This edition of our Professional Services Sector Update explores evolving investment dynamics in 2026, where anticipated private equity activity has been eclipsed by significant US-UK legal mergers. It also looks at growing private capital investment across Europe, key regulatory and tax developments and the rapid advancement of AI and its potential impact on the sector.
A new report from TheCityUK underscores the ongoing strength of the professional services sector, revealing that UK financial and related professional services exports have been rising annually by over 8% on average in recent years, and reached £174 billion in 2023. Impressively, the sector made up nearly 40% of all UK services exports in that year.
Turning to 2026, the start of the year was abuzz with predictions that private equity would be the driving force behind a flurry of investment activity in the legal sector, as we've witnessed in recent years in the accountancy sector. Fast forward to now, and those forecasts haven't quite materialised – at least, not in a way that sets 2026 apart.
The liveliest area of transactional activity in the legal sector has been transatlantic mergers. A spate of tie-ups announced late last year – Hogan Lovells and Cadwalader, Ashurst and Perkins Coie, Taylor Wessing and Winston & Strawn – are set to create legal powerhouses with revenues each comfortably topping £1 billion. These mega-mergers are playing in a league of their own, far removed from the smaller private equity bolt-ons that many predicted would define this year. All signs point to 2026 being the year of the US-UK super-firm, perhaps running contrary to the question marks being raised over the US-UK "special relationship" on the geopolitical stage.
A similar theme of global consolidation, albeit under a different guise, is playing out in the accountancy sector. Deloitte revealed its plans for a major regional combination under a new Deloitte EMEA enterprise, which will integrate member practices and have combined revenues of €20 billion. Grant Thornton UK and Grant Thornton US, which are both (separately) private-equity backed, are consolidating their network of independent firms (which we touch on in our article on the demise of the Swiss verein). PwC has announced that it is considering bringing together its risk and consulting practices, as part of its strategy to move towards more integrated global services.
In this edition we explore current trends in network structures, provide an update on the recent consultation regarding interest on client accounts and review case law developments in relation to mixed membership partnership rules and the Mazur case. We also share our thoughts on the newest advancements in AI within the sector and on professional services activity across Europe.
The network structure has recently come under sustained pressure as the preferred structure for international businesses in both the accountancy and legal sectors. A number of converging factors have led firms to reconsider the structure, which appears to be leading to a significant shift towards more integrated international professional services firms.
In the accountancy sector, the network has been the predominant form of international structure due to the liability risks associated with providing audit services, with the network structure a way of ring-fencing liabilities to national member firms. Many law firms adopted the network structure when expanding internationally since, without full financial or operational integration, it offered a quicker route to the creation of an international platform and the flexibility to treat different parts of the global business on a bespoke basis. Liability issues have been less of a concern in the legal sector given the reduced exposure to third party claims.
However, the limitations of the network structure have become increasingly apparent, particularly regarding collaboration amongst member firms, unwieldy decision-making processes and increasing pressure to make global capital investments. The interest of private capital in the accountancy sector has also accelerated this trend, given international expansion (on an integrated basis) can be viewed as a key source of growth for ‘buy and build’ strategies.
A combination of these factors has led many national accountancy firms to combine with other member firms in the same network. Member firms of Grant Thornton, BDO and RSM to name but a few recent examples, have instigated mergers within their networks. And Deloitte recently announced the creation of an EMEA regional unit within the wider Deloitte network.
Perhaps even more pronounced has been the movement away from network structures in the legal sector. It is notable that none of the recently announced transatlantic mergers will be adopting the network structure (traditionally an easier way to accommodate the discrepancy between PEP and cash vs accrual accounting at US and UK firms, that often are the most difficult elements of such mergers). Even established network firms (e.g. DLA, Baker McKenzie, Norton Rose Fulbright and King & Wood Mallesons) have sought to integrate their constituent businesses and/or have abandoned the network structure altogether.
The trend in international structures seems clear: firms wish to operate on a more integrated and collaborative basis. However, an integrated approach can create its own set of issues, e.g. the application of central control and global profit sharing in highly regulated markets and the need for global remuneration structures to reflect local market dynamics, which these firms will need to grapple with.
Management remuneration continues to be an area of focus in the tax world. Whilst we are still waiting on the Supreme Court judgment in Bluecrest, recent case law brings the Mixed Member Partnership Rules into the spotlight. These are anti-avoidance provisions designed to prevent individual partners in a partnership from accumulating profits in a non-individual partner (such as a company) to reduce their overall tax liability.
