Legal Business Blogs

RBS: some recovery in sight but weak demand and 5,000 surplus solicitors still define turbulent legal market

Disaggregated, wrestling with tight margins, reliant on defensive mergers and probably still with more than 5,000 un-needed solicitors in England and Wales – the good news is that there actually is some good news in a new report on the profession from the Royal Bank of Scotland (RBS).

The research from RBS’ law firm banking team concludes that there are tentative signs of recovery in the world’s second-largest legal market, with 60% of responding law firms expecting to increase their top line over the next 12 months and half predicting an upturn in chargeable hours.

But while the picture is more upbeat than RBS’s last report on the profession in 2012, the conclusion remains that the industry is still a long way from its pre-2008 era, while there is excess capacity in the market of around 5% – equivalent to around 6,000 surplus solicitors. RBS, along with Barclays, is one of the dominant lenders to the UK legal profession.

RBS law firm banking head James Tsolakis noted weak utilisation and demand, commenting: ‘There are early signs of recovery but fundamental weaknesses remain and the profession is still dealing with substantial levels of over-capacity.’

As such, the report argues that the profession remains under considerable margin pressure and has had to turn increasingly to measures like outsourcing, shifting operations to low-cost centres and the expansion of paralegal ranks to juice up returns. All respondents predicted that their use of outsourcing would either be maintained or increase over the next 12 months.

Law firms are also increasingly set on the need for consolidation to withstand the turbulent market and the drive for bluechip clients to rationalise their panels, with over 70% of respondents expecting to see an acceleration in the rate of legal mergers in the 12 months ahead. Given that the last two years has already seen a sustained run of merger activity within the LB100, that’s a notable finding.

The report also cites a marked increase in law firm debt in recent years. In response, more law firms are moving to increase partner capital, with more than four in 10 responding firms expecting to increase capital contributions in the next 12 months from existing partners. The report notes that nearly a third of responding law firms have said they are raising capital through retained profits, illustrating that law firms are beginning to abandon the riskier full distribution model.

Tsolakis commented: ‘Financial management had improved but as you go down the market the quality still diminishes very substantially.’

Despite the continued challenges facing the profession, the veteran law firm banker approvingly notes the creative mood that has taken hold in London post-Lehman, which has uniquely positioned the City in the global legal industry. ‘London is a magnet for new entrants. I’m fascinated by it,’ he said.

See: ‘Merger frenzy hikes Legal Business 100 income but growth masks another tough year‘ for coverage of financial performance in 2013