The legal sector has entered a new phase in the mergers and acquisitions (M&A) cycle, one marked by scale, ambition and scrutiny, with publicly listed firms like Knights making headline-grabbing acquisitions.
The ink was not dry on the print following the announcement of the £30M acquisition of IBB Law before the £16.6M deal for Birkett Long was made public. This is a time of opportunity for the sector, but also one of real compliance complexity and risk.
Whilst the big players are ramping up, there is evidence that small and medium firms are more cautious. A recent LexisNexis survey of 308 lawyers showed that just 5% are considering M&A as a way to grow. For many, it’s not just the financial risk, half said the real challenge is finding the right partner. That’s a noticeable drop from the past two years, when 10% and 13% of lawyers, respectively, said they were open to merging with another firm.
The market: appetite for growth, but at what cost?
From a commercial standpoint, for those on the acquisition trail, deals like these make sense. Brand consolidation, new markets and economies of scale. But from a compliance perspective, they increase real compliance issues that every firm must be alive to.
- How is financial crime risk being assessed across inherited client files?
- What happens to systems and controls when two firms with differing processes and appetites for risk are merged?
- Is the acquiring firm inheriting dormant risk that has not been properly surfaced during the deal process?
Systems, supervision and suitability
The SRA’s June 2024 warning notice on M&A activity is a clarion call to law firms, particularly acquirers, that regulatory expectations in the pre and post-deal landscape are intensifying.
It highlighted that ‘Managers of a firm should always make sure that acquisitional growth does not lead to ineffective governance structures, systems or controls which could cause detriment to clients or undermine trust in the profession.’
Specifically in relation to due diligence the SRA highlighted the following concerns:
- Acquiring firms undertaking no or inadequate due diligence on the firm being acquired and failing to consider prior to acquisition whether they have the competence, systems, staffing or capacity to do the new work.
- Sellers, failing to investigate concerns about the acquiring firm’s competence, systems, staffing or capacity to act in their current clients’ best interests going forward.
Key compliance takeaways for law firms
Whether you are buying, selling, or considering a merger, there are some basic practical steps every compliance team should be implementing including:
1. Pre-deal compliance due diligence must go beyond the financials, scrutinise:
- Client base risk profiles
- Open complaint files
- Regulatory history
- Evidence of compliance processes
2. Assess cultural compatibility
If your firm runs lean, paperless files with tight compliance practices, but you’re acquiring a firm with a more traditional approach to file management and with an unstructured compliance approach, the post-deal headache multiplies.
3. Develop a regulatory integration plan
This should include:
- Compliance programme harmonisation
- Conflict check system integration
- Induction and training for incoming staff on your firm’s ‘way’
- Supervision structure reviews
Don’t assume all regulated firms are uniformly compliant or compliant at all.
4. Appoint a deal risk lead
One senior individual (often the COLP or compliance manager) should have authority to veto or raise red flags throughout the M&A process. Their independence from the commercial pressure of the deal is critical.
5. Engage the regulator early
If your deal touches on high-risk sectors, vulnerable clients, or large-scale transfers, consider pre-emptively discussing your plans with the SRA. This can demonstrate transparency and improve trust.
The road ahead
The M&A trend in the legal sector shows no signs of slowing. The combination of listing structures, private equity interest and succession pressures is fuelling a market where larger firms are in acquisition mode, while smaller or regional players seek scale, exit or both.
Scale alone does not insulate a firm from regulatory risk. As we’ve seen in other sectors, rapid inorganic growth without a matching investment in compliance infrastructure and cultural integration is a recipe for supervision, or worse, sanction.
The challenge for compliance leaders in law firms today is to support the commercial ambitions of their business, while acting as a counterweight where necessary. M&A can be a growth engine, but only when it is executed with eyes wide open and with the regulator and regulation front of mind.