In a nutshell
Banking and finance is giant sector internationally, intersecting with various industries and overlapping with multiple other practice areas. Banking and finance lawyers may work in any one of the specialist areas described below, but all deal with the borrowing of money or the management of financial liabilities. Their task is to negotiate and document the contractual relationship between lenders and borrowers, and to ensure that their clients' best legal and commercial interests are reflected in the terms of loan agreements. It is a hugely technical, ever-evolving and jargon-heavy area of law.
Straightforward bank lending: a bank lends money to a borrower on documented repayment terms.
Acquisition finance: a loan made to a corporate borrower or private equity sponsor for the purpose of acquiring another company. This includes leveraged finance, where the borrower uses a very large amount of borrowed money to meet the cost of a significant acquisition without committing a lot of its own capital (this is called a leveraged buyout or LBO).
Real estate finance: a loan made to enable a borrower to acquire a property or finance the development of land and commonly secured by way of a mortgage on the acquired property/land.
Project finance: the financing of long-term infrastructure and public services projects, where the amounts borrowed to complete the project are paid back with the cash flow generated by the project.
Asset finance: this enables the purchase and operation of large assets such as ships, aircraft and machinery. The lender normally takes security over the assets in question.
Islamic finance: Muslim borrowers, lenders and investors must abide by Shari’a law, which prohibits the collection and payment of interest on a loan. Islamic finance specialists ensure that finance deals are structured in a Shari’a-compliant manner.
Financial services regulation: lawyers in this field ensure that their bank clients operate in compliance with the relevant financial legislation.
What lawyers do
- Meet with clients to establish their specific requirements and the commercial context of a deal.
- Carry out due diligence – an investigation exercise to verify the accuracy of information passed from the borrower to the lender or from the company raising finance to all parties investing in the deal. This can involve on-site meetings with the company’s management, so lawyers can verify the company’s credit profile.
- Negotiate with the opposite party to agree the terms of the deal and record them accurately in the facility documentation. Lenders’ lawyers usually produce initial documents (often a standard form) and borrowers’ lawyers try to negotiate more favourable terms for their clients. Lawyers on both sides must know when to compromise and when to hold out.
- Assist with the structuring of complicated or ground-breaking financing models and ensure innovative solutions comply with all relevant laws.
- Gather all parties to complete the transaction, ensuring all agreed terms are reflected in the loan and that all documents have been properly signed and witnessed. Just as in corporate deals, many decisions need to be made at properly convened board meetings and recorded in written resolutions.
- Finalise all post-completion registrations and procedures.
Realities of the job
- City firms act for investment banks on highly complex and often cross-border financings, whereas the work of regional firms generally involves acting for commercial banks on more mainstream domestic finance deals. If you want to be a hotshot in international finance, then it’s the City for you.
- Lawyers need to appreciate the needs and growth ambitions of their clients in order to deliver pertinent advice and warn of the legal risks involved in the transactions. Deals may involve the movement of money across borders and through different currencies and financial products. International deals have an additional layer of difficulty: political changes in transitional economies can render a previously sound investment risky.
- Banking clients are ultra-demanding and the hours can be long. On the plus side, your clients will be smart and dynamic. It is possible to build up long-term relationships with investment bank clients, even as a junior.
- Working on deals can be exciting. The team and its counterparty are often working towards a common goal, usually under pressure and with heavy time constraints. Deal closings bring adrenaline highs and a sense of satisfaction.
- You need to become absorbed in the finance world. Start reading the Financial Times or the City pages in your daily newspaper for a taster.
- In light of the British people's decision to leave the European Union, there are likely to be a number of consequences for the UK's financial markets and the legislation that surrounds it. A significant portion of banking activity within Europe is made possible by EU legislation, and an anticipated Brexit will affect the legal environment in which organisations operate. International financial institutions are less likely to view London as an appropriate place to conduct European business, but it is unclear what the overall impact will be on the City's prestigious financial sector.
- At present, authorised businesses including banks, insurers and asset managers can operate freely across the European Union provided they have a base in the UK under a system known as 'passporting'. Crucially this applies to both British businesses and overseas outfits with a subsidiary here. Independent think tank Open Europe reckons around 20% of annual revenue in the banking sector is tied to passporting. Brexit throws the future of this arrangement into doubt, as passporting cannot continue if the UK leaves the EU unless a special agreement is reached.
- The Banking Reform Act came into force in December 2014 with the aim of improving and protecting the banking sector in the wake of the 2008 financial collapse. Measures include protecting taxpayers by separating money belonging to individuals and small businesses from that used in wholesale trading, and imposing criminal sanctions when reckless misconduct causes banks to fail.
- There has been a lot of commentary in the business and financial press on whether financial services firms will move from the City to Frankfurt, Dublin or Paris post-Brexit; of these three Dublin and Frankfurt may be considered more attractive. Ernst & Young conducted a study of public statements by financial services companies and found that 19 spoke of a move to Dublin/Ireland, 18 to Frankfurt/Germany and 11 to Luxembourg.
- The Financial Conduct Authority has turned its gaze upon the asset management industry. The regulatory body recently concluded a two-year report into the industry and made a variety of suggestions for improvement. It indicated that parts of the industry are under-performing and overcharging due to a lack of consumer knowledge and weak price competition. Recommendations included standardising and simplifying fee disclosures and making transaction costs transparent.
- It's fair to say that banks have been fighting a PR battle post-financial crisis. A recent scandal involved US bank Wells Fargo, which was found to have signed up customers to hundreds of 'ghost accounts' without their knowledge (and taking a fee as a result). In 2016 the bank announced it was paying $185 million in fines.
- The ramifications of the Libor interest rate fixing scandal continue to be felt. Allegations emerged that some foreign exchange traders rigged foreign exchange market rates by manipulating the rate at which banks lend to one another. After an initial inquiry was established by the FCA, the Serious Fraud Office launched a full criminal investigation into the matter. Major law firms are still advising on issues related to this scandal. Recently two British former traders at Rabobank had their convictions overturned by a US appeals court.
- After a series of delays the long-awaited implementation of Basel III by global regulators has begun. This group of measures is designed to strengthen regulation and minimise risk in the banking sector. Measures were intended to come into force between 2013 and 2019, but have instead been gradually introduced from 2015 onwards. The process hasn't been entirely smooth: the US and European members of the Basel committee have disagreed over the models used to assess the risk that banks have, delaying implementation of the rules. Over the next few years, law firms will be kept busy providing advice and guidance to the banking sector on how to stick to the new rules.