Typically, LLPs that conduct business for profit are treated as transparent for tax purposes, with each member paying tax on the share of the LLP’s profits or gains allocated to them by the partnership documents. However, where the Mixed Member Partnership Rules apply, HMRC can reallocate profits from a corporate partner to the individual partners, bringing those profits into tax in the hands of those individuals.
The Upper Tribunal recently considered these rules in detail in Holden v HMRC and HMRC v The Boston Consulting Group UK LLP and Others [2026] UKUT 25 (TCC). In this case, the LLP was part of a global group which granted senior management interests linked to growth in the value of the group's global parent, BCG Inc. This was replicated in the limited liability partnership agreements (LLPAs): the individual partners were granted "Capital Interests" which on certain trigger events could be sold to the managing partner, BCG Ltd., for a sum calculated by reference to increases in the BCG Inc. share price.
Although the interests were described in the LLPAs as "capital", the Upper Tribunal looked through to the economic reality of the arrangements, concluding that they were not capital assets. Turning to the income tax analysis, it found that the effect of the arrangements was to reallocate to BCG Ltd. profit share that would otherwise have been allocated to the individual partners, reducing their share and the overall tax position. The Mixed Member Partnership Rules therefore applied and the profits could be reallocated.
Since income tax is an annual tax and, in fact, the LLP issued annual statements showing how much the Capital Interests had increased in value, the Upper Tribunal decided that it was reasonable to reallocate relevant profits to the individual members annually. It acknowledged that this could mean individuals being taxed before actually receiving any cash (a so-called dry tax charge) but felt this was not unusual in a partnership context.
For more detail on the case, read the full article.
The Ministry of Justice (MoJ) recently closed a consultation on proposals to create an Interest on Lawyers’ Client Accounts Scheme (ILCA) in England and Wales. The scheme's aim is to create a new source of funding to enhance the delivery of services in the justice system (including access to justice), by remitting a proportion of interest earned on lawyers’ client accounts to the government. Similar schemes are already established in other jurisdictions, where interest generated from client funds is used for public purposes. Under the current ILCA proposals, 75% of interest on pooled client accounts and 50% on individual client accounts would go to the government, with firms retaining the residual interest, which would remain subject to existing client interest rules.
While the MoJ's research suggested that most legal service providers are not reliant on client account interest for business sustainability and that clients rarely expect to receive interest, some evidence points to the contrary, particularly as interest rates rise. We understand that, for some firms, client money interest now accounts for around 15% of net profit. Whilst a retention of a healthy level of interest supports competitive fee levels offered to consumers, and helps meet firms' operational costs in an increasingly complex client-monies system, firms that are seeking private equity or other external investment may also be impacted by the introduction of an ILCA, as it could hit profitability and the related multiples that an investor might be willing to pay.
Responses from bodies such as the SRA and Legal Services Board have broadly supported the principle of an ILCA, but raise practical concerns about implementation, regulatory alignment, and the need for independent scheme administration. The sector now awaits further clarity on the scheme’s design and operational details, as the government reviews feedback from the consultation.
Recent developments in the case of Mazur v Charles Russell Speechlys, which we provided an overview of in our last update, have been welcomed after a period of uncertainty around some roles in the legal sector. At the end of March, the Court of Appeal in CILEX v Mazur and others confirmed that non-lawyers, such as paralegals and legal assistants can lawfully work on litigation matters provided they are supervised by a qualified solicitor, overturning the High Court's decision that had caused significant uncertainty and led to the threat of job losses within the profession.
The judgment confirms that supervised, unauthorised staff are not “carrying on the conduct of litigation” under the Legal Services Act 2007 and do not commit a criminal offence by assisting in litigation tasks. The ruling has been widely welcomed as aligning the law with everyday practice, supporting diversity, and resolving uncertainty over the roles of many in the profession. Firms should continue to ensure appropriate arrangements for effective supervision are established and maintained to ensure both compliance and efficiency with the SRA rules.
There has been a notable uptick in private capital investment across Spain’s professional services sector, with both local and international funds showing strong interest in law firms, consultancies and financial advisors. Our colleagues in Spain have attributed the sector's growing popularity to its reliable cash flows and consistently strong performance.
