SME LEGAL SERVICES NEEDS AN OPPORTUNITY FOR PROVIDERS OF COMMERCIAL INSURANCE CONTACT US. W: E: T:

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1 CONTACT US Epoq Legal Ltd Middlesex House High Street Edgware HA8 7UU W: E: T: SME LEGAL SERVICES NEEDS AN OPPORTUNITY FOR PROVIDERS OF COMMERCIAL INSURANCE July 2014

2 2 SME legal services needs : An opportunity for providers of commercial insurance Introduction As the UK economy improves, many small businesses seek to grow by investing in product development, increasing production, and employing more people. Whilst these activities are essential to growth, they also increase SMEs exposure to a number of risks, both financial and legal. Insurers and brokers play a vital role in helping SMEs protect against these risks, but access to affordable legal services is equally critical. In this paper, we summarise the findings of recent research into the legal needs of SMEs and the opportunities these needs create for insurers and brokers to give greater value to their SME customers and develop deeper and longer-term relationships with them. The surveys outlined indicate that there is a substantial level of need among SMEs for legal services. There are also significant costs to SMEs associated with compliance, not just in terms of spending on legal services but also in terms of lost staff time and opportunity cost. Traditional providers appear not to be widely utilised for the resolution of legal problems (mainly due to high costs), with most SMEs choosing to resolve issues themselves. This suggests that initiatives to provide SMEs with easy access to affordable legal tools would represent a significant value proposition for the small business sector. The market for SME legal services 4.9m private sector businesses in the U.K 99.9% are small businesses 62.6% solos 0.1% are large businesses 8.9% partnerships 28.5% companies Figures taken from Finaccord s - Law Metrics: Consumer and Small Business Behaviour in the UK Legal Services Market (2006) and the BIS Business Population Estimate (2013) 778.5m market size for legal services used by solos and micro businesses 3bn size of the SME legal services market including more substantial small businesses 1.17m 30k SMEs have 1 to 49 employees SMEs have 50 to 249 employees 56.6% of SMEs expect to grow in 2014

3 3 SME legal services needs : An opportunity for providers of commercial insurance The latest Federation of Small Businesses (FSB) Voice of Small Business index shows that the UK s 4.9 million SMEs have much higher aspirations: well over half now expect to see rapid or moderate expansion in the next 12 months. However, other research shows SMEs are struggling with the burden of compliance and the cost of resolving legal problems. Opportunities for commercial insurers and brokers working in the SME space lie in providing solutions that address these small business needs and concerns. SME spending on legal services The most in-depth attempt to measure spending on legal services by small businesses in the UK was made by Finaccord in Finaccord calculated a proxy of for average annual expenditure among small businesses and self-employed individuals buying legal services, which implied a market value of million. Changes in the Consumer Price Index (CPI) and our own internal data on the average fees solicitors charged SMEs over the past seven years indicates a market size of 778.5m in However, Finaccord judged that this underrepresented the size of the market for larger small businesses, which is more likely to be in the region of 2-3 billion. While these figures give an estimate of current spending on legal services, they do not include the costs to SMEs caused by compliance and legal problems; many of which have to be resolved by SMEs themselves. These are explored in the following sections. The costs to SMEs of legal compliance The latest study from the Forum of Private Business shows that the cost of compliance for micro to small and medium-sized employers (one-250 staff) has risen to 18.2 billion ( 11.3 billion for internal salaried costs and 6.9 billion for external support costs). These costs average out at 6,900 for a business with fewer than five employees, 9,150 for a businesses with five to nine employees, 15,400 for a small business and 34,000 for a medium-sized business. 18.2bn 18.2bn total costs total costs 14,800 per business 14,800 per business Figures taken from FPB s Referendum 204 report - The Cost of Compliance (2013) Figures taken from FPB s Referendum 204 report - The Cost of Compliance (2013) 3.7bn 4.7bn 6bn 3.7bn 4.7bn 6 health & safety employment tax health & safety employment

4 3.7bn 4.7bn 6bn health & safety employment tax 4 SME legal services needs : An opportunity for providers of commercial insurance Annual compliance costs by size of business 6,900 under five employees 9,150 five to nine employees Annual compliance costs by size of business 15,400 small business 34,000 mid-sized business MID SIZED BUSINESS 34,000 Mid-sized business 6,900 9,150 15,400 Five to nine Small business Under five employees The FPB employees regards these as the minimum costs, however there are also opportunity costs resulting from business owners and staff members pursuing compliance rather than other business activities. Factoring these into the calculations means that compliance is costing UK businesses 37.8 billion per year or a total of 30,800 per business. About 43% of businesses surveyed by the FPB reported they had less time for doing business as a result of compliance or were having to increase work hours, and 31% saw increased costs. 43% 31% 1,970 of SMEs reported they had less time for business due to compliance or were having to increase work hours of SMEs saw increased costs as a result of compliance is the compliance cost incurred when a business takes on an employee ( 1,845 in internal costs and 125 in external costs) The cost impact of legal problems As well as the costs of ensuring compliance, SMEs are also affected by the costs of dealing with legal problems. An in-depth survey on the subject was conducted by YouGov on behalf of the Legal Services Board (LSB) in The resulting report In Need of Advice? Findings of a Small Business Legal Needs Benchmarking Survey detailed the use of legal services by 9,703 small businesses (45% were solos, 44% had fewer than 10 employees and 11% fewer than 50 employees). The report issued the following findings: SME legal problems 9,703 small businesses were surveyed by the Legal Services Board (May 2013) 93,205 legal problems were reported by these businesses in total for the past year Figures taken from LSB s In Need of Advice? Findings of a Small Business Legal Needs Benchmarking Survey (2013)

