Market consolidation presents a new set of risks for firms to be aware of and prevent, a Solicitors Regulation Authority report has concluded.

The regulator said it had collected mounting evidence showing the legal profession is shrinking at a rapid pace in the face of competitive pressures.

In 2012, there were 60% more mergers between law firms than in 2008, while the proportion of firms remaining as sole practitioners in 2013 was 29%, down from 41% in 2006.

At the top end, consolidation is a key priority too, with 42% of the top-50 firms considering a merger to be very or fairly likely by 2016.

A consolidated market, the report notes, was no more risky for clients than a fragmented one, but the current period of transition does throw up some dangers to firms:

  • Costs incurred in consolidating adding to firms already in financial difficulty;
  • Group contagion as larger structures form;
  • Conflict of interests as different firms merge;
  • Inadequate systems and controls as firms grow rapidly.

The SRA said it does not seek to encourage or inhibit market consolidation but will step in to ensure firms are managing risks.

The report added: ‘We have a duty to ensure competition in the provision of legal services, but this must be done in a way that is compatible with our requirement to protect the public interest and the interests of consumers.’

Sectors such as personal injury and conveyancing are most likely to see consolidation, with added costs pressures from competition and government reforms.

The market share of the top-10 conveyancing firms increased from 5.3% to 10.3% between 2010 and 2012, while the number of firms making applications to Land Registry fell by 2,400. Cuts to legal aid and the ban on referral fees are likely to accelerate the process for firms reliant on them.

Although a shrinking market presents some risks, the SRA report also noted the potential benefits.

‘The new market structure, and businesses within it, may perform better at broadening access to legal services for those that require them,’ it added.