The number of law firm in the UK fell in 2020 for the first time as the industry consolidates and as the top 100 firms continue to boost their market share, according to a new report from investment bank Liberum.

The report – Legal Services: The Consolidators – shows that while the number of smaller firms is falling, businesses with more than 100 employees are increasing, in part driven by M&A activity. The top 100 law firms now account for around 72% of the market, up from just over half in 2010.

The overall decline in the number of firms is the first since the Office for National Statistics started compiling data – though there remains more than 33,000 ‘legal activities businesses’ in the UK, compared to fewer than 31,000 in 2014.

Liberum wrote in the report: “We infer that the smaller end of the UK legal services market is being consolidated, which is supportive of companies with acquisition strategies like Knights who are consolidating the smaller end of the UK legal market.”

Another reason for the decline in the overall number of firms is pressures on fees and costs.

Liberum said: “Services in the UK legal mid-market are becoming more commoditised and competition is increasing. This has resulted in fee pressure, which can erode profitability quite quickly in a sector of the market with high salary costs that could be viewed as either fixed or variable.” 

However, the number of firms transitioning to alternative business structures (ABSs) has been increasing since those reforms were introduced in 2011. There were more than 1,100 ABSs in England and Wales at the end of October this year, up from just 40 in 2012 and roughly 200 more than at the end of 2018.

Liberum added that while Brexit remains a threat, it could be positive for UK-focused mid-market firms because while the UK’s exit from the EU will likely reduce cross-border trading, the initial post-Brexit period is expected to increase work for lawyers.

The firm said: “We would therefore suggest the mid-market firms are better placed to benefit from this as they have very little international exposure. We expect that larger firms such as DWF could see a benefit in its UK operations, but international operations could suffer as a result of a hard or no deal Brexit due to a reduction in cross-border trade.”