Hello and welcome back to the Fides Weekly Update.
We’re back with the week’s trends, moves and developments in legal compliance. Scroll down to see our regular feature of Movers & Shakers of the week.
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This week:
1. The curtains are closing on KWM
The story of the European arm of King Wood Mallesons, having dominated the headlines for the past 10 months, today is expected to come to an end as the firm enters into administration.
It has been a rough week for the firm and those who work for it, as on Tuesday Barclays refused to release salary payments for the firm, and proposed administrators AlixPartners withdrew over concerns about funding. This means that staff have effectively worked for free so far this month, and will now have to apply to the firm’s new administrators to attempt to claim back their pay for this period.
Yesterday KWM China managed to strike a deal to retain a small presence of 30-40 lawyers in Europe, although it was announced that all London training contracts would be cancelled effective from today ahead of the administration.
News of partner exits continued throughout the week, with Reed Smith taking a further three KWM partners – including equity capital markets head Delphine Currie – whilst Simmons & Simmons have hired a further two partners, private equity funds partner Cindy Valentine and banking and finance partner Jen Yee Chan to strengthen its financial markets practice.
The firm also dropped a lawsuit against Goodwin Procter which granted the move of a 26 lawyer (5 partner) team to its London office, as it was announced that French international funds co- head Arnaud David is set to join the US firm as part of a five-lawyer team in Paris. It was also announced that former SJ Berwin senior partner Jonathan Blake was joining the global investments funds group at O’Melveny & Myers.
Other firms that have announced the hire of KWM partners this week include Baker Botts and Cambridge real estate boutique Bicham Dyson Bell.
At such a difficult time for those still associated with the firm, we hope that lessons are learned within the industry from this event which has led to the demise of once a well-regarded UK law firm.
Whilst the market and legal press remain awash with the continued news of partner exits and lateral hires from KWM, our thoughts go out to those not represented – the associates, trainee’s and business support staff – whose critical work behind the scenes has made this firm function to the best of its ability in this difficult time.
We hope there is a swift resolution to this situation so those affected find employment and stability as soon as possible.
2. Former VW compliance executive arrested in the aftermath of diesel emissions scandal
The Department of Justice cracked down on Volkswagen (VW) this week, bringing to a close last year’s high profile diesel emissions scandal, with VW agreeing to pay a settlement of $4.3bn to US authorities, and six current and former executives of the corporation charged in relation to the investigation.
Monday brought news of the arrest of Oliver Schmidt who, during the period in which emission tests were rigged, acted as VW’s head of the US compliance team. He has been charged with fraud and conspiracy, after US officials claim he was fully aware that the allegations made when the scandal broke were correct, but continued to conceal the truth about their vehicles. The five other executives charged are based in Germany, but it has been deemed unlikely that they will be extradited.
As the week went on, it resulted in further fallout from the scandal, as the automotive company announced it plans to pay penalties totalling $4.3bn (£3.5bn) and plead guilty to three felonies. These include “participating in a conspiracy to defraud the United States and VW’s U.S. customers”, being “charged with obstruction of justice for destroying documents related to the scheme” and “importing these cars into the U.S. by means of false statements about the vehicles’ compliance with emissions limits”.
Unfortunately for VW the blows don’t stop there. In the UK, 10,000 VW owners filed a class action lawsuit on Monday against the German carmaker, requesting £30m in compensation. Harcus Sinclair, the law firm acting on the suit, has claimed that owners should be compensated because they paid extra for what they thought were clean diesel cars.
The continuous aftermath VW have been faced with after getting caught rigging diesel emissions tests 14 months ago is a clear example set by both US and international regulatory authorities and officials of the severity of the consequences businesses can encounter. Not only have they dealt with harsh financial ramifications and a tarnished brand reputation, but the authorities are also making it known that the rules on individual accountability for wrongdoing will be enforced, which once again reinforces the importance for all corporate institutions in maintaining robust regulatory and compliance systems.
The US authorities are persisting with the approach they have taken with certain financial institutions who have attempted to manipulate markets by handing out much more severe penalties and higher fines on European institutions, in comparison to smaller fines issued by less aggressive EU regulators. However, with the US inauguration of its 45th president Donald Trump taking place next week, his strong views and opinions on global institutions and overregulation of the markets could be a sign of incoming leniency to these rules.
Movers & Shakers of the week
Appointments
113 take silk in latest round of QC appointments
Partners from numerous City law firms, including Freshfields Bruckhaus Deringer, Herbert Smith Freehills, King & Spalding and Skadden, Arps, Slate, Meagher & Flom have been included in this year’s QC appointments.
Eric Nitcher has taken the top legal role at BP, rising from America general counsel to global legal chief as he replaces current head Rupert Bondy, who departs for Reckitt Benckiser
Freshfields has chosen new global heads for their M&A practice
London-based Bruce Embley and NY-based Matthew Herman are both appointed global co-head of M&A for Freshfields Bruckhaus Deringer
Lucozade look to appoint new GC
Current general counsel for Lucozade Ribena Suntory Mollie Stoker has decided to take on a new position internally, leaving the soft drinks brand to search for a new legal head
Moves
Legal shake-up in the media industry
Marcel Apfel, former general counsel for Ministry of Sound, has decided to join brand management company Iconix as the vice president for international legal
Sole Singapore partner exits O’Melveny
Nathan Bush departs from O’Melveny & Myers’ Singapore office to join DLA Piper as their Asia head of investigations in Singapore, leaving O’Melveny’s office with two associates.
KWM’s funds specialist joins US firm
O’Melveny & Myers’ gains King & Wood Mallesons’ European head of funds Jonathan Blake in London
KWM’s five-strong Paris team to join Goodwin Procter
Five lawyers from King & Wood Mallesons’ Paris office will be joining Goodwin Procter, which will include the firm’s co-head of international funds Arnaud David
Dechert boost competition offering in Brussels
Cadwalader Wickersham & Taft’s managing partner for Brussels Alec Burnside is set to join Dechert, taking with him special counsel Anne MacGregor, who joins as a partner, and associates Marjolein De Backer and Adam Kidane
Office openings & closings
Ince & Co opens third French office
Ince & Co launches an office in Marseilles with the hire of lawyers Fabien d’Haussy and Laurianne Ribes, who specialise in shipping and transport
Macfarlanes launches Brussels office
Macfarlanes has opened an office in Brussels after having hired a three partner competition team from King & Wood Mallesons in Cristophe Humpe, Tom Usher and Cameron Firth
Dentons expands in Mexico and Barbados
Dentons launches its second Mexico office in Monterrey, whilst bolstering its Barbados offering with the hire of partners Charles Gagnon, Rosalind Bynoe and Ruan Martinez
Bircham Dyson Bell acquires new Cambridge office
Bircham Dyson Bell have gained a nine lawyer real estate team from King & Wood Mallesons along with the firm’s Cambridge office, led by partner Simon Burson
Herbert Smith Freehills plans an office opening in Malaysia later this year, expected to consist of two partners and four lawyers
Partner promotions
Reed Smith promotes 25 to partner globally, with five in its City office
Hello and welcome to the Fides Weekly Update. Take a look at this week’s key trends, moves and developments in legal and compliance.
Tweet us @Fides_Search to let us know your thoughts.
