The Solicitors Regulation Authority (SRA) is poised to loosen the rules governing what private equity houses can do as owners of legal businesses, a move likely to encourage more investment from the sector.
The alert comes from professional regulation lawyers reviewing aspects of last week’s purchase of the Simplify Group by Palamon Capital Partners, owner of law firm network QualitySolicitors.
Regulatory specialist Tony Guise of Guise Solicitors told the Gazette that currently such acquisitions are difficult because they risk contravening the separate business rules, which limit how solicitors can structure their business. ‘It’s a dangerous area for the solicitor or authorised person,’ he added. Crucially, he noted, solicitors’ responsibilities go beyond a role in reserved matters.
Realising the full potential of ‘entrepreneurial tie-ups’ will be possible from April 2015, if the SRA acts on its intention to reform the separate business rules. A consultation on reform ended on 18 June.
Crispin Passmore (pictured), SRA executive director for policy, told the Gazette that following further consultation this autumn, the regulator will ‘forge ahead with changes that remove restrictions and regulation that cannot be justified. A more open market will allow innovation and competition, which can only be good for consumers’.
Changes to the separate business rule would give the green light to private equity houses with plans to invest in legal services. Guise said a key obstacle was the regulator’s current policy of preventing regulated activities ‘being run through an unregulated environment’.
‘We are finding a lot of interest in this type of approach from both solicitors and VCs [venture capital] who both see these arrangements as the obvious way to minimise overhead and maximise return,’ Guise added.
Eddie Ross, the former management consultant who is now chief executive of QualitySolicitors, pointed to ‘other industries’ where a focus on competition has led to less regulation. ‘A terrific number of people need legal advice, and technology is changing the way they access that,’ he added. To allow them full choice and access ‘the regulation has got to be right’, Ross said.
Private equity investors are showing strong interest in the legal services market, though few deals have so far been made. Private equity house NorthEdge Capital last month confirmed a £15m investment in the industrial diseases practice of Roberts Jackson.
The Gazette understands that another private equity house is seeking to buy ‘two law firms a month’ – an ambition as yet unrealised.