The answer is entity regulation. But what is the question?

The answer is entity regulation. But what is the question?

HamletThe Bar, like the rest of the legal services market, is coming to terms with the difficult challenges that we have come to treat as normal in the modern post-financial crisis era.  As a referral profession it has historically focused on providing services to solicitors, an approach that has kept it busy but left it dangerously isolated from its end consumers and their changing buying behaviours. Consequently, awareness of the capability and value offered by the Bar is lower than it ought to be among current consumers of legal services, both organisational and individual. Whether or not this is widely recognised at the Bar is unclear, but there is an obvious appetite to broaden its appeal and find different and better ways to deliver its services and communicate its propositions to the market.

Earlier this year the Bar’s regulator, the Bar Standards Board (BSB) sought to facilitate this by announcing the introduction of entity regulation, effectively opening up the possibility of barristers working together under an incorporated entity, which can also include other legal professionals.

The BSB summarised its rationale as follows: “We believe that becoming a regulator of entities will help new advocacy focussed business models emerge and flourish, which in turn will increase client choice. Barristers will be better placed to come up with new and innovative ways of providing legal services.”  Importantly, the BSB also states that its “focus is on the regulation of advocacy and related litigation services and expert legal advice”.

It is quite right that the Bar looks to innovate in order to remain competitive and relevant, and for the BSB to seek to facilitate this.  But innovation is far easier to talk about than to put into meaningful effect.  And innovation is commercially effective only if it results in genuine benefits for the consumer either directly in the way services are delivered or indirectly by bringing about structural or operational improvements that enable this.

In this context it is disappointing but perhaps unsurprising that the initial take up of entity regulation comes almost exclusively from individual practitioners simply seeking incorporation as a platform from which to continue their existing self-employed practice while benefiting from tax advantages. Clearly this does nothing to achieve the BSB’s stated aim to stimulate innovation or increase client choice.

It may be that on a large scale these financial savings could be significant enough to offer a more marked financial advantage for such an entity.  But a large corporate entity would be significantly disadvantaged by conflict restrictions, the absence of which is one of the independent Bar’s key advantages, enabling members of a set to act for different parties in the same case.  This scenario is perhaps more common than widely perceived.  It is undoubtedly financially significant, particularly in the more specialist fields of practice.

Of course, sets not concerned about conflicts (eg. those practising exclusively in defendant personal injury, or prosecution-only crime) could benefit from this but they would also need to consider some significant risks.  The lack of diversity of income streams would make it extremely vulnerable to external market influence and its members would miss out on the variety of experience which is in my view essential to turn good lawyers into great ones.  For individuals who wish to practise in an entity with solicitors there is of course the straightforward and well-trodden path of joining solicitors’ firms.

One of the hard things about seeking to improve upon the chambers structure is that the bar (no pun intended) is already set extremely high.  Ancient thought it may be, the Bar’s business model has unquestionably been successful in sustainably delivering high quality at relatively low cost.  This has been achieved through the expertise, specialisation and independence of its practitioners combined with the simplicity, flexibility and low overhead of the operating model.  By way of illustration, a solicitors’ firm might typically operate at a profit margin around 25%, with the figure for chambers at around 70%.  (Source: Legal Services Board website).  It is difficult to imagine how any increase in efficiency can be achieved from changing such a lean model and how incorporation could do anything other than take it a step backwards.

Opportunities for innovation by way of generating new services or revenue streams seem similarly limited under the BSB initiative.  The restriction of regulated entities to providing advocacy, litigation and specialist advisory services precludes any change in the nature of services offered, which means such an entity can do nothing the Bar can’t already do through its existing model.

It could be argued that an incorporated entity might have an improved capability to invest, however many sets of chambers already have separate non-regulated corporate entities for the purpose of managing major capital investment such as property acquisition.  Similarly, the contracting capacity of a corporate entity can often be essential for the winning of bulk contracts but again these can be set up as simple, non-regulated procurement vehicles without the added baggage of regulation.

It will be no surprise that in summary I find it hard to view the BSB’s introduction of entity regulation in its current form as successful in progressing its stated aims.  It may of course be a precursor to more ambitious initiatives further down the line (such as ABS licensing, for which an application to the LSB is under way) but aside from the relatively modest individual tax advantages it is hard to see how the Bar can benefit in any meaningful way or, more importantly, how consumer choice and public interest can benefit.

There are plenty of things the Bar can be doing to improve services to the market with technology, more innovative and targeted marketing and the widening its service offering around litigation.  There is no reason why the independence of the self-employed Bar needs be sacrificed to achieve this.

Ultimately, sustained success demands uncompromising focus on providing the customer with the best possible service and experience.  When regulation or structure constrains this then that is the time to make adjustments.  In the meantime, if you are seeking that innovative “spark” I’d suggest the market is a better place to look than your regulator.

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