‘‘Cooperative arrangement in which two or more parties work jointly towards a common goal.” – Definition of collaboration, Business Dictionary website

The need for successful collaboration in the delivery of legal services is crucial. Whether this is relating to collaboration between peers, within differing layers of a firm’s hierarchy or between lawyers and non-lawyers, those who are able to work together successfully will be ahead of the pack.

Despite the above definition appearing to have collaboration at its core, law firms in particular are known to put less of an emphasis on the collective. Is this driven by the concept of the billable hour? Or perhaps the move away from the traditional lockstep model which has put more emphasis on individual performance rather than collective strength? Whatever the driver, it seems that genuine collaboration between individual lawyers, non-fee earning members and the firm’s global network can lack consistency in the eyes of lawyers and clients alike.

The competitive nature of the current legal landscape has put pressure on law firms to deliver cost effective solutions, often with a cross-border element. The successful delivery of these services is now under greater scrutiny and collaboration will play a central part of this process. Project management, business development and in-house technology teams have become essential additions to law firm infrastructure, shaping how the delivery of legal services is received by clients. For that reason, developing the relationships amongst these teams and lawyers will greatly affect the quality of legal services a firms can provide.

Individual mind-sets limit the extent to which lawyers are able to collaborate and provide integrated, streamlined services to their clients. Lawyers are naturally competitive and aren’t accustomed to working in collaboration or sharing information with peers. Typical remuneration models further block these efforts, as sometimes does the partnership model, and when assessing cross-border working methods, different cultural attitudes and behaviour will also affect how open a law firm is to the idea of collaboration. There is no doubt that the culture of law firms and their partnerships has changed in recent decades and with this, their business model has changed. As the need to continue evolving and progressing is constant, law firms must ensure underlying cultural support for this change.

As the market seems to be demanding better collaboration of its lawyers, the challenge remains as to how individuals within firm’s best do so. Whilst technology is pushing the industry into a new era and the size and scale of international firms continues to expand, there remains a basic necessity for interpersonal collaboration to bring all these things together. This fundamental need for personal collaboration might be the greatest challenge expanding firms face, but it could also represent the greatest opportunity for these firms to differentiate themselves in the market.

We have witnessed an increase in commercial mindedness across Legal & Compliance in recent years which we believe is a by-product of wider market conditions within the financial services sector and generally heightened risk awareness in the industry. The impetus has been thrust upon control functions to improve awareness of risk across all product areas, while at the same time, Legal & Compliance practitioners have had to step up their understanding of the businesses they support. In the following paragraphs, we will explore how Compliance functions have improved their commercial mindedness while Legal functions have sought to enhance their awareness of risk.

The transition and trends from a pre-crash compliance officer to today’s more business-aligned demographic has meant that commercial awareness has become an essential prerequisite for anyone looking to get ahead in these so called ‘middle-office’ functions. Gone are the days of ‘box ticking’ and simply going through the motions of adhering to the rules. Now there is a flow of former business professionals making the transition from transactional teams into regulation and compliance, where we are seeing traders moving into surveillance and sales professionals into risk advisory. However the transition manifests itself, it is normally driven by an awakening to the fact that control functions need to be infused with an in-depth and thorough understanding of the commercial rationale and drivers behind the transactions being undertaken by financial institutions.

“The role of in-house lawyer has morphed significantly from facilitator and ‘deal doer’ to advisor and protector”

Conversely, in Legal we have witnessed a seismic shift of emphasis from the business led transactional side to the more risk aware litigation and regulatory functions within the in-house sector. The impact of this shift is reflected by law firm demand as they have strived to adjust to their clients’ needs. The role of in-house lawyer has morphed significantly from facilitator and ‘deal doer’ to advisor and protector (even sometime ‘whistleblower’) with an emphasis on reputation, risk profile and standing with the regulator. Whilst individual front line teams within banks and funds may still comprise of lawyers, they ultimately defer to authority and sign off of with an independent legal function which is most likely be headed up by a GC whose principal focus will be on regulation and risk.

In parallel with the gravitation of legal counsel away from commercial mindedness towards risk awareness, we have seen law firms in turn apply commercial mindedness in their own way, namely seeking to capitalise on the opportunities which have sprung up from banks needing to tighten compliance and risk measures and those systems underpinning their control functions. This accounts for the rise in law firms setting up consultancies and risk advisory businesses to meet client demand, and the call for additional support in tackling the mammoth task of regulation and risk compliance.

