Private equity investment into the Scottish legal sector: Where are we now, and what next?

Latest on the introduction of licenced legal service providers in Scotland

The Law Society of Scotland (LSS) has set out its approach to the implementation of the Regulation of Legal Services (Scotland) Act 2025 (2025 Act) and confirmed that work on regulating licenced legal service providers will be deferred until 2027.

This move will allow the LSS to focus on other reforms to be introduced by the 2025 Act, including improvements to the current complaints system. However, this news will be a setback for those Scottish firms hoping to seek external investment, and allow for ownership by non-solicitors, under the new regime.

As set out in this article, the road to this juncture has not been straightforward.

Licenced legal service providers to encourage investment and growth

Law firms in Scotland are traditionally limited liability partnerships (LLPs) with the partners of the firm, who are all practicing solicitors, owning the LLP as its members.

The Legal Services (Scotland) Act 2010 (2010 Act) sought to reform the ownership of law firms in Scotland and allow for investment, and ownership, by non-solicitors through the creation of a new business model known as a licenced legal service provider (LLSP).

One of the key reasons for the introduction of LLSPs is to allow law firms in Scotland to seek external investment to compete in UK and international markets and encourage innovation in the legal sector.

In broad terms, an LLSP under the 2010 Act is a business comprised of solicitors and non-solicitor regulated professionals (such as accountants) and other non-solicitors. A key requirement under the 2010 Act was that the solicitors and other regulated professionals must together hold at least a 51% stake in the ownership, or control, of the business.

For several reasons, the LSS did not launch the LLSP regime under the 2010 Act, and work on the regulatory regime was paused whilst further reforms to the regime were considered under the 2025 Act.

An updated regime for licenced legal service providers

Although the creation of LLSPs in Scotland remains unavailable, the regime has been subject to further reforms under the 2025 Act.

In 2018, Fit for the Future, Report of the Independent Review of Legal Services Regulation in Scotland was published.

This report noted that the LSS viewed the 2010 Act as “effectively unworkable”, and sought a new, flexible regulatory framework.

The report also noted that the requirement for solicitors and other regulated professionals to hold at least a 51% stake in an LLSP created difficulties, particularly for small firms who may be able to benefit from employee and community ownership, if this requirement was removed.

To this end, the report recommended that there should not be a requirement for legal professionals to hold a controlling interest, and this was subsequently removed by the 2025 Act.

Pause by LSS on finalising the regulatory regime until 2027

The reforms to be introduced by the 2025 Act are wide-ranging, and the LSS has decided to prioritise other aspects of the 2025 Act in the short term, and defer further work on the regulatory framework for licenced legal service providers until 2027. Interestingly, the LSS notes that there has been limited interest expressed by firms in terms of becoming a LLSP.

External investment on the horizon

For at least the next two years, the traditional Scottish law firm model will continue.

This is in contrast to the position in England and Wales, where alternative business structures were introduced in 2012, and many firms have since sought external equity investment.

The 2010 Act, and the reforms introduced by the 2025 Act, will open the door to external equity funding in Scotland, but not in the short term.

Once the regulatory scheme for licenced legal service providers is developed by the LSS, it is hoped that this regime will provide new opportunities for law firms, and investors, in Scotland.

Until then, and as noted in the 2018 report, many firms have found ways to work around the current constraints, and that is likely to continue until the new regime is in place.

If you have any questions about licensed legal service providers, please get in touch with a member of our Corporate team.

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