This week:
1. Trio of global banks faces €485 million in Euribor fines
Following a five-year long investigation, EU regulators have fined JP Morgan, HSBC and Credit Agricole a total of €485 million for colluding to manipulate the Euribor benchmark rate.
Competition authorities in Brussels have undertaken a lengthy probe investigating rate-rigging of the Euro Interbank Offered Rate (Euribor), Libor’s European counterpart, which began with Barclays alerting the European Commission of misconduct and subsequently reaching a multi-state settlement over Libor and Euribor rate-rigging charges. In 2013, a proposed settlement of €820 million was also imposed on and accepted by Deutsche Bank, Société Générale and Royal Bank of Scotland.
All seven banks have now been fined for entering into a cartel and colluding to manipulate the Euribor rate, which breaches EU antitrust rules and can generate massive gains for the banks, given the volumes they are trading. Credit Agricole, JPMorgan and HSBC refused to join the multi-bank settlement served in 2013 and EU regulators have finally managed to issue fines for the three remaining institutions.
JP Morgan was fined €337m, HSBC €33m and Crédit Agricole €114m. These were all calculated based on their time involved in the cartel and the value of products involved.
However, all three banks continue to deny wrongdoing, with each respective institution issuing a statement declaring as such. JPMorgan states it “did not engage in any wrongdoing with respect to the Euribor benchmark,” whilst Credit Agricole argues it “firmly believes that it did not infringe competition law” and HSBC said it “did not participate in an anti-competitive cartel.”
American magazine Forbes have also argued that the banks shouldn’t necessarily be fined for cartel activity, maintaining that it wasn’t organised manipulation between the banks that took place, but rather collusion and market manipulation amongst individuals working within these institutions.
Regulators around the globe have spent the last decade focusing their efforts heavily on currency market manipulation. Since the beginnings of suspected misconduct in 2003, fines have been levied against a dozen banks for benchmark manipulation with the total value reaching around $9 billion. Over 20 traders have also been individually charged for wrongdoing.
Nonetheless, penalties for the alleged manipulation of the $5.3 trillion forex market remain to be distributed, with Margrethe Vestager, the EU’s competition commissioner, said to be in the process of developing a cartel case against multiple banks for FX rigging.
With the mounting evidence obtained by investigators, it is expected incoming forex fines will exceed anything previously given for rate rigging. Such fines have now become common place within banking and these market tremors are set to reverberate for years to come. While significant regulatory change and compliance frameworks have been implemented over the years, we are yet to see how effectively institutions have implemented the measures to prevent or at least mitigate the risk of wrongdoing. Collusion between traders or a lone wolf is always a threat, but now with a highly sophisticated surveillance techniques and the severe personal penalties for stepping over the line, hopefully these incidents will be few and far between and institutions can continue to rebuild their reputations for the future.
2. Innovation, Innovation, Innovation
Innovation was the talk of the town this week, with Barclays and Linklaters introducing new schemes to assess how they can work in more innovative ways and bring greater value to their customers and clients.
Barclays announced the launch of a new innovation panel with six of the bank’s core legal advisers, including Ashurst and Simmons & Simmons.
Selected based on their use of legal project managers, collaboration with other law firms or services providers, sophistication around pricing arrangements and thought leadership, the aim of the panel is not to pitch firms against each other but provide an environment in which legal innovation can flourish.
The innovation panel was the brainchild of the commercial management team, led by Stephanie Hamon and Chris Grant, which also oversaw the bank’s panel process earlier in the year which saw its legal line up slashed by 60% to 140 firms.
The bank is already working on various projects as a result of the panel, such as apps relating to regulatory changes associated with Brexit, as well as the hiring and training of legal project managers to sit within law firms.
Meanwhile, Linklaters have set up a partner-led global innovation team to oversee the firm’s use of technology.
Led by a trio of partners including Paul Lewis in London, Sophie Mathur in Singapore and Christian Storck in Frankfurt, the team coordinate developments with different practices across the firm, working with ideas from partners, associates and trainees.
Some of the current firm-wide initiatives include working on AI projects, as well as a pilot program teaching lawyers the basics of coding and blockchain.
‘It’s absolutely something general counsel are looking for,’ said Paul Lewis, upon commenting that clients were looking for more from law firms to drive innovation and efficiency.
These are promising signs made by client and law firm alike to harness greater innovation in the sector.
With in-house counsel being universally challenged to do more with less, this presents both a challenge and opportunity for panel law firms in the constant drive to increase their efficiency.
Through fostering innovative thinking, law firms have the ability to offer solutions beyond that of traditionally delivered legal advice that will lead the way legal services are perceived and accessed by clients.
These solutions hinge on the development and use of technology to make legal processes more efficient, and save time and money for clients.
The best route forward, as witnessed here with Barclays, is for law firms to collaborate with clients to take their ideas for better productivity and innovation forward, and in so doing prompt further change and innovation in the sector.
To read more on this topic, check out our blog Collaboration: The Vital Ingredient to Law Firm Success by Directors Philip Burdon and Tom Spence
Movers & Shakers of the week
Moves
RBS loses divisional legal chief to property fund Valad Europe
Robin Macpherson joins Valad Europe as Head of Risk
Noerr hires 11-strong team in Warsaw led by ex-White & Case head
Noerr has added an 11-strong team of fee-earners in Warsaw, including former White & Case Warsaw Poland managing partner Witold Danilowicz.
Quinn Emanuel takes fraud heavyweight Hastings from Addleshaw Goddard
Fraud specialist Mark Hastings joins Quinn
Simpson Thacher antitrust head joins Weil Gotshal
Kevin Arquit, antitrust head and former CC rainmaker joins Weil Gotshal & Manges
Shearman private equity partner duo resurface at Goodwin Procter
Former Shearman & Sterling private equity partner duo Mark Soundy and Sarah Priestley are set to join Goodwin Procter
Simmons hires former UBS GC for financial institutions team
Former UBS EMEA group general counsel Andrew Williams joins Simmons as a senior consultant
Squire Patton Boggs hires WilmerHale team in Frankfurt
Former Frankfurt managing partner Reinhart Lange, Christofer Eggers and Eva Schalast are joining Squire Patton Boggs along with a five-strong brand management team
Office Openings & Closings
PwC launches Singapore foreign law practice
Hello and welcome to the Fides Weekly Update. Take a look at this week’s key trends, moves and developments in legal and compliance.
Tweet us @Fides_Search to let us know your thoughts.
This week:
1. Continual shift of the law firm landscape: A week of mergers
This week has seen the momentum of law firm mergers rise with significant force and with it the continuation of change within the legal landscape in the UK and globally.
Following the three way tie up of CMS, Nabarro and Olswang, this week it has been announced that Addleshaw Goddard have approved a merger with HBJ Gateley and Holman Fenwick Willan’s acquisition of Texas firm Legge Farrow Kimmitt McGrath & Brown. The news has also broken of Dentons and Greenberg Traurig circling a merger with KWM’s European business, whilst other suiters for larger portions of the business also lie in wait. Add to this Eversheds’ proposed tie up with US firm Sutherland Asbill & Brennan and we can conclude that this week has been a busy one.
