WITHIN weeks, ministers will unveil proposals to legislate a series of reforms to the legal services market proposed by Sir David Clementi.

Alongside proposals to allow solicitors and barristers to set up in partnership is the controversial idea to allow outside businesses to own or invest in law firms — the proposal that has become known as “Tesco Law”, under the assumption that big retailers and supermarkets will want to buy up law firms and offer their own legal services.

The RAC is on record as stating that it is keen to extend the idea so that its members can buy its own-brand legal services. But the proposal also gives investors who are not lawyers a chance for the first time to tap into law firms as investment — good news at at a time when, after years in the doldrums, investors are returning to the FTSE 100, which recorded a four-year high in mid-August.

This breaks new ground. Until now, the rules governing how solicitors conduct their business, laid down by the Law Society, have required all firms to be owned by solicitors themselves — in their entirety, unlike some other professions.

The Clementi review recommends that this should be changed, and that ownership should be open to other entities or individuals, subject to various checks and balances as to the ethical integrity of the owners and the independence of the lawyers working in the firm. Sir David’s proposals, if enacted, open the door to non-lawyers owning law firms.

The idea has prompted fears that terrorist organisations, or other undesirable investors, could buy into firms. The Bar Council of England and Wales has raised the prospect of “Maxwell Law” — after the late newspaper tycoon, Robert Maxwell. But not much coverage has been given to the advantages in individuals becoming owners (or part-owners) of law firms, in just the same way as they have stakes in public or private companies, commercial or residential property, government bonds, and all the other sorts of investments that find their way into people’s portfolios in the hope of income yield and capital appreciation.

So how interesting to private investors would law firms be? The regulatory framework proposed by Sir David means that there will be ethical hoops for prospective owners to jump through, demonstrating fitness for purpose. So expect the process of gaining approval to be tough and time-consuming — the registration process for the Financial Services Authority may be a guide to the extent of the documentation and evidence required and the length of time which the process may take.

Secondly, that ethical regime will extend to the management of the firm itself, with controls to ensure that owners do not compromise the independence of the lawyers working in the firm or the quality of the legal advice that they provide. The senior executives of the firm will themselves be registered with the regulator and will have to demonstrate that there has been compliance with all ethical and regulatory requirements.

Because of this emphasis on compliance, the owner’s working relationship with the law firm is likely to feel different from what you may have experienced before as a “business angel” investor. You will still be able to discuss commercial strategy and be involved in high-level decisions, but a non-lawyer owner will not be able to get close to the “product” (individual legal cases) in the same way as in a widget-making business.

The main concern of potential investors, though, will be the prospective financial return: this will require careful consideration, because there is virtually no published track record on dividend yield and capital appreciation — in sharp contrast with other business sectors.

Even the formal structure of the business will require thought because most law firms are structured as partnerships or LLP, but investors are likely to want a limited company structure (either as a private company or plc).

The Clementi report recog-nises that owners will require a dividend return on their investment, but, as partnerships, most law firms are used to sharing all annual profits between the partners. As an investor you will want a dividend, which means the partners will have to give up some profit to enable that to be paid. They will need to accept short-term pain for long-term gain, and that discussion may be lengthy.

Finally, there is the question of capital value. In recent years it has been rare for capital value (goodwill) to be paid by incoming partners: post-Clementi, however, partners approaching retirement may argue that there is value in ownership. The potential investor, of course, will have to make his or her own decision, bearing in mind “if I invest, how will I realise my investment in due course, and at what price?” The jury will be out on that for some time.

The author is head of professional practices at Grant Thornton UK LLP

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