How law firms are responding to Brexit

Brexit missing star

To be a commercially aware candidate in 2018 means understanding how the legal profession is positioning itself for Brexit.

Common sensationalism

In the space of two years, the future of Britain’s relationship with the EU is no less ambiguous. Warnings of £80 billion holes in the budget, food shortages and capital flight dominate headlines, while government is characterised by party rifts, policy U-turns and ministerial walkouts.

The chaotic landscape isn’t an ideal one for businesses, and most have been lobbying tirelessly for a 'soft Brexit' – one that resembles the status quo as much as possible and which maintains key benefits such as passporting for financial services and a comprehensive customs agreement for goods.

Negotiations between the UK government and Brussels remain ongoing and are nearing their final stages – or at least they should be. But despite the Prime Minister's best efforts to rally support for her Chequers plan (a proposal that mixes a soft and hard Brexit), a simultaneous rejection from both Barnier and Boris has made a no-deal Brexit look like much more of a possibility.

It's a scenario not welcomed by much of the legal sector: a recent survey by Legal Week found that three-quarters of City law firm partners backed a second referendum; a study by the Law Society predicted that the UK legal sector could suffer a £3 billion hit in revenue and a loss of 12,000 jobs by 2025 in the event of a no-deal Brexit;and a report by Thomson Reuters and The Lawyer found that from a sample of more than 300 partners across Europe and the UK, just 23% of those in the UK thought that a no-deal Brexit would result in a long-term increase in workload (those in Europe had a rosier view of things, with 64% predicting a long-term increase in workload).

“Preparing for no deal isn't a waste of time even if we do get a deal; it's all about having the galoshes and umbrella ready and hoping it doesn't rain!”

However, it's not all bad news. The last report mentioned above also found that more UK partners predicted a significant or slight increase in workload in the short-term – principally in the form of regulatory advice – than those anticipating a significant or slight reduction. As Laura King, global head of people and talent at Clifford Chance, told us: “Brexit is generating enormous amounts of work, and simple things like how clients label their products are requiring a significant legal rethink.” A report compiled by Clifford Chance in collaboration with consultancy experts Oliver Wyman estimated that the cost of WTO tariff and non-tariff barriers for UK businesses is an estimated £27 billion. Mitigating the impact and costs will not be easy, the report warns: 'It will take time, planning, resourcing and investment for companies to deliver.'

You can be sure that much of that 'investment' will make its way into the coffers of City law firms. Most big law firms now have dedicated Brexit taskforces and helplines, busy pumping out sector impact reports and modelling risk for clients. “The advantage of modelling for a no-deal scenario is that it's the clearest scenario,” a magic circle corporate partner told us. “Anything else encompasses a whole range of possibilities. A no-deal outcome is also likely to happen in March 2019 which makes it more urgent compared to a transitional arrangement that occurs over a number of years – that's a lot harder to prepare for.” She adds: “Preparing for no deal isn't a waste of time even if we do get a deal; it's all about have the galoshes and umbrella ready and hoping it doesn't rain!”

It's not just the big players in the City who are thinking about the impact of Brexit: smaller and regional firms are also considering the possible implications of the UK's departure from the EU. For example, small Leeds commercial firm Blacks Solicitors recently launched a business immigration team in response to the high number of EU nationals living in Leeds. Managing partner Chris Allen told Insider Media: “With uncertainty around Brexit it seems the perfect time to expand with a brand new service.” Meanwhile, regional firm Wilkin Chapman recently published an article bluntly encouraging farms and landowners to diversify their business because of Brexit uncertainty, for instance into tourism. A senior source at the firm told us: “I think our perception of Brexit is there’ll be as many opportunities as there are negatives."

Daringly dégagé

Moreover, in defiance of some of the more dire predictions, the UK legal industry has remained buoyant in 2018. The four biggest magic circle firms all recorded profit increases of at least 4% in 2017/18. More broadly, the top 100 firms achieved an average fee income increase of 7.7%. “The extent to which perception has affected the appetite for investment in the UK has probably been countered by the effects of currency exchange rates, so the UK is very good value for investment from abroad,” one firm’s managing partner explained to us, adding: “As interest rates go up that will that continue to strengthen the pound.”

“Increasingly I think that our London office will remain important as this is a vital centre for capital raising, banking and insurance and all of that will continue post-Brexit.”

Many also remain confident in the future of London's place as Europe's financial powerhouse. “We haven’t done anything to respond to Brexit,” the training partner of a big American firm in the City asserted. “We haven’t changed our investment plans for London or moved activities to Frankfurt or elsewhere on the continent. Increasingly I think that our London office will remain important as this is a vital centre for capital raising, banking and insurance and all of that will continue post-Brexit. So as a business we’re reasonably sanguine about it.” The dégagé approach is shared by the training partner of a smaller US firm in London: “Generally the scope of work we do is much bigger than just the UK so we will likely not be hugely affected.”

So the Americans haven’t given up on us yet. And undeterred many US firms are actually growing their offices in London: Winston & Strawn, Gibson Dunn, Fried Frank and Goodwin have all initiated their own training contracts recently. Goodwin also recently moved into premises at 100 Cheapside which are more than double the size of its previous space in Tower 42. Similarly, as part of McDermott's 'strategic review' in 2016, London was targeted as an office “where we really wanted to see a significant increase in size,” training principal Nick Holland told us. “We had originally anticipated the office doubling in size over the next five years but that might happen within the next year.”

This confidence is likely in part a reflection of the muscle US firms have on the international stage – many have in excess of 20 offices worldwide, covering multiple jurisdictions. They know that if things go sour in the UK, they have their overseas empire to fall back on. For the same reason English firms with a big global presence are displaying a similar degree of confidence. A magic circle partner told us: “Many of our clients are global FTSE 100 companies who may be inconvenienced by Brexit but won't be greatly impacted. And where clients seek to relocate their headquarters to Europe, we will direct them to our European offices there.”

