In a nutshell
Banking and finance is a 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 a broadsheet newspaper for a taster.
- At the time of writing, the full impact of the 2020 lockdown on the banking world remains unclear. Long-term effects will depend on how long the Covid-19 pandemic lasts, the severity of it (i.e. what measures are needed to mitigate its spread) and the ability for governments to balance public health with economic concerns.
- The crisis means that 2020 has been the most challenging year for the banking and finance sector since the 2008 crash, with global economies suffering downturns which will inevitably plague the banking and finance sectors. In the UK, roughly £38 billion worth of loans by government-backed schemes were dispersed to help nearly a million businesses and avoid catastrophic levels of job losses.
- Most major banks have put billions aside to cover the shortfall caused by loan losses, the result of slower or defaulted credit payments caused by unemployment and businesses closing. There are also concerns that small to medium-sized businesses, required to start paying back the government-backed loans by 2021, may struggle to do so should the virus endure at similar levels into the next year.
- Credit rating agency Fitch predicts that sovereign debt held by EU banks will increase significantly as a result of the pandemic, with central governments scrambling to cover losses in the private sector. This is likely to remain the case in the coming years, as alleviating the debt more quickly would require harsh austerity measures or potentially unpopular tax rises.
- Brexit remains a consideration for the banking and finance sector, with the future for banks and financial services not much clearer now than when the referendum result was announced. A significant portion of banking activity within Europe is made possible by EU legislation, and 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. A recent report by the London School of Economics predicts business conditions will deteriorate in the wake of Brexit, providing a double blow on top of the impact of the Covid-19 pandemic.
- Supporters of Brexit have heralded a stronger UK-US economic relationship as a positive result of leaving the European Union. For the banking and finance sector, that would mean dealing with the market volatility associated with the Donald Trump administration and the protectionist 'America First' policies that have led to fears of a trade war with China and could have a detrimental effect on the global economy. Notable economists have warned that such trade conflicts and increasing tariffs could lead to a recession.
- The Bank for International Settlements introduced Basel III in 2019. This group of measures is designed to strengthen regulation and minimise risk in the banking sector internationally. The process hasn't been entirely smooth: the US and European members of the Basel committee disagreed over the models used to assess the risk that banks have, which delayed the 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.