Trying to pick through all of this in one go would be unachievable and with the continual press picking apart poor KWM in recent weeks, we have decided to take a closer look at the Eversheds tie up in what could be significant news for the UK mid-market.
It is well known that Eversheds have been seeking out a US merger, with the firm previously reported to be in talks with Foley & Lardner, which failed to result in a tie-up last year. Tuesday’s news of merger talks between Eversheds and Atlanta-based Sutherland has shown much more potential, as equity partners at each of the respective firms have been presented with the proposal and are expected to vote on the 16th December.
The transatlantic tie-up, which would sit under the name Eversheds Sutherland, would house over 2,300 lawyers in 61 offices across 29 countries. Their combined revenue could total over $900 million, placing them amongst the top 40 largest law firms in the world (by revenue) and would represent a significant shift within the shape of the UK mid-market, much in the way the Silver Circle changed, or some might say dissolved, with the mergers of Norton Rose, Lovells and Herbert Smith.
The merger appears to be one of equals, as even though Eversheds is larger in terms of capability and breadth of offering, Sutherland is more profitable. Bloomberg has therefore posted that that the new entity would be overseen by a global board, with equal representation from each existing firm.
Eversheds’ core practice areas include real estate, company commercial law and consulting, which would complement Sutherland’s expertise in energy, financial services, intellectual property and litigation. It also allows Eversheds to gain a much desired US presence whilst Sutherland can benefit from the UK firm’s extensive international network.
Given a successful partner vote, the merger could go live as early as January as will HFW’s tie up with Legge Farrow Kimmitt McGrath & Brown (3rd January 2017).
Whilst the number of mergers or merger talks hitting the news in the last week has been significant, it is not unsurprising given the circumstances within the legal marketplace. In the case of Eversheds, it could be said that this is a traditional UK or regional UK firm who have developed their business both domestically and internationally in such a way that they are now able to become a truly global brand within the mid-market. This move takes them clearly away from their traditional, regional routes and onto the world stage as a top 40 firm, a credit to their leadership team. Others have not been as lucky however, as the situation at Olswang and KMW demonstrates that the question of ‘merge or die’ will only ring louder around UK firms’ corridors following this week’s news.
2. Report finds number of female leaders stagnates in asset management
The number of women running investment funds globally has not increased since the financial crisis, a new research report by data provider Morningstar found this week.
Only one in five funds has a female portfolio manager the study found, which examined more than 26,000 funds across 56 countries. However, the problem was particularly acute in the US, Germany, Brazil, India and Poland where one in 10 funds or fewer have female managers.
The data also showed that women are 74 per cent more likely to run a passive fund that tracks an index compared with one that tries to beat the market, suggesting gender balance could be improved if we were to see a structural shift towards passive management. Assets managed in passive mutual funds have grown four times faster than traditional active products since 2007 and now stand at $6 trillion globally.
This mirrors other recent research, with Citywire finding that just 10% of the world’s fund managers are women after an analysis of its global fund manager database in May.
Women’s share of the $13 trillion (£8.9 trillion) retail asset management industry rose slightly in terms of the number of investment funds managed by teams that included women (14%), however only 7% of funds were run by a female manager on her own.
Following this, City Hive – an industry network for women – was launched this week with the support of 15 asset management and investment firms.
This sits alongside other initiatives such as The Diversity Project, which aims to ensure diverse recruitment across the asset management industry in terms of gender, ethnicity, socio-economic background, age, sexual orientation and disability.
In August, BlackRock also shared its diversity data for the first time, marking a breakthrough for gender equality. This was followed by a commitment from six other fund houses – Franklin Templeton, Fidelity International, Amundi, Baillie Gifford, Union Investment and Capital Group – to also publish their diversity statistics and make their businesses publically accountable to change.
These statistics show that, although the pipeline of women moving into fund management is improving, the proportion of women seeking the chartered financial analyst (CFA) qualification rose to 37% last year, up from 29% in 2008 – firms are still struggling to retain top level female talent.
This is of critical importance as research has overwhelmingly found that more diverse organisations – in terms of gender or otherwise – are more successful financially. Greater diversity and inclusion is a business imperative for firms wishing to stay competitive in the global marketplace.
This holds true for asset management and financial services in particular, as regulatory change has issued in a more risk-averse era with a greater focus on customer outcomes. Furthermore, several studies have shown that female fund managers did better than men on a ‘risk adjusted’ basis, with men putting in some of the best and the worst performances.
As such, despite asset management being a great career option for women, currently there is not enough of them as firms struggle to retain and progress their female talent. Hopefully these findings from Morningstar will help create greater impetus for change as asset management firms continue to address the need for greater gender equality in their sector.
Movers & Shakers of the week
Moves
Standard Chartered hires divisional GC
Barclays star regulatory lawyer Chris Allen will move to Standard Chartered as its general counsel for clients and products
Magic circle PE rainmaker joins US firm
Allen & Overy private equity partner Michael Bernhardt moves to Milbank, Tweed, Hadley & McCloy’s corporate department in Frankfurt
DAC Beachcroft gains four-strong personal injury team
Four partners from Clyde & Co’s personal injury team have joined DAC Beachcroft. Partners Danielle Singer, John Goodman and Nigel Adams are based in London, whilst partner David Knapp is based in Guildford.
Freshfields makes corporate hire in the US
Corporate partner Aly El Hamamsy has left Cadwalader Wickersham & Taft to join Freshfields Bruckhaus Deringer in New York
Mischon sees rare partner exit
Partner Helen Croft exits the employment team at Mischon de Reya to become COO and GC at communications agency Mission Media
Sidley Austin expands City restructuring team
Linklaters restructuring partner Yen Sum departs the magic circle firm to join Sidley Austin in London
Mergers & Alliances
Holman Fenwick Willan to merge with US boutique Legge Farrow Kimmitt McGrath & Brown
Eversheds in talks for a US tie-up with Sutherland Asbill & Brennan
Shoosmiths merges with local firm McManus Kearney in Northern Ireland
DWF also gains Belfast offering, merging with C&H Jefferson
Addleshaw Goddard set to merge with Scottish firm HBJ Gateley
Partner Promotions
Herbert Smith Freehills promote five to partnership in Australia
Hello and welcome back to the Fides Weekly Update. This week we’re discussing KWM’s troubles and what we learned from the FCA’s Asset Management Review. Don’t forget to scroll down and take a look at our Movers & Shakers of the week.
Follow us on LinkedIn for regular market updates
This week:
1. Integration gone wrong: European partners fail to back KWM recapitalisation plan
Global giant King & Wood Mallesons has dominated the legal press this week as news emerged that European partners failed to commit to the firm’s recapitalisation plan, rejecting to secure additional funding from the Asia-Pacific business.
Only 21 of KWM European partners agreed to commit to the plan, which was far below the 70 partners (60%) required to raise £14m in extra funding to secure the bailout from China, which also tied partners to a 12 month lock-in.
This was despite European partners being warned at the start of the week that they might have to pay back two years’ worth of profit contributions should the bailout deal not go ahead.
Initially paused in October due to a raft of senior partner exits, the recapitalisation plan would have guaranteed that equity partners received at least £11,000 per equity point in remuneration, despite the financial difficulties in Europe. This would have equated to an additional £220,000 to £660,000 dependant on a partners position in the firms’ 20-60 point lockstep.
