Growth forecasts for the sector from the Office for National Statistics show the industry growing at around 1.8% annually. Predictably, much of the performance of the industry will be linked to Brexit which, on improved expectations of a more orderly Brexit than anticipated several months ago, provides a mixed outlook.
Brexit advisory services to remain a focus
Many professional services firms, including law and particularly accountancy firms, have seen an increase in Brexit advisory related work given the implications for business following Brexit. This additional income stream is likely to continue and indeed increase post the outcome of Brexit. Following the result of the December 2019 general election, and assuming the Withdrawal Bill passes through Parliament, the next significant date will be 31 December 2020 when the withdrawal transition period ends. Uncertainty will remain, and fears of another looming cliff edge could mount through the year given the tight deadline to negotiate a new trade deal with the EU. The increase in advisory work has offset weakening demand for other services caused by Brexit such as conveyancing and M&A work.
The state of the economy and recessionary threats
The UK just managed to ward off recession in 2019 and fears of a further slowdown in 2020 are mollified, at least for the time being, with the improved sentiment that a no-deal Brexit is less likely – although by no means impossible. A slowdown in the UK residential and commercial conveyancing market has affected solicitors, surveyors and valuers. A recent analysis by the Royal Institution of Chartered Surveyors concluded that the downturn in the conveyancing market was due to Brexit, with the 20% dip in demand more manageable than the recession following the credit crisis in 2008, when demand fell 80%. There is, however, a lot of pent up demand for property, particularly in London and the South East and some of that capital may start to flow in 2020 if the next phases of Brexit run more smoothly. M&A activity has also been suppressed due to Brexit uncertainty with the view that international buyers of AIM-listed companies are waiting for discounts post-Brexit.
Firms still need to focus on productivity
The bank’s recent benchmarking surveys have shown that growth in recent years was driven by an increase in volume, with more lawyers and accountants being hired to absorb additional work. However, margins in both legal and accountancy sectors continue to fall, and firms need to focus on productivity and efficiency to increase profit margins. Investment in technology is considered to be one means of bridging the productivity gap but will require significant expenditure.
Efficiencies from robotics
Firms will continue to take advantage of technology to improve productivity and embed capabilities. There is hope that the early adopters of artificial intelligence and robotic process automation (RPA) should benefit from a lower cost base to serve their clients while also gaining a competitive advantage over their rivals. Some of the more ambitious hopes of RPA are still to materialise while law firms are still required to fulfil more complex tasks. Still, the role of firms could change, with more basic repetitive tasks carried out by automatic processes when, previously, these jobs would be the role of junior solicitors and paralegals.
However, there has also been speculation that firms may have to brace for lower fees as a result of technological advancement, but this may be offset by automation helping to deliver more value. Technology more broadly is an essential area of focus among forward-looking organisations, which deploy tech to enable flexible working and better work-life balance.
Business models will continue to evolve
Following the Legal Services Act in 2007, which allowed lawyers and non-lawyers to form businesses together called alternative business structures (ABS), seven firms have listed in the last few years. It is still relatively early days for this development, and it is yet to be seen whether this model will be a success in the long term, particularly as partner lock-in periods begin to expire. Elsewhere, the big accountancy firms are increasingly entering the legal space. In 2019, EY hired large teams of lawyers with a view to becoming a multidisciplinary service, with natural crossover and in-house referrals.
Accountancy sector under scrutiny
With the Big Four accountancy firms making up 61% of UK accountancy and some negative stories around audit quality, the major firms have faced mounting scrutiny. Following its review of the accountancy sector, the Competition and Markets Authority (CMA) fell short of calling for the breakup of the Big Four but left the option open if the profession does not change. While such a breakup may be beneficial to the next tier of firms, it would amount to a considerable shakeup of the sector. Changes could imply increased cost as teams will no longer be able to work collaboratively across both audit and advisory groups, and a squeeze on profit margins. In 2020, obtaining more profitable advisory work will be critical to all firms.
Regulatory change
The main change on the horizon is the Civil Liability Bill, which is due for inception in April 2020 and will affect the personal injury (PI) market. This is secondary legislation that will increase the small claim threshold from £1,000 to £5,000 and the tariff for whiplash through a road traffic accident. The legislation aims to deal with damages awards more fairly and quickly. Once enacted, PI firms will likely see a high number of cases caught by the tariff fall under the new regime, which will negatively affect their profitability. PI claimants will also not be able to recoup legal expenses from the party they are suing if their claim is for less than £5,000. With the fixed fee amounts being considerably lower than currently awarded by the court, this is likely to remove a number of PI firms from the system. As a result, many are already cutting costs, going into run-off or consolidating and running a more streamlined business structure in anticipation of these reforms.