5 5 Small Business Legal Needs Benchmarking small businesses were legal problems were Survey surveyed by the Legal reported by these (2013) SME legal services Services needs Board : An opportunity businesses for providers in total of for commercial insurance (May 2013) the past year 38% 45% 1, bn of these SMEs had experienced a significant legal problem in the past year of these problems had a tangible effect on these SMEs business was the median financial impact of these legal problems is the total cost to UK businesses per year if this sample were scaled to all UK SMEs How businesses respond to legal problems Types of problem Response to problems % 9% 8.7% 51.9% 9% 29% trading employment tax of SMEs deal with problems on their own of SMEs take no action of SMEs obtain independent help % 6.9% 43.1% 12% 45% premises regulation of SMEs make use of the internet to deal with legal problems of SMEs use solicitors to resolve their issues of SMEs do not think solicitors are cost effective (only 13% do) In the majority of cases (52%), businesses dealt with problems entirely on their own. Independent help had been obtained in respect of 29% of problems, 16% in the case of help from (traditional or dedicated) legal services. Only 12% of small businesses used solicitors to resolve their legal problems. Furthermore, 45% of businesses disagreed with the statement lawyers provide a cost-effective means to resolve legal issues (only 13% agreed). This statistic is mirrored by our own research findings where over 70% of businesses surveyed disagreed that law firms provide good value for money.

6 6 SME legal services needs : An opportunity for providers of commercial insurance Addressing SME legal needs The findings summarised above show quite clearly that today s SMEs have a range of legal needs, but the costs associated with meeting those needs preclude many small businesses from taking action. This leaves them vulnerable to a number of risks, including financial and reputational losses. Being adequately insured will help to alleviate losses in the event that a business needs to make a claim, but there are other risks that can be minimised with access to affordable legal services, such as employment contracts, health and safety policies and sales agreements. Not only do legal services need to be affordable, but they need to be accessible too. Online legal document services provide SMEs with an easy and convenient way to access and complete a range of essential legal and compliance documents, contracts and policies without the need to take time away from the business to visit a traditional law firm. Our own research - summarised in the infographic on the following page - indicated that nearly 60% of small businesses would find an online legal document service of value and over 60% would find access to a legal helpline helpful. Just over 40% said they would be likely to buy such a legal service if it was offered as a discounted add-on to their business insurance. For the insurer or broker, including legal services as an enhancement to their insurance product will not only help differentiate their service, but also give demonstrable value to their SME customers. For example, our research shows that a law firm is likely to charge a business customer around 700 to draft an employment agreement. The same service could be offered to an insured customer for a fraction of this cost. Furthermore, unlike legal expenses insurance, a legal service can be used by an SME on an everyday basis not just at the point when they need to make a claim. This enables the insurer to develop deeper relationships with their SME customers and retain their custom in the longer term. And as the FCA continues to scrutinise the value of insurance add-ons (such as legal expenses), legal services provide an easily demonstrable value-add to a commercial insurance product.

7 SME INTEREST IN ONLINE LEGAL SERVICES 57% 41% 525 SMEs responded 100 is of SMEs said they would find an online document preparation and review service of value of SMEs would be likely or quite likely to buy the service as an add-on to business insurance the amount SMEs would be willing to pay for the service per annum 56% % 8% 51+ 9% Number of employees 10% % 6-10 of respondent SMEs bought their insurance from brokers 60% of SMEs do not think law firms give good value for money Most commonly used legal services by SMEs 1. Employment agreements or procedures 2. Health and safety reviews 3. Confidentiality agreements 4. Specific contracts for the provision of goods and services 5. Fire risk reviews Survey of SMEs carried out by Epoq in March 2014

8 8 SME legal services needs : An opportunity for providers of commercial insurance REFERENCES, FURTHER READING AND CONTACTS PREPARATION In Need of Advice? Findings of a Small Business Legal Needs Benchmarking Survey (Legal Services Board, 2013) - Voice of Small Business Index (Federation of Small Businesses, Quarter ) - Law Metrics: Consumer and Small Business Behaviour in the UK Legal Services Market (Finaccord, 2006) - General Insurance Add-ons: Provisional Findings of Market Study and Proposed Remedies, (FCA, March 2014) - Closing the Gap: Increasing Consumer Understanding and Trust in the Insurance Sector (Epoq Legal Ltd, February 2014) - Sector-Whitepaper-Feb2014.pdf About Epoq Contacts Founded in 1994, Epoq s mission is to make the law easy, affordable and accessible for consumers and SMEs. We provide integrated online legal document and advice services that help consumers and SMEs to protect their interests and manage everyday legal matters easily and cost effectively - all from the comfort of their own home or office. RICHARD COHEN Solicitor, Chairman and Head of Institutional Partners DAVE JONES Business Development Director For over a decade our services have been adding value to insurance propositions, enabling some of the UK s largest insurers to benefit from increased customer engagement and retention. T: E: richard.cohen@epoq.co.uk T: E: dave.jones@epoq.co.uk

9 HOW WE HELP SMES THROUGH THEIR LIFECYCLE EPOQ LEGAL SERVICES Business startup Debt recovery Copyrights & trademarks Employing staff Health & safety Motoring Sales agreements Landlord & tenant Managing staff Dismissing staff SME LEGAL NEEDS Choosing a legal structure Ecommerce Protecting ideas Letting a property Taking on staff Managing staff Starting a business Trading & doing business Chasing debtors Motoring Issues Health & safety compliance Discipline, staff & dismissal SME INSURANCE NEEDS Employers, public & product liability, professional indemnity, premises, assets, motor, employee benefits STARTUPS SMALL TO MEDIUM SIZED BUSINESSES SMALL TO MEDIUM BUSINESS

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