Had the recapitalisation gone ahead, the combined funds would have been used to pay down some of the partnership’s debt, to provide working capital and to guarantee European partner earnings at a minimum level.
With partners within the European arm initially agreeing to a £14m recapitalisation in the summer, commentators suggest that it was the provision that partners could not leave the firm for 12 months that ultimately led the majority of European partners to reject the plan.
As a result, this has put the future of the firms’ European arm into question, with KWM’s management team scrambling to find alternative solutions, including mergers.
Despite this, many in the market believe that finding a suitable merger partner will be difficult to achieve, given the level of debt (understood to be around £35m) and stark lack of buy in from partners.
The failed recapitalisation plan raises serious questions about the global KWM project, and what to do next following the reputational damage to the firm.
European partners have sent a strong message to Asian management in rejecting plans to recapitalise the firm, forcing them to find other solutions. On the other hand, it is questionable to how well the firm’s Asian-based corporate and finance practices could operate without a solid base in London.
Where this leaves KWM in Europe is clear, and how the firm chooses to redevelop and build is yet to seen. However, without a merger partner for the European business, rival firms will continue pick at their failing partnership until KWM Europe is either no longer or certainly no longer in the news
Pre-merger SJ Berwin, we’re once a hugely well regarded firm in the City, who unfortunately by chasing growth through merger have been left exposed and subsequently depleted.
The potential lesson for other UK firms is to look at all options regarding growth rather than focussing on mergers alone as KWM are not the only firm who have hit difficulties following rapid expansion through merger.
2. 4 key points from the FCA’s Asset Management Review
It’s been a stressful week for fund managers as they begin to prepare themselves for the aftermath of the FCA’s Asset Management Review.
In a critical review of the industry, the regulator expressed their dissatisfaction with how investors are treated, hinting that there may be an overhaul of fee structures being introduced that will make it fairer and simpler for customers to invest.
Here are some of the key points outlined in the review:
Active funds under scrutiny
Actively managed funds have been hit the hardest by the interim report, as it declares that active funds often don’t outperform their benchmark, but continue to charge high fees and secure large profits. The FT has listed those who specialise in active funds and could be most affected by upcoming changes include Jupiter, Henderson, Schroders, Aberdeen and Ashmore.
Changes to charging structures
Achieving transparency of costings for customers is the key objective, says the FCA. They aim to make costs easier to compare between fund houses, allowing more investors to individually seek better value for money. The regulator plans to address this, as “investors are not given information on transaction costs in advance, meaning that they cannot take the full cost of investing into account when they make their initial investment decision.”
Under new conditions, asset managers could be required to consider formulating alternative fee-structures, and reevaluating current fees incurred by investors, which not only includes transaction costs, but also ‘box profits’.
The “all-in fee”
The review also references to the potential introduction of an “all-in fee”. It offers multiple ways that this new structure could be implemented, one of which is to package up both the transaction costs and fixed fees that fund houses charge. It would benefit customers by giving them a clear upfront image of the cost of investing, whilst also ensuring that fund managers absorb any extra costs incurred.
Shift away from “dinosaur investment products”
Increasing competition will be another focus for the FCA. The review claims there is “weak price competition in a number of areas of the asset management industry” and not enough incentive for investors to switch between funds and asset managers to get better value for money.
Hargreaves Lansdown senior analyst Laith Khalaf argues that there are billions of pounds invested in “dinosaur investment products” and individuals should be encouraged to review their investments. These products have been criticised over the last year for failing to produce sufficient returns and for being ill-suited to the modern investment marketplace. The regulator is hoping to provide tools to allow investors to more easily search for alternatives investment opportunities.
Many are speculating that the outcome of this interim report will be damaging to asset manager profits. Those most disadvantaged will be managers in the active funds space, who will be anticipating an overhaul of their fee structures and should ready themselves for the “all-in fee” which, depending on how it’s implemented, could significantly impact their revenue. However, Daniel Godfrey, former chair of the Investment Association, believes the incoming changes may prove beneficial to some: “This won’t be good for everyone — the weak asset management companies will die. But if margins come down and the overall pool of assets gets bigger, profits can be higher.” Whether or not this is case, it’s fairly likely that the FCA could shake-up the industry, bringing about a more transparent and competitive investment environment.
Movers & Shakers of the week
Appointments
New York Times gain new GC
The New York Time Company will promote their deputy general counsel Diane Brayton to the role of GC in January next year
Freshfields PE head promoted to lead sector group
Adrain Maguire will leave his role as head of private equity as Freshfields Bruckhaus Deringer to become the new head of their global financial investors (GFI) sector group
Moves
Dechert expands Middle East capability
King & Wood Mallesons corporate and M&A partner Hamish Walton has exited their Dubai office to join Dechert, leaving KWM with only five partners in their local office
Freshfields M&A heavyweight moves to US firm
M&A partner Ben Spiers leaves Freshfields Bruckhaus Deringer for Simpson Thacher & Bartlett in London
Office Openings & Closings
Norton Rose Fulbright launches Papua New Guinea office
Partner promotions
Weil, Gotshal & Manges promotes 13, two in London
Simpson Thacher & Bartlett makes up 11 with two in the City
Hello and welcome to the Fides Weekly Update. Take a look at this week’s key trends, moves and developments in legal and compliance.
Tweet us @Fides_Search to let us know your thoughts.
This week:
1. Asset managers to help recover costs of MiFID II
The FCA released a paper on Wednesday announcing that wealth and fund firms will assist in settling the costs incurred in introducing MiFID II.
In a consultation paper labelled CP16/33 Regulatory fees and levies: policy proposals for 2017/18, the FCA has proposed a plan to increase fees to recover the costs of bringing in the EU’s Markets in Financial Instruments Directive (MiFID II). The paper has declared that the firms most affected by MiFID II will be the ones paying for it.
Financial services companies are allocated into different fee blocks depending on what services they offer. The FCA are yet to decide the proportions of how much each fee block will contribute, but it is expected that portfolio managers, fund managers and pension scheme operators will all be incurring these fees.
The FCA have stated: “When we complete cost recovery in 2018/19, we expect to have sufficient information to moderate the allocations for fee-blocks with lower proportions of firms benefiting directly from MiFID II. We will set out the final position in spring 2018.”
Along with the cost recovery of MiFID II, the paper also touched on changes to the fixed fee rates that asset managers are normally charged.
Firms currently pay a minimum fixed-rate of £1,067 for service companies with incomes up to £100,000. The paper proposes a plan to retain the minimum fixed-fee rate of £1,067, and add a variable rate fee of £1.80 per every extra £1,000 of income.
With MiFID II not coming into play till January 2018, asset managers are already seeing the effects of the new regulation. These fee increases are only the latest notice of MiFID II costings, with news breaking last month that the incoming regulation’s new research rules will also be hitting asset managers’ bottom lines.
It is still unknown exactly what impact MiFID II will have on wealth and fund firms, but one expectation is that the regulation could result in a reduction in the range of investment choices available to customers. Perhaps this, along with the aforementioned costings, could hit the asset management industry harder than initially expected.
In addition to MiFID II additional costs and the announcement today of the initial suggestions of the FCA’s Market Study into asset management, it looks as though the asset management industry will have to bring in new innovative ways to draw investors and remain competitive in terms of pricing.