Meanwhile, our team in Warsaw reports a surge of activity in Poland’s professional services market, particularly among firms specialising in accounting and payroll. Mirroring the trends seen in Spain, the Polish market is viewed as a solid investment opportunity, underpinned by a loyal client base and long-standing supplier relationships. One of the recent stand-out deals is the acquisition of Nexia Advicero, a tax advisory and accounting outsourcing firm, by Swiss-based Ufenau Capital Partners, who have announced plans to further consolidate the Polish business advisory landscape.
There has also been considerable interest from international investors in the professional services market in Germany. Direct ownership of law firms is tightly regulated, which has limited the scope for investment in that sector, whereas the accountancy market (tax and audit) has seen a number of material transactions. However, that could all be about to change, as the Finance Committee of the German government has just published draft legislation that significantly restricts the external ownership of tax consulting firms. Existing investors have typically used an overseas audit firm (with less stringent ownership requirements) as an indirect investment vehicle but the law is set to change as early as next month, which would prevent any new investments adopting that structure. It could also make it virtually impossible for the private equity houses who have already structured their investment on that basis to sell to another external investor. We are keeping this under review and hope to be in a position to provide greater clarity in our next update.
Artificial intelligence (AI) is, of course, the topic of the moment, and will almost certainly change the way we live and work, but it still feels relatively new and unfamiliar to many of us. Regulators in the sector have tried to address this by providing guidance rather than a new set of AI-specific rules. In February, the SRA released updated guidance for solicitors on the use of AI and technology. Whilst the guidance itself is relatively limited, it highlights the broader UK government standards on ethics and emphasises that firms remain free to use any technology they deem suitable – so long as they continue to meet the SRA's principles and standards. Importantly, the SRA reminds firms that their Compliance Officer for Legal Practice must oversee regulatory compliance whenever new technology is adopted. The SRA clearly supports, and encourages innovation, but reminds us of key legal issues, for example agreeing liability for errors when using third-party law tech.
Similarly, in the accountancy sector the FRC has published comprehensive, though not prescriptive, guidance on the use of AI in audit. The FRC's review of the six largest accountancy firms found significant investment in AI, particularly for tasks like large-scale document review and risk identification, but a critical gap remains: many firms are not yet tracking the impact of AI on audit quality.
In the sector, we are seeing AI rapidly evolve, with agentic AI starting to take centre stage. Unlike generative AI – which relies on a series of prompts from users – agentic AI is designed to act more like a human, making decisions and orchestrating complex tasks with minimal human input. A recently published report by the Law Society into the future of agentic AI in legal practice looked at its potential impact in the legal industry and noted that regulation isn't keeping up with automation.
Popular platforms like Claude are evolving towards these agentic models, and the SRA's approval of the UK's first AI-driven law firm in May 2025, Garfield AI (which uses an AI powered litigation assistant to help SMEs recover debts) signals just how mainstream these tools are becoming. When authorising Garfield AI, the SRA required assurances around quality checks, confidentiality, conflicts of interest and the management of AI "hallucinations" – all issues that will only become more relevant as generative and agentic AI becomes embedded in our everyday practice.
We have recently assisted a number of clients in updating their terms of engagement to reflect the latest regulatory guidance and the growing use of AI in professional services. This includes clarifying how AI is deployed to enhance client delivery, and providing transparency around the use of third-party platforms in delivering services.
The speed of AI adoption across the sector continues to accelerate. According to a Thomson Reuters report, organisation-wide usage of AI in professional services firms doubled in 2026 to 40%, reflecting how quickly the sector is embracing these tools. As agentic AI becomes more prevalent, it is crucial for firms to consider which solutions best meet their needs, and to ensure robust risk management and compliance controls are in place. Charlotte Marshall, Partner in our Commercial Team, recently wrote in Insider Media about the key considerations businesses should address before deploying agentic AI solutions and this guidance is especially relevant as AI becomes an integral part of delivering best-value services for clients. Read Charlotte's full article.
A new insurance product for professional services transactions has recently been launched, offering multi-year professional indemnity (PI) run-off cover. The offering comes at a time when increasing M&A activity in the professional services space means PI run-off cover is in increasing demand and creates additional administrative burden when negotiating transactions. The new product – which can be taken out as part of an M&A process or as part of a post-transaction review of insurance policies – can run for a period of one to six years (avoiding the traditional annual renewal process), with a one-off, up-front premium payable, providing cost certainty.
If this is of any interest, please contact the team and we can make an introduction to an independent broker.
For advice on legal issues relevant to professional services firms, including business structures, M&A and PE investment, regulatory matters, and disputes and investigations, please contact a member of our specialist team.
