We live in a free market economy.
The Legal Services Act 2007 brings changed market forces to the legal services market and the Legal Services Board has a regulatory objective to encourage competition.
Apparently well-capitalised new entrants or investors in existing providers are coming into the market. There are said to be circa 100 alternative business structure applications impatiently queuing for SRA licences to practise.
The business model is changing and some practices are failing, while others are said to be on the watch list, in the face of continuing consolidation in the market and increasingly limited access to finance and working capital.
Such is the nature of competition. We see it in other sectors and have an insolvency regime that is intended to promote and protect an entrepreneurial culture, providing mechanisms that enable businesses to be ‘rescued’ by shedding some of the encumbrances (usually debt) incurred in respect of an earlier business plan, model or strategy, now overtaken by changes in the economy or innovative competition.
The legal profession was regarded as a good bet for investment and lending post-2000, but the apparently unforeseen economic impact post-2007/8, a reduced overall demand for some legal services and the introduction of new and different competition, have left some decent practitioners in difficulties.
We have seen some better resourced firms stepping forward to rescue all or part of those worst affected, using some of the mechanisms established in the wider economy.
So the pre-pack comes to the law.
I have always taken the view that practitioners are in business and commercial but working in an environment where a practice failure was traditionally regarded as indicative not of entrepreneurial capability, but of a lack of competence and probably integrity.
However, if the overarching regulator encourages the white heat of competition, particularly in an otherwise fairly static domestic market, it must anticipate the impact on existing providers and, presumably take the view that a few failures and accelerated consolidation are in the public interest.
Whether some creditors would agree that these costs of transition are in the public interest is a question I won't answer.
So what is the attitude of the regulator to the principals of a failed law firm?
Our professional Principles require us to manage our businesses effectively, in accordance with good governance and risk management. The failure of any business suggests the Principals will have failed to meet this mandatory obligation.
The question has significance for the individuals falling out of the affected firms as well as those firms who step forward to rescue - thereby avoiding serious disruption to client service, possible reputational damage to the sector as a whole, and potentially expensive interventions.
A firm may regard the individuals as good lawyers, with valuable client relationships that they can sensibly add to the reach of their own practice, or to consolidate their position on one or more panels.
However they are properly concerned to understand how the SRA will respond and how quickly. Is the rescuing firm going to find itself welcoming an individual or team/group who will later collect an adverse finding that will require disclosure and therefore prejudice later tenders?
So, in cases that arise in the future will the SRA look first at the possible regulatory breach, or have regard to a greater public/consumer interest in ensuring the damage from the failure of a firm is limited? Thus focusing on the ultimate outcome?
We will see.
The able but walking wounded and their potential employers need to know, or at least have sufficient information to form a view, in the management of risk (and discharge of their regulatory obligations).
Guidance, with usual caveats in respect of those who demonstrate a genuine lack of integrity, would be helpful.
Robert Bourns is senior partner at national law firm TLT