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, authoritised 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. 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.
- With lower oil prices, low inflation and improved financial market conditions, consumer spending is up in the UK. Consumer credit in the UK grew by £1.5 billion in May 2016, after a £1.29 billion increase in April. Credit Card lending increased by £400 million and other loans grew by £1.1 billion. These statistics were expected to continue rising, but an atmosphere of uncertainty surrounds the sector following the result of the recent EU referendum.
- 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.
- The Financial Conduct Authority continues to strongly enforce regulations. This includes launching a new approach to deal with serious failings of standards in companies. 'Enhanced Supervision' is intended only for exceptional circumstances and focuses on the fundamental causes of deficiency by targeting managerial policy and demanding commitments from a firm's board to resolve any issues.
- 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. After an initial enquiry was established by the FCA, the Serious Fraud Office launched a full criminal investigation into the matter. Major UK law firms are advising institutions under investigation by the FCA. In August 2015, former UBS trader Tom Hayes became the first person to be convicted of Libor manipulation, receiving a 14-year prison sentence.
- Though over £2 billion in fines has been issued in the UK for Libor and forex benchmark manipulation, the FCA still doesn’t believe that banks are keeping a sufficiently wary eye on staff, leaving the door open for further diddling in the future.
- In the wake of the Panama Papers revelations in early 2016, the FCA has instructed banks and other financial institutions to hand over information about their dealings with the law firm Mossack Fonesca, and a wider inquiry into UK firms' links with tax havens is ongoing.
- 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. 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.
- The Small Business, Enterprise and Employment Act came into force in October 2015, and is being implemented in stages from summer 2016. Driven by a desire to create a more transparent financial market, it’s hoped that the Act will improve financial access for small businesses, and streamline contact between creditors and insolvency practitioners.
- In 2016 an agreement was reached by both parties in the ongoing $108 billion acquisition of SABMiller by Anheuser-Busch InBev. The transaction combines the world's two largest beer makers and involves the biggest loan financing in history.