2. Three-way merger takes a toll on Olswang
As the infamous three-way merger between CMS Cameron McKenna, Nabarro and Olswang continues to push forward, Olswang is struggling to retain talent with news breaking of a further departure for the firm.
Two partner departures were reported at Olswang this week, with their co-head of patent prosecution Justin Hill exiting for Dentons to lead their European patent prosecution and opposition practice.
The Lawyer then revealed later in the week that the former Asia managing partner Rob Bratby has also opted against joining the mega-merger, departing for City firm Arnold & Porter.
Hill is the second IP partner to be leaving Olswang since the merger was announced after their co-head of life sciences Stephen Reese joined Clifford Chance in October.
These departures could be signs of further exits anticipated during the next few months, not only in IP but across the firm. The firm gave partners until 10th October to sign a lock-in agreement committing to the merger, and those not signing have until May 2017 to move on.
It’s widely reported that Olswang has been struggling to retain partners in recent times, with the firm losing over 30 partners in the last 20 months, as reported by Legal Business. It’s unknown whether these mass departures are as a result of the impending merger or if it could in fact be a lifeline for the firm, allowing partners an opportunity to work on larger deals and broaden their platform.
The three-way merger is just one of a numerous mergers taking place in the legal sector as we witness another wave of market consolidation. Interestingly a recent study by Harvard Business Review has looked into the ways in which abnormally high levels of merger activity can affect industries. It has found that mergers don’t in fact have a discernible effect on productivity and efficiency. Despite this article being a reflection on many industries, the new wave of mergers within the global law firm landscape will mean firms constantly striving for the benefits of economies of scale and strategic synergies through successful integration. As has been seen with CMS Nabarro and Olswang there is always an inevitable fall out at the outset and during the integration phase and time will tell as to the final make up, strength and market reputation of the combined entity.
Movers & Shakers of the week
Moves
Olswang loses patent co-head ahead of merger
Justin Hill, Olswang’s co-chair of the patent prosecution group, is set to join Dentons as the head of their European patent prosecution and opposition practices
Simmons bolsters European IP offering
Simmons & Simmons have hired IP partner Michael Knospe, along with counsel Caroline von Nussbaum and supervising associate Massimo Bellitto-Grillo, all joining the firm’s Munich office from King & Wood Mallesons.
Senior Olswang partner to depart
Former head of commercial telecoms and Asia managing partner Rob Bratby has decided to leave Olswang to join Arnold & Porter
DLA’s Australia managing partner to step down
Australia managing partner at DLA Piper John Weber will be retiring from the firm by the end of April
Mergers and Alliances
King & Wood Mallesons and Morgan, Lewis & Bockius call off merger talks
Dentons ties-up with Costa Rican firm
Fieldfisher merges with Beijing’s JS Partners
Law firms traditionally operated a simple quid pro quo dynamic whereby young lawyers were expected to devote years of their professional life in exchange for the estimable carrot of partnership. Trainees joined prestigious firms following a rigorous selection process which conditioned their mind-set from the very beginning – “I am and will continue to be part of an elite”. Their performance and sacrifices would in time lead to significant kudos and financial reward.
However, the impact on law firm profitability from economic and macro conditions over the past few years has placed this equation under severe strain, and frankly it no longer holds true for most law firms.
The traditional model was predicated on a principal tenet that what is good for the partners is good for the firm as a whole; that the pursuit of profitability which drove the partners would likewise motivate the associates, trainees etc. Inclement markets on a global scale, coupled with the fact that law firms had expanded so drastically pre-2008, have meant that the numbers no longer stack up: there are not enough partner slots to meet the aspirations of talented young lawyers and in many cases the financial upside is not even close to as compelling as it used to be.
As firms grapple with PEP erosion, the issue of career progression has gathered momentum, as associates have woken up to the fact that the risk reward analysis of yesteryear is a myth, and that firms can only deliver partnership to a minuscule proportion of their intake. Accordingly private practice lawyers are re-evaluating what career progression means to them, and indeed more so than ever, whether partnership is worth aspiring to anymore.
In the past associates worked hard to put themselves into a position of contention, with the ‘risk’ that one might not get promoted being mitigated by the idea that you could ultimately move to another firm, potentially into direct partnership, relocate overseas or move into a coveted in-house position. The current reality is that many are opting out of the partnership track altogether, adopting a far more pragmatic stance around work life balance. Associates are no longer willing to work around the clock only to be told by firms that there are 7 to 10 people ahead of them in the queue.
More and more lawyers we speak to say they would rather a more modest but consistent remuneration over a longer period of time, which reflects individual performance and value-add whilst also enabling a better quality of life and a more sustainable working dynamic. Accordingly, decision makers within law firms have to a greater or lesser degree rallied around to find ways to retain talent by providing palatable alternatives to the partnership track while making people feel valued.
This includes increased stratification within the associate lockstep, with the introduction of gateways such as Managing Associate, Senior Legal Advisor and Counsel. There has also been a trend of segmenting the partner lockstep, making it more meritocratic and setting milestones to achieve. These are all moves which strive to balance out the need to retain people through progression and financial incentive while remaining financially viable.
Moving in-house remains a very attractive transition for those who want to move out of private practice completely, however it is no longer a panacea as it used to be, being both risky and less highly remunerated. It is also often perceived as a dead end due to the lack of liquidity of roles we have witnessed over the course of the double/triple dip recession.
Where does this leave us? Law firms have created so many barriers to partnership and career progression that ultimately they have fuelled an alternative market for lawyers outside of the partnership model. Lawyers are having to ‘think outside the box’ more than ever, especially now that the in-house market has contracted and they can no longer default to moving into standard in-house legal roles. We have, and continue to witness, a recalibration of lawyers’ career trajectory with increased diversification into areas like Compliance, Risk Advisory and Investigations. We have also seen greater appetite for entrepreneurial opportunities; where traditionally risk averse lawyers would have shyed away from start-ups, many are willing to take a gamble for fulfilling and interesting roles which may be riskier but potentially offer a more compelling upside. The demographics are evolving such that many of the preconceptions and stereotypes which have infused the legal community for decades are being challenged.
Written by Edward Parker and Shirin Stanley, founding Directors of Fides Search.
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1. A marriage of convenience: Arnold & Porter and Kaye Scholer combine stateside
In the latest example of consolidation in the legal market, Thursday saw the announcement that east coast firms Arnold & Porter LLP and Kaye Scholer LLP are set to combine in 2017. The merger will propel the new 1,000 lawyer firm – with a combined revenue of $1bn – into the top 40 largest firms in the world, with a significant presence in Washington DC, New York and London.
To many commentators the tie up did not come as a surprise, with each firm brining complementary expertise and footprint. With the 700 lawyer Arnold & Porter is known for its litigation and regulatory expertise, headquartered in Washington D.C., whilst at half the size, Kaye Scholer is best known for its financial services and life sciences work and will give Arnold & Porter a long-desired critical mass in New York.