All this of course is just fine for these firms – and for their lawyers in Paris, Frankfurt, Amsterdam etc – but it could mean they need fewer lawyers in the UK in future. Put simply: if more businesses move operations out of the UK, lawyers will follow. But despite one City firm telling us it was cutting trainee recruitment numbers because of Brexit in 2018, as yet there has been no major exodus of bankers, financiers and other businesspeople from the UK to continental Europe.

But what about the future? To an extent the fate of the economy is determined by perception and speculation, so the degree of confidence in post-Brexit Britain will be an important factor in whether the UK continues to attract businesses to its shores. Any slight slips – very slow economic growth for example – are likely to exacerbate the ongoing squeeze on mid-market law firms (and mid-market businesses in general). It’s reasonable to expect that without access to overseas offices some may be less well placed to attract work. This may result in more law firms encountering financial difficulties in the next few years, and it’s certainly likely to mean more mergers taking place so firms can cut overheads and shore up their international presence: think CMS absorbing Nabarro and Olswang or BLP’s recent merger with Americans Bryan Cave to form BCLP.

Contingency plans

Another concern some have relates to London’s role as a centre for international dispute resolution. McDermott training partner Nick Holland told us:

“People pick English law and English courts because English judgments have an unmatched enforceability in foreign jurisdictions, including Europe. The legacy of empire means there is an unparalleled network of treaties with commonwealth countries in place, compared to jurisdictions like the Canadian provinces which generally only have agreements with other provinces in addition to the UK. However, that reach is threatened by Brexit and what we are seeing are countries such as the Netherlands and France who are making changes to their tax and court systems to try and attract business post-Brexit.”

In addition to the impact of London's attractiveness to business, law firms must also consider the logistical impact of Brexit on their ability to conduct business. These include concerns over the maintenance of legal professional privilege in disputes (e.g. over EU competition matters) which currently allow them to withhold documentation from investigating authorities in litigation proceedings. To mitigate this possibility, many law firms are seeking to register lawyers in Ireland. More than 1,644 solicitors have registered since 2016 including 132 from Eversheds and a significant 25% of Latham & Watkins' London lawyers.

“That reach is threatened by Brexit and what we are seeing are countries such as the Netherlands and France who are making changes to their tax and court systems to try and attract business post-Brexit.”

Other firms have resorted to opening new offices in favourable jurisdictions. Lewis Silkin recently opened a base in Dublin. Chief executive Ian Jeffery told us dryly: “Quite a lot of work we’re involved in is cross-border, and we felt it was important for us strategically to have a base within the European Union.” Similarly, tech and IP specialist Bristows opened an office in Brussels in 2017, the firm’s first overseas base in its 180-year old history; and elite City firm Macfarlanes dumped its longstanding single-site policy to open a Brussels office in 2017.

Services vs goods

Given its degree of integration with EU law, competition is one area of law that will be most impacted by Brexit. A magic circle senior source told us wearily: “If you're doing an international M&A transaction that will now need to be subject to both UK and EU processes – that inevitably means more red tape for businesses and more work overall.” Indeed, the UK’s Competition and Market Authority is expecting a 40 to 50% increase in its workload as it takes on more cases related to cartels, anti-competitive agreements and abuse of dominance that were previously handled by the European Commission.

Banking and finance is another area identified by our magic circle source as at risk of “the greatest impact. In other areas of business, you might need a new certification for goods, but it doesn’t require you to restructure your entire business.” Particular anxieties concern future financial passporting arrangements. The current EU passporting system for banks and financial services allows authorised firms to trade and sell freely across any EU or EEA state – if you’ve got permission to operate in one you can operate in all. But it’s now the government’s official policy to ditch passporting. Our magic circle source explained: “The official regulatory position is that if you want to carry on doing business, you should seek new authorisations before March 2019. So we've recently been very busy advising clients seeking those authorisations and working out where they can transfer to. A lot of that involves setting up a new subsidiary in Europe and transferring the business into a new entity. It's an area that has required the most when it comes to our attention and resources.” One group of businesses that have been doing this exact thing are the UK's big insurers: they are using so-called ‘Part VII Transfers’ or turning themselves into an entity known as an SE (Societas Europaea) that allows them to move easily between EU states.

However, not all companies are necessarily planning drastic restructurings. Paul Butcher, Brexit director at Herbert Smith Freehills, told Thomson Reuters: “Companies will leave lots of things to the last minute that lead times allow, because they will want to know what happens with the negotiations. Clients will therefore need their law firms to meet very tight deadlines while controlling cost and not compromising on quality.” His predictions are consistent with a report conducted by Deloitte on the impact of Brexit on M&A activity, which states that “M&A is a long term decision-making process and we see many deal makers in a ‘wait and see mode’ approaching the post-Brexit world.” The report encouragingly indicates that “far greater numbers are considering incremental M&A opportunities from Brexit than those looking away from UK as a target destination.”

One significant outcome of this 'wait and see approach' could be a huge potential short-term spike in firms’ workload once the terms of the relationship are finalized. The Thomas Reuters report mentioned above found that to deal with this demand 62% of UK respondents planned to hire more lawyers, with a significant minority planning to invest more in legal software solutions, innovation technology and legal outsourcing. This again works favourably for the larger City firms with superior technological infrastructure and investment. For example, Linklaters' flagship AI machine-learning tool, Nakhoda, which launched in 2017, will no doubt be an invaluable asset for automated contract generation and analysis of non-disclosure agreements.

If you want to show you’re a commercially savvy and engaged student, understanding what law firms are doing on Brexit is really important at the moment.