Andy Poole interviews Martyn Kendrick, UK Head of Legal and Professional Services at Lloyds Banking Group, to explore his thoughts on the current financial performance of law firms and partner capital funding.
Tell me more about your new role as UK Head of Legal and Professional Services for Lloyds Banking Group
My role is all about supporting Lloyds’ growth within the legal sector, ensuring our 40 specialist relationship directors and managers have the support, skills and knowledge they need to add real value to our legal clients.
One thing that sets them apart is that they are all Lexcel accredited by the Law Society so they understand how firms operate, the regulatory landscape and how we can best support them as a bank. This gives us a really clear proposition for the sector and it also helps inform our strategic work, including developing new, tailored products and propositions.
Elsewhere, we work closely with our partners in the sector, including as supporters of the Law Society’s bellwether Financial Benchmarking Survey. We’ve also been a part of Law Firm Ambition for a number of years now, which shares important advice and insights from industry experts, including the Lloyds team and Armstrong Watson.
And I’m the first Head of Legal and Professional Services for many years who is not London-based, which gives me an extra insight into what’s happening in the regions.
What thoughts do you have on the current financial performance of law firms?
Law firms continue to contribute significantly to the UK economy. The sector is a clear growth priority for us and we’re seeing stable financial performance from firms.
While we’ve seen shrinkage in conveyancing work as the property market slowed, this may recover as interest rates come down and the cost of borrowing to purchase a home decreases, which would stimulate the market.
There is also plenty of merger and acquisition activity happening across the sector as law firms look to expand or strengthen their foothold in their markets.
However, more broadly, there is also concern around succession planning, a lack of qualified solicitors wishing to become equity partners and the increased cost of Professional Indemnity Insurance.
Another potential area of concern is the view coming from regulators that firms should not benefit from interest on clients’ funds. This is an issue to keep a close eye on as the impact on firms who rely on this income could be significant.
Many of our clients have reported year-on-year fee growth during the last year, despite increasing pressure on their margins. Their profit per equity partner has also grown. However, this, to a large extent, has been due to exceptionally high levels of interest income during 2024 compared to the previous period.
Without this client interest, there is every prospect that many firms – especially smaller firms – will experience financial stability problems.
But the Solicitors Regulation Authority has clearly signalled that it does not think it is appropriate for firms to continue to profit from holding money on behalf of clients. The results of the consultation will be eagerly anticipated.
We’re also seeing that sustainability is increasingly being factored into clients’ decision-making when they are procuring legal services. Growing numbers are now building ESG commitments and performance into their legal procurement frameworks. Reporting on this can be a challenge, and we have been working with our legal clients to help them identify relevant, measurable data to disclose. Having a clear purpose and a track record of positively impacting society will only become more important as firms work to build stronger brands and facilitate their long-term growth.
Obtaining partner capital funding has proved more difficult over the last few years, what is the approach and appetite of Lloyds for this, and how can it apply to law firms structured as limited companies?
There’s no doubt that partner capital funding is becoming harder to find. That’s a particular challenge for law firms that have chosen to incorporate and become limited companies.
The appeal is easy to understand. It’s a structure that provides additional protection for partners, it can help firms raise more money and shareholders can pay themselves dividends which attract lower rates of tax.
However, no major bank currently offers partner capital loans where the firm is a limited company. We're aware of the challenge this presents and it’s something that we are looking at very closely.
And even for firms with traditional partnerships, fewer banks are providing partner capital funding, perhaps because it’s a complex area that requires a really good understanding of how the sector works.
Each lend needs to be looked at in a lot of detail, with a manual underwriting by an experienced credit analyst. That said, Lloyds is one of the few lenders who are still very much open for business when it comes to partner capital funding.