The firms combining might well position the merged firm to improve their financial performance. Last year, Arnold & Porter’s revenue fell 6.4 percent, to $650 million, whilst profit per equity partner (PEP) fell 12.6 percent, to $1.21 million. Kaye Scholer’s revenue also dipped last year, by 1.3 percent, to $370 million, and its profit per partner fell 2.1 percent, to $1.38 million, according to figures from the American Lawyer.
The deal is rumoured to be the largest law firm combination so far this year in the US. While the numbers and scale of the deal has been widely reported, Richard Alexander the current Chairman of Arnold & Porter who is also set to lead the new firm was quoted as saying “We don’t think this is a transaction about size, but instead about partnering with clients” and identifying the synergies of the respective platforms as being vital to the combined firms future.
The combination is the latest in a string of tie-ups involving Global 100 firms in a market that is ripe for consolidation with increasing commoditisation. Earlier this month, Legal Business revealed Morgan Lewis & Bockius is in talks with King & Wood Mallesons, while Addleshaw Goddard and Hunton & Williams have held talks in recent months as well as the well-publicised CMS Nabarro Olswang tie up in the UK. It seems that on both sides of the Atlantic that merger activity, particularly in the mid-market is a constant theme with firms looking to compete on an international footing with the big established players.
2. 22 HNW individuals under investigation from Panama Paper task force
A government taskforce created to analyse the Panama Papers data leak has identified a number of leads that are relevant to a major insider-trading operation, led by the Financial Conduct Authority (FCA) and supported by the National Crime Agency.
The task force has opened civil and criminal investigations into 22 individuals for suspected tax evasion and is investigating the links of 43 “high net worth individuals” with Panama.
It has also identified 26 “potentially suspicious” offshore companies whose beneficial ownership of UK property was previously concealed, established links to eight active Serious Fraud Office investigations and identified nine potential professional “enablers” of economic crime, “all of whom had links with known criminals”.
In the first update to the House of Commons on the progress of the task force on Tuesday, Chancellor Phillip Hammond said that the cross-agency task force set up to analyse the information in the data leak had “added greatly” to the understanding of the ever more complex and contrived structures used to mask offshore tax evasion and economic crime.
The UK’s task force, set up in April with funding of up to £10m, is jointly led by HM Revenue & Customs and the NCA and draws on investigators, compliance specialists and analysts from those two bodies plus the SFO and FCA.
The cross-agency task force was established to analyse all the information available from the Panama Papers, leaked data from leading Panamrian law firm Mossack Fonseca published by the International Consortium of Investigative Journalists.
Over the past few years, the government has increased penalties and introduced new measures to tackle offshore and onshore tax evasion. In the summer 2015 Budget, the Government gave HM Revenue & Customs an additional £800 million to invest in compliance and tax evasion work. This is expected to recover £7.2 billion in tax by the end of 2020/21.
However, despite this, the UK government continues to campaign against the EU to prevent Guernsey, Jersey and British overseas territories from going on an EU blacklist of tax havens, set up by the European Commission to add greater tax transparency in wake of the papers release.
Some financial experts remain sceptical about the number of prosecutions likely to result from the Panama Papers with the investigations still in their infancy. With the average length between opening similar enquiries and passing them onto the Crown Prosecution Service being 44 months, “This is a marathon not a sprint,” a government source told the City A.M.
3. Movers & Shakers
APPOINTMENTS
Finance partner Paul Stacey elected as Slaughter’s next executive partner
Jane Haxby succeeds Peter Crossley as EMEA managing partner at Squire Patton Bogs
MOVES
HSBC Global Asset Management general counsel leaves for top legal role at World Bank
The World Bank Group has recruited HSBC Global Asset Management general counsel Sandie Okoro as its new general counsel (GC)
LOD co-founder Brenner joins Keystone Law to realize future growth strategy
Jonathan Brenner, the co-founder of Berwin Leighton Paisner’s contract lawyer spin-off LOD, is set to join virtual law firm Keystone Law at the end of the month.
Kirkland finance partner John Markland and White & Case private equity partner Ross have joined Dechert’s City base this week
MERGERS AND ALLIANCES
Arnold & Porter and Kaye Scholer confirm $1bn merger deal
US firms set to combine as Arnold & Porter Kaye Scholer on 1 January 2017
Fieldfisher merges with Reed Smith spin-off for Birmingham launch
Fieldfisher has merged with Hill Hofstetter, a 19-partner UK firm with revenue of around £6m that spun off from Reed Smith in 2008.
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1. Process not Politics: High Court rules Brexit will not take place without parliamentary scrutiny
In one of the most constitutional court cases in generations, the High Court has ruled that Parliament must vote on whether the UK can start the process of leaving the EU.
In holding the executive to account, the judiciary has created a nightmare scenario for Prime Minister Theresa May who insisted the government alone would decide when to trigger Article 50, intending to formally notify the EU of the UK’s intention to leave by the end of March.
Within minutes of the ruling by the Lord Chief Justice and two other judges, Liam Fox, the international trade secretary, told the House of Commons that the government would appeal to the Supreme Court, scheduled to take place on 7-8 December.
The legal dispute focused on the interpretation of the wording of Article 50 of the treaty on European Union, which says any member state may leave “in accordance with its own constitutional requirements” – an undefined term.
Nevertheless, in the landmark ruling the three judges looking at the case unanimously, rejected the government’s argument that it could use its “prerogative”, or executive powers to trigger withdrawal under Article 50.
They added that triggering Article 50 would fundamentally change UK people’s rights – and that the government cannot change or do away with rights under UK law unless Parliament gives it authority to do so.
This has huge implications on both the timing and terms of Brexit, and could make any future deal subject to parliamentary control.
As for now, questions remain as to whether the Supreme Court will uphold the decision – most definitely causing the PM’s March timetable to collapse – and if so, if Parliament are likely to vote in the same way as the people. Despite the majority of MP’s voting against Britain’s exit, many of them represent constituencies that wanted to leave.
Although the nature of how parliament will be consulted remain unclear, critics argue that triggering Article 50 as a result of an act of parliament would steer the UK towards a ‘softer’ exit with more ties to the union and a more open immigration policy.
Whatever the decision of the Supreme Court, the significance of this ruling lies in its interpretation of the law in spite of the pressure of politics. With the constitutionality of the Government’s right to trigger Article 50 unfounded, and the future impact of this yet to be foreseen, ultimately this case represents democracy in action as an independent judiciary holds executive powers to the account of the people.
2. Former BlackRock manager pleads guilty to insider trading
A former BlackRock manager has pleaded guilty to insider dealing as the FCA turn their attention back to investigating those who trade using inside information.
Ex-BlackRock portfolio manager Mark Lyttleton appeared in Southwark Crown Court on Wednesday where he pleaded guilty to two counts of insider dealing, using information he gathered during his time at BlackRock.
Lyttleton gained knowledge of a proposed takeover of EnCore Oil by Cairn Energy in October 2011 whilst sitting in the Fundamental Equity Team at BlackRock. He then traded in securities related to these companies, amounting to 175,000 worth of shares, which was conducted through an overseas asset manager trading on behalf of a Panamanian registered company. The indictment also claims that Lyttleton subsequently dealt in call options after also learning of Cairn’s discovery of oil in Greenland.
In the UK, the maximum sentence for insider trading is seven years, although the judge presiding over the case has declared that Lyttleton’s early plea will be taken into account. He is due to be sentenced at Southwark Crown Court on 21st December.
