Big Four accountants pose ‘very serious’ challenge to legal sector

THE growing presence of global accountancy firms in the legal market place will present a “very serious” challenge to traditional law firms in Yorkshire, according to experts.

Ernst & Young and PwC have already decided to embrace Alternative Business Structures (ABS) and KPMG may not be far behind.

Dr Sundeep Aulakh, of Leeds University’s Professional Services Sector Hub, believes the arrival of the global players could be a game changer for the legal sector, although it may be slow progress.

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She said: “Up until the announcement by PwC and EY, most of the other ABS firms were operating in the high street retail aspect of the market. They didn’t want to increase market share, it was about supplementing their accountancy service.

“Direct Law & Finance, based in London, was the first firm to put law and accountancy side by side last year, which was a more aggressive approach.”

Ernst & Young (EY) is the latest high profile accountancy firm to announce it will launch a legal offering.

It has appointed Philip Goodstone from law firm Addleshaw Goddard to build its legal service in the UK, subject to regulatory approval. PwC gained an ABS licence at the end of January.

ABS was introduced as part of the Legal Services Act, which allows outsiders to take equity stakes in law firms for the first time.

The changes meant that PwC, which has ambitions to become a global top-20 legal services player within the next five years, could become an owner of, and investor in, PwC Legal, a separate legal firm within the PwC network of member firms.

KPMG is also understood to be considering an ABS application.

A spokeswoman from Deloitte declined to comment on the firm’s position.

Professor Richard Susskind, author of Tomorrow’s Lawyers, told The Yorkshire Post: “Whether the Big Four choose to take the top tier firms head on or to compete instead in the new market of alternative providers, with their strong brands, formidable investment capability, superior technology and sheer commerciality, the growing presence of the major accounting firms in the legal marketplace will present a very serious challenge to traditional law firms.”

He expects the legal profession to change more in the coming two decades than it has in the past two centuries.

There were 250 ABS firms in the UK at the end of February 2014, according to research by Dr Aulakh.

Twelve of these ABS firms originate from the finance and accounting sector - two are based in Yorkshire.

Dr Aulakh said: “What is interesting about Yorkshire is the high proportion of ABSs compared to solicitor firms. At 11 per cent, it’s four percentage points higher than the total population of solicitor firms in the region (seven per cent). It’s higher than you would expect.”

The number of accountancy firms entering the legal market may significantly increase this year after the Legal Services Board (LSB) enabled the Institute of Chartered Accountants in England and Wales (ICAEW) to grant its members the right to conduct probate work and form ABSs.

The ICAEW’s research indicates that around 250 firms might seek accreditation: 150 sole practitioners, who would have authorised firm status, and 100 larger practices, most of whom would look to become ABSs.

The LSB expects the move to lead to increased competition and lower costs within the sector.

But Dr Aulakh believes it has also generated anxiety within the legal profession that did not previously exist.

She said:: “Most law firms have been dismissive of ABS so far but they are now starting to take notice of what is happening.”

She added: “The arrival of the global accountancy firms will disrupt the legal sector but not for a long time. These are radical reforms but the pace of change is quite slow. It is having an impact but it will be slow and evolutionary.”

The first ABS to market itself as a firm offering both legal and accountancy services was licensed by the Solicitors Regulation Authority last year.