UK Legal Market

The UK law sector is one of the leading global legal markets, rated as the second largest in the world by fee income and was valued at £35.1 billion in 2018. This represents a 6.3% increase, or a 3.7% real increase if you factor in inflation from the previous year, showing a healthy growth within the sector.

The market itself is very diverse with over 9,500 law firms and 91,000 solicitors in the UK showing not only the high demand for legal services but also the high levels of competition that exists. It is therefore important to look for firms that stand out in the market and can continue to deliver strong performance.

MARKET

The market looks set for sustained growth, with the Law Society predicting 2.2% average annual growth from 2019-2025 with a soft Brexit, or dropping to 1.5% with a 'harder' deal. Brexit will be a key factor on the sector’s growth rate due to its focus on the UK domestic market, increasing its sensitivity to Brexit outcomes and the surrounding uncertainties.

The suggestion behind this is that Brexit will have a knock-on effect on the market’s future performance due to legal services mainly being classed as derived demand. Essentially, as other products and services decrease due to reduced expenditure in the UK economy from Brexit uncertainty, it will hypothetically result in downward pressures on the legal sector.

However, the legal market should continue to grow regardless as the sector is less correlated that predictions suggest. Moreover, though the overall sector may not achieve high levels of growth, there will be certain firms that offer exciting investment opportunities. For example, Keystone Law, a challenger law firm that operates in the law mid-market, is standing out in the market via its technology-enabled business model. The concept is that principals are self-employed and can focus on revenue-generating services whilst Keystone Law provides a back and front office in return for a 25% cut of fees generated. 

FUTURE CHALLENGES

As well as the previously mentioned issues arising from Brexit uncertainties, there are several trends facing the legal sector.

One of the key issues in any service industry is being able to attract and keep quality professionals, in this case, lawyers. This is because legal firms derive their revenue from lawyers and the business they are able to capture. This is evident in the legal market as lawyers specialise in different areas, for example, personal injury, bankruptcy, intellectual property, and corporate law. This underlines the degree of specialisation within the market and hence the ever need to capture high-quality lawyers.

Another global trend is the influence of technology. In this case, the power of technology that enables further price transparency for customers. This is evident in many markets such as the recent decline of Dignity, a funeral service provider, who were overcharging customers who found out once technology enabled easy price comparison. This resulted in a loss of business due to price switching and hence the share price collapsed.

Furthermore, margins are being competed away through regulations, which are increasing the requirements for legal service providers to publish prices digitally. This influences lawyer fees as customers can easily compare services with competitors. This is common market practice as regulations cause downward pressure on the market in order to prevent monopolistic profits. As such, revenues are being squeezed in the legal sector, which provides a challenge for future financial performance.

Though the legal sector is facing difficult challenges ahead, firms that have robust balance sheets, solid cash flows, and strong management should be able to overcome the difficulties the sector is facing. For example, I believe my holding in Keystone Law will provide future returns due to its business model built on low fixed costs and providing value to attract new skilled lawyers.