Britain | Due diligence

Brexit could deprive British law firms of business in two ways

English-qualified solicitors could find it harder to work on deals in Europe—and may find that is where their clients have gone

ALTHOUGH London’s legal district traces its roots back to the 14th century, the city’s law firms are modern, international businesses. Britain is home to four of the world’s ten largest law firms by revenue, and its companies have extensive networks of offices abroad. The British legal industry earns around £25bn ($33bn) a year, a fifth of it from exports. Much of its success is due to the dominance of English law, which is often chosen as the governing law for international commercial contracts and dispute resolution, even by parties with no links to Britain.

Brexit presents London’s lawyers with two unknowns. The first is how Britain’s future relationship with the European Union will affect their operations in Europe, where they do a lot of their business. The second is how their clients will respond to Brexit. With little more than a year left before Britain is due to leave the EU, law firms are preparing for both uncertainties.

Take the first. Currently, lawyers qualified in Britain can fly to continental Europe to advise clients, and relatively easily set up shop or requalify as solicitors in other EU countries. As lawyers of an EU member, they can represent clients at the European Court of Justice (ECJ) and advise on EU law. This includes European merger and antitrust cases, which are often handled by City firms and which pay well. Two British-based firms, Freshfields Bruckhaus Deringer and Linklaters, worked on the takeover last year of SABMiller, a British brewer, by Belgium’s ABInBev, which faced competition reviews in Europe.

How much of this will survive Brexit? One concern is that lawyers qualified only in Britain may no longer enjoy legal privilege in EU cases, or rights of audience at the ECJ. The result has been a flurry of applications to the roll of solicitors in Ireland. Around 1,200 English- and Welsh-qualified solicitors have joined in the past 18 months, says Ken Murphy of the Law Society of Ireland. That compares with typical numbers before the Brexit referendum of 50 to 100 a year. Most of those registering are EU competition and trade-law specialists, including lawyers from almost all the largest London firms, he says. Few have any intention of moving to Ireland; rather they are seeking to ensure they can continue to practise in these fields post-Brexit.

Meanwhile, some British firms are beefing up their presence in Brussels. Since the referendum, Slaughter and May has relocated part of its antitrust team, while Macfarlanes has set up a Brussels office.

The second uncertainty concerns clients. Financial-services firms, in particular, are a big source of business for lawyers. Between 2009 and 2014 they accounted for 44% of the value of deals handled by the City’s 50 largest law firms, according to the Law Society. If Brexit limits London financiers’ ability to trade with the continent, parts of the industry could relocate. The EU announced on November 20th that after Brexit it will move its main bank regulator from London to Paris.

Should clients move there, or to Frankfurt or Luxembourg, Britain’s big law firms will feel well prepared. Most are established on the continent or have close relationships with local firms. But they worry that Dublin, a potential destination for asset managers, might represent a gap in their planning. Rather than set up bases there, British firms have previously dealt with Irish work out of London. Now they are considering expansion, though so far only one, Pinsent Masons, has acquired an Irish practice since the referendum. A relocation of clients to New York could also cause problems. Although British law firms have offices there, they may have to expand in order to compete against the American behemoths.

The nature of advice will change, too. Britain’s membership of the EU’s single market has until now limited British businesses’ need for advice on trade law. Now, as they start planning for life outside the single market, clients are requesting help on the niceties of World Trade Organisation rules. A number of firms, such as Linklaters and Clifford Chance, have put together stand-alone trade practices since the referendum, hiring academics and former advisers to governments and to international trade organisations. Such work is likely to be labour-intensive and low-margin, since many clients will expect such advice as part of their existing relationship.

Firms worry that Brexit might put a brake on dealmaking, reducing the amount of work for lawyers. But so far there is little sign of this. The biggest law firms are well hedged, given their foreign exposure. A survey by PwC, a consulting firm, suggests that revenues last year were buoyed by sterling’s fall.

City lobbyists have warned that the popularity of English law could wane. But many of the reasons for its dominance, such as its reputation for fairness and its centuries of precedent, need not be affected by Brexit. The longer-term risk, suggests Wim Dejonghe, senior partner at Allen & Overy, is that Britain loses its “soft power” and that foreign lawyers and managers become less likely to favour English law as fewer work or study in Britain. If London law firms’ future is not in imminent danger, nor is it quite beyond reasonable doubt.

This article appeared in the Britain section of the print edition under the headline "Due diligence"

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