During his stint at the global investment management firm, Lyttleton was tipped to be one of their rising stars, with colleagues particularly commending him for his management of BlackRock’s UK Dynamic and Absolute Alpha portfolios. He left the fund manager ahead of his arrest in 2013, for reasons unrelated to the investigation, the FT reports.
The FCA first prosecuted for insider trading in 2008 and has racked up a total of 30 convictions relating to the crime to date. The regulator handled one of the UK’s largest cases for insider trading earlier this year, which resulted in four convictions and three acquittals. Labelled Operation Tabernula, the case brought about a record four year prison sentence for ex-Deutsche Bank MD Martyn Dodgson and was the first major investigation for the FCA following the extensive probes into the manipulation of Libor rates.
This guilty plea comes at a time when the FCA is carrying out an extensive review of the asset management sector, focusing on competition between buy-side institutions and the sustainability of its regulatory regime. The review, due to be published in early 2017 will no doubt produce areas of concern and weaknesses, that will need to be addressed.
Movers & Shakers of the week:
Appointments
TLT head to lead the firm for 18 years
TLT managing partner David Pester has been re-appointed in his position for a further three years, which will bring his total number of years leading the firm to 18
Ropes senior partner set to retire this year
Maurice Allen, Ropes & Gray’s co-founder of the London office and senior partner, has announced his retirement will take place at the end of the year. His replacement is yet to be announced
Asahi Europe appoints new head of legal and company secretary
Former group senior counsel Edward Perks is promoted to head of legal and company secretary after having acquired European beer makers SABMiller
Linklaters makes changes to senior management of their corporate team
Newly appointed head of corporate at Linklaters Aedamar Comiskey has given three corporate group head roles to Simon Branigan, Nick Rumsby and Iain Wagstaff.
Moves
Legal AI start up gains former magic circle managing partner
Artificial Intelligence start up TagDox has added former Linklaters managing partner Tiny Angel to its advisory board
Santander UK hires new COO and legal and regulatory counsel
John Bennett has departed his role as GC at the Bank of Ireland to join Santander UK as their senior counsel for legal and regulatory as well as their chief operating officer
KWM loses five lawyer team in Germany
King & Wood Mallesons’ German banking and finance head Sabine Schomaker will be joining Taylor Wessing along with fellow partner Clemens Niedner plus one counsel and two associates
Cooley gains new member of global management committee
London tax partner Natasha Kaye has been appointed a position on Cooley’s global management committee
PwC Legal gains six new partners in Sydney and Melbourne
PwC Legal has hired six new partners in Sydney and Melbourne including Clifford Chance Australia co-founder and DLA Piper’s former Australia head
Freshfields partner joins Matrix Chambers
Raj Parker is leaving his roles as dispute resolution partner at Freshfields Bruckhaus Deringer to join Matric Chambers as an associate member
HSF bolsters Paris real estate capability
Real estate partner David Lacaze, along with one associate, leaves Paul Hastings’s Paris office to join Herbert Smith Freehills
W&C has added three more HSF partners to its Australia offering
Senior associates Adeline Pang and Ged Cochrane, and special counsel Michelle Keen are all leaving Herbert Smith Freehills to join White & Case in Melbourne as partners
Office Openings & Closings
Norton Rose sets up in Monaco
Norton Rose Fulbright will be opening an office in Monaco early next year in a bid to grow shipping practice
Mergers & Alliances
Simmons & Simmons sign on to a joint law venture with Singapore firm JWS Asia Law
Partner Promotions
Latham & Watkins announces a global promotions round of 27, including two in London
I’m almost at the end of my work experience at Fides Search, and after a week I have developed a detailed insight into the UK legal market. Currently in the process of applying to university to study Law, naturally I had to look into the trends associated with this year’s partner promotion rounds to have an idea of what awaits me in the future.
1. Social Mobility in the Magic Circle
April saw the completion of partnership promotion rounds in the magic circle, with Allen & Overy, Clifford Chance, Freshfields, Linklaters and Slaughter and May all publicising who had joined the upper echelons of their firms in 2016. With 40 new partners revealed, despite now being “at the top” of their profession, where did these lawyers start out? The most recognizable names on the list were University of Cambridge and University of Oxford, with almost half (19 out of 40) of the new partners graduating from these institutions. Other institutions commonly drawn from include the University of Edinburgh, University of York and University of Leeds with a number of new partners having also studied overseas.
Nevertheless, despite working hard to improve social mobility within the sector, we can still see some firms performing better than others in terms of the educational backgrounds represented in their promotions. Allen & Overy seem to achieve the best representation in making up only one new partner from Oxbridge. Slaughter and May and Clifford Chance have the least amount of variation in the backgrounds of their partners. Over half of the new partners from Slaughter and May (6 out of 10) graduated from either Cambridge or Oxford, whilst the figure was 5 out 8 at Clifford Chance.
2. Gender Diversity in legal partner promotions
With 60% of new solicitor admissions being women, law firms continue to struggle in transitioning this representation into partner promotions and senior positions. This issue can be clearly seen in the number of the major law firms in the UK, as female partnership numbers stand at 17% in the top 10 law firms.
For example, although the overall representation of gender at Slaughter and May a is balanced with 52.2% of employees being women, Diversity and Inclusion Statistics from 2015 show a clear disproportionality between men and women in partnership. Almost three quarters of new partners are men, with only one women being promoted to partnership in 2016 out of an 11-strong promotions round, an example typical of many other UK firms.
Nevertheless, there are signs that progress is being made with White & Case performing exceptionally well in their promotion of women compared to other legal firms this year. Globally, 40% of the firm’s promotion round were women which included four out of the eight partners made up in London. This 50/50 split in partnership promotions shows other firms the potential of developing female lawyers internally.
3. Partnership promotions across the Globe: Linklaters Case Study
The promotion of partners in different jurisdictions, as well as the practice areas of the lawyers made up, reveals an awful lot about market conditions and individual law firm strategy. In taking Linklaters as an example, the firm promoted 24 new partners worldwide this year following a fluctuation in partnership promotions in 2010 and again in 2014. Noticeable trends include the lack of investment in South Africa since 2010 and no promotions in the Middle East since 2014. The number of partner promotions has decreased in most locations including Europe, USA, South America and Middle East. Only the number of promotions in London and Asia have increased since 2010, which coincides with the expansion of these offices.
Linklaters has seen the majority of its partner promotions in the London office, with over 60 partners made up between 2008 and 2016. The second most popular office, is Hong Kong with only 18 promotions. Therefore there is a massive difference between first and second place, which coincides with the global strategy of many law firms in the City to consolidate their London base. Moreover, promotions at other offices – such as Paris, Brussels, Moscow and New York – only range between 5 and 15.
Conclusion
Through the analysis of partner promotions, key trends can be seen into the legal market regarding a firm’s progress on the social mobility and gender diversity of its workforce, alongside insight into its international strategy and future plans. Despite this, the consistency of partner promotions across the sector indicates a healthy and competitive market and an exciting prospect for those planning on entering the profession.
