Almost a fifth of the UK’s 9,000 law firms could be forced out of business in the next few years as banks tighten up on lending to the profession, a leading firm of advisers has warned.

BDO Stoy Hayward believes that lenders are poised to radically re-assess their once-liberal attitude towards bankrolling law firms and that the legal industry faces a "fundamental change" as a result.

David Miles, a professional services partner at BDO, said: "Historically, banks have been very keen to lend to law firms and as a result the firms were insulated from the commercial pressures that other sectors have had to face up to.

"Whilst banks are still keen to lend to the right firms, they now realise they need to be more discerning."

BDO made its predictions after consulting with lending banks, which Mr Miles said have been instructing BDO’s insolvency department to advise on an increasing number of distressed situations involving law firms in the last three to six months.

Mr Miles declined to identify the banks that had run into trouble, or say how many law firms were affected.

Although the UK’s top law firms earned record profits in 2006, Mr Miles warned against complacency.

"There is a widely held belief in the legal industry that only small firms are at risk. However, we would urge more medium-sized and larger firms to take note."

However, BDO said that many at-risk law firms might be able to avoid insolvency by merging with rival practices. The comments come in the same week that two UK law firms, DWF and Ricksons, finalised their merger, and Reed Smith Richards Butler, an amalgamation of UK and US firms, began trading as a joint entity continuing a recent trend for law firm mergers.

Recent research from Smith & Williamson, another accountancy firm, suggests lawyers are already aware of the benefits mergers can offer in an increasingly competitive market. A survey of managing partners released last week found that 69 per cent of those questioned had either initiated, or been the subject of merger talks in the last 12 months.

BDO’s warnings come four months after similarly gloomy predictions from the Law Society. Research commissioned by the representative body for lawyers in England and Wales said around 800 law firms could close as a result of highly controversial pending changes in the UK’s legal aid system.

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