just a fad or a move that provides clear profitable benefits?
Legal expense insurer DAS has already chosen a law firm to buy and will be announcing it in the very near future.
DAS head of legal services Kathryn Mortimer said the company could not technically acquire the law firm until 2011, when the regulatory bodies were in place. In the meantime, DAS would have directors sitting on the firm’s board to secure a share of the company.
She said: “We have been making preparations for the past 18 months and we will now go full steam ahead to acquire the law firm.”
Moritmer said the acquisition of a law firm would allow DAS to reduce its current panel of third-party insurers. An acquisition would also allow the company to reduce the costs of legal advice and services.
Motor insurer RAC, owned by Aviva, is also said to be in discussions with law firms over potential partnerships.
A spokesman said: “This gives us more opportunity to look into diversifying our business. We are looking into our opportunities and options.”
“We have been making preparations for the past 18 months and we will now go full steam ahead to acquire the law firm
Kathryn Mortimer, DAS Legal Expenses
Hugh Price, head of business litigation at Hugh James, said companies would have to be cautious before jumping into buying a law firm. In many cases, forming affinity partnerships was a more sensible option.
He said: “My view is that it’s unlikely companies such as Tesco will buy a law firm. It sells wine and vegetables, but it doesn’t own vineyards and farms.”
Price said buying a law firm was an extremely expensive endeavor because of overhead costs and the expense of professional indemnity insurance.
Companies would also want to be selective in terms of what areas of a law firm they invested in.
Most law firms, Price said, had parts of the business that would not be attractive to investors, because of issues such as long and drawn out cases and claims.
Due to issues of conflict of interest, insurance companies may also be somewhat restricted in the type of firms they can purchase.
But DAS’s Mortimer adds that law firms owned or partnered with non-law firms would have to maintain 100% autonomy in order to receive regulatory approval.
Many have lauded the passing of the Legal Services Act as a triumph for accessibility to justice, claiming it allows people to receive legal services at lower cost.
But most agree though it is unlikely the insurance industry will immediately launch into a law firm acquisition-spree.
Companies may prefer to initially test the water through affinity partnerships and investments before diving in.
The Legal Services Act
Described colloquially as â€˜Tesco Lawâ€™, the Act allows law firms and non-law firms to form partnerships and companies.
The Act sees the creation of an independent oversight regulator called the Legal Services Board.
Under the legislation, non-law firms can invest and make money from law firms.
It follows a review by Sir David Clementi, who was commissioned by Lord Falconer in 2004, to report into the regulation of legal services.
Clementi determined the old regulatory framework had insufficient regard for consumersâ€™ interests.
His review stated that business structures were restrictive and resistant to change and that the complaints system was inefficient.