Written by Sandra Mikosinska, Economics, Psychology and English Language & Literature Student at Westminster Kingsway College
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This week:
1. Upcoming trends in the legal sector: PwC Annual Law Firm’s Survey Released
This week saw the annual release of the PwC Law Firms Survey, which marks its 25th anniversary this year. One of the most extensive insights into the UK legal sector, this week’s newsletter highlights the report’s key findings and suggests how this will impact future trends in the industry.
Overall, the survey found revenue and profit growth in 2016 to have been modest, reflecting challenging market conditions and a sector saturated with supply outstripping demand. Whilst global fee income increased across the board, the Top 10 at least, this was attributable to foreign exchange rates.
There has been continued growth in UK revenues across most firms, although achieving profitable growth across the sector has been challenging, with all bandings in the Top 50 firms reporting reduced net margins. The same also holds true for the expansion of UK firms into North America, with average margins being as low as 10% in comparison to 35% last year.
Key challenges to net profit include continued pressure from clients for fixed or contingent fees alongside higher staff costs as a result of increased headcount and/or increases to base salaries to attract and maintain top talent.
The survey found PEP performance to be flat (on average) across the Top 50 firms, whilst the profit performance of the Top 25 continues to lag significantly behind that of the Top 10. This suggests further consolidation of the mid-tier, with firms reconsidering their global strategy in terms of structure and international coverage.
Regarding people, firms have continued their focus on recruitment into 2016 with headcount increasing both domestically and internationally in Top 50 firms. Increased demand for top talent and the influence of US firms within the London market has led to inflated salary costs, with average full-time fee earner cost increasing by 10% in the Top 10 and 21% in the Top 11-25.
Greater diversity and inclusion within the sector remain a key theme, with the gender balance at partner level remaining disappointing at 17% and 18% in the Top 10 and Top 11-25 respectively. The introduction of gender pay gap reporting in the UK from next year will force firms to better consider the flow of diversity through their organisations in the future.
Unsurprisingly, the impact of Brexit features heavily on the survey’s findings. Regarding employment, the Brexit vote has clearly influenced firms’ outlook on performance and headcount needs, with some institutions delaying salary reviews or putting in place salary freezes.
As can be seen with the recent fluctuation of the pound, exchange rate movements exacerbated by the global volatility of the Brexit vote, now pose a significant risk to global law firms. Impacting not just financial results, but the remuneration of global partners, inter office transactions and the negotiation of single-currency contracts with clients, law firms need to consider exchange risk and risk mitigation and consider hedging mechanisms to protect against volatility (As seen with the overhaul of associate salaries at Akin Gump)
Information security, in particular cyber-attacks, were also identified as another area of risk that needs to be better managed by law firms, 73% of all firms surveyed suffering a security incident this year – most commonly through phishing attacks (84%) and infection by viruses / software (55%).
Information technology systems also play a critical role in helping law firms identify opportunities to increase efficiency in areas such as pricing and resource management which directly impacts profitability. With the utilisation of technology being critical to enable the future delivery of innovative services to clients, the fact the majority of firms outside the Top 10 do not consider their IT systems to be a ‘strength’ is worrying.
In looking to the future, the survey concluded that it would take positive responses and significant financial investment by law firms to overcome the challenges faced by the sector. In particular, the need to invest heavily in new technologies and processes to streamline workforce models and the management and deployment of resources emerged as key strategic priorities for the future.
As such, the onus is now on firms to be agile in adapting to change and utilising difficult market conditions.
To read the full report, please click here.
2. ‘A very sorry history of scandals’: The FCA opens consultation on future mission
The Financial Conduct Authority has launched a public consultation on its mission statement which aims to set out the organisation’s priorities for the 56,000 firms and the 130,000 approved persons that it regulates.
“Our mission will set out a framework within which we prioritise our work, ensuring we focus our resource in the right places,” said chief executive Andrew Bailey, as the regulator tries to move on from a “very sorry history” of financial scandals and subsequent record-breaking fines.
The mission statement, open for consultation until the New Year, does not intend to relax the regime but rather be clearer on what things meant.
Mr Bailey’s first major policy initiative since taking the job in July, the mission statement does not reposition the FCA as either pro-city or pro-consumer and will serve to guide the agency through the UK’s post-Brexit relationship with the EU.
The document pledges to intervene sooner to protect particularly vulnerable consumers, make regulation clearer and be more active against financial organisations committing misconduct outside of the FCA’s remit (Such as payment protection insurance and interest-rate hedging products). What role the FCA plays in financial compensation schemes is also to be discussed.
Regarding enforcement, the mission statement said redress would play a more important part in any sanctions for wrongdoing, but added that just because an investigation was launched did not mean a penalty would be automatic. The organisation also promised to review the use of its ‘private warnings’.
This consultation on the priorities of the FCA comes at a critical juncture, as research released by think tank New City Agenda earlier in the week concludes that the FCA risked sleepwalking into the next financial crisis unless it stood up to politicians and stopped watering down rules.
Since the ousting of Martin Wheatley last year the regulator has been accused of taking the pressure off the banking sector and relaxing its enforcement regime. Markets thrive on stability but with June’s EU referendum result and the government’s decision to delay triggering article 50 until early 2017, institutions have been operating in turbulent times.
Encouragingly, the recent positive profit announcements by UK and U.S banks shows a strong showing for many business areas that last year underperformed which is a relief to shareholders as the remain campaign painted predicted apocalyptic downturns.
The FCA, with Andrew Bailey at the helm has a window of opportunity to provide the markets with a sense of direction and stability with a clear message on its approach and focus for the future and hopefully his first meaningful strategy will deliver this.
3. Movers & Shakers
Appointments
Mark Rigotti confirmed as sole CEO at Herbert Smith Freehills
After the Anglo-Australian firm announced that it was phasing out its joint CEO leadership structure, Rigotti is confirmed over Leydecker to hold the post solo.
DLA appoints new London Managing Partner
Corporate M&A partner Tom Heylen has been appointed as managing partner of DLA’s London office succeeding Lord Clement-Jones who is stepping down after six years in the role.
Moves
Clifford Chance disputes veteran to join Dechert’s London base
Dechert has recruited Clifford Chance (CC) litigation partner Stephen Surgeoner in a boost for the US firm’s London office.
Latham magic circle hires continue with Allen & Overy M&A star
M&A partner Edward Barnett joins Latham’s London office after 20 years at A&O
KWM halts recapitalisation programme after the resignation of four London partners
The firm confirms the resignation of UK investments funds head Michael Halford, private equity partner Jonathan Pittal, corporate partner Andrew Wingfield and former managing partner Rob Day. It has since emerged that Wingfield and Day have joined Proskauer Rose.
Kirkland takes US private equity partner from Freshfields
New York-based corporate partner Doug Bacon joins Kirklands Huston office
Willkie Farr to launch London competition practice with KWM partner hire
Philipp Girardet joins the London office of Willkie Farr with senior associate Rahul Saha
Partner Promotions
Ropes and Gray adds two to partnership in 11-strong promotion round
Ropes & Gray has made up London lawyers Andrew Howard (Tax) and David Seymour (Real Estate) in a reduced global round
Taylor Wessing confirms two London partner promotions
Josef Fuss (Corporate) and Gareth Lawson (Finance) made up in 15-strong global promotions round
Office Openings & Closings
Clyde & Co close Libya office amid political instability
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