Noting where we are in the cycle and the extent to which financial institutions have stepped up control functions and systems to meet their obligations and industry standards, while regulatory change is likely to continue to be a hot topic, we sense the pace of change is beginning to slow down as markets start to turn a corner. While we are unlikely to return to the heady days witnessed during the first decade of this century, there will need to be a further adjustment of the balance of power between risk awareness and commercial mindedness. With lessons learnt, greed banished and pre-emptive measures in place, we ask ourselves whether it is conceivable that an equilibrium be struck between “risk” and “reward”.

If you would like to more information on this topic, please contact authors Director Shirin Stanley or Consultant Max Alfano.

High Frequency Traders (HFT) have largely lived in the underbelly of Financial Services, operating in a rare and often complicated world performing trades at speeds the human brain will never match. Regulators and governing bodies have not had the capability or the resource to fully understand and grasp these complex business models, which includes Hedge Funds and dark pools, leaving them to operate within looser parameters compared to the heavily regulated Investment Banking sector.

In November 2010 the ‘Flash Crash’ – where a trillion dollars was wiped off the U.S stock market in minutes only for it to rebound just as rapidly – made the global regulatory world take note as it sent shock waves throughout the market. Following this seismic event, it became clear that HFT’s operate in a digital age technologically but are largely governed by “Depression era-legislation”and there has been a significant reaction from regulatory bodies across the globe.

Since 2012 a wave of new rules have been implemented, including the revision of MiFID II adapted to ultimately de-risk the sector and the approach of HFT’s, although there still remains a stigma that these firms are not ultimately market makers. Significant banking institutions who essentially provide the market places for HFT’s to trade have never fully accepted their standing within the market, and coupled with their high risk gung-ho approach has led to a strained relationship. So much so, that banks are now turning their back on HFT firms, regardless of their profitability and platform, purely because of the risk attained with dealing with these institutions.

Banks and Hedge Funds have also made a strategic decision to focus on developing their own trading systems to be faster, with the use of algorithms, encroaching on the pure HFT houses such as Getco, Hudson River and Jump Trading. This has created a technological arms race with the biggest firms spending millions to find that nanosecond of time and be ahead of their competitors. This has separated the ‘haves’ from the ‘have-nots’, as smaller trading firms have been forced to think laterally and to have a more sophisticated strategy and business to remain profitable.  Investment banks have to be more commercial with their capital to enable it to stretch across its complex and diverse business areas, and are renowned for having antiquated technology not able to compete with HFT’s. This adaptive strategy has meant that the smaller trading houses have had to learn how to execute their strategy over a relatively longer period, which would perhaps not classify them as HFTs at all.

Regulators have struggled to keep up with this pace of development, to ensure that the new technology models are capable of delivering to the stricter regulation imposed on HFTs. Technology vendors such as Fidessa are not regulated themselves, and it is a question of whether they should be when they provide the technology to regulated entities.

It has now become increasingly difficult for firms to operate with Banks, Exchanges and Regulators clamping down on the marketplace in which HFTs operate. However, it does not seem to have slowed profits as they continue to develop ingenious ways to better their competitors. It is only recently that plans to build a tower taller than The Shard were submitted to transmit trades within one-millionth of a second to Europe’s markets and stock exchanges. Even with these increased regulatory challenges, the focus of High Frequency Traders to stay at the forefront of change is apparent, as remaining to be seen as approved market participants is integral for global footprint.

By Barrie Lee and Max Alfano, Consultants at Fides Search.

Adapt to survive.

Adapting and embracing change is essential to remain competitive and survive in the legal services provider marketplace.

With greater expectation from clients for ‘value added services’, alternative pricing structures and wider competition in the market from other law firms, the Big four and agile legal service providers, law firms must adapt to this change, with the failure to react fast enough not only impacting on profitability, but their very survival.

Increased expectation from clients and competition within the market has led to greater innovation in law, with firms challenging established working methods to achieve better service delivery whilst maintaining or reducing costs. The concept of law firms themselves have been redefined as beyond that of just legal service providers and the solvers of complex problems, to organisations who partner with their clients, better understand their market challenges, and provide flexible pricing and billing alongside greater efficiency and support.

In today’s world, law firms and their lawyers need to do and be more for their clients. In this blog we look at how law firms have adapted their infrastructure to embrace change within what is now a more competitive marketplace than ever before.

Legal Project Management

Legal project management (LPM), the effective use of technology, people and processes to lower costs, whilst boosting (or at least maintaining) law firm profitability has exploded over the last few years. Whist each firm differs individually, the role of a legal project manager is to look after the operational side of transactions to allow partners to focus on the legal technicalities of the work. By bringing cohesion to complex mandates, they help achieve greater efficiency and cost certainty for clients and firms across a range of matters

Used correctly, project managers can manage both internal communications on a project and some external relations with clients, including anything from scoping the resource requirements before the project starts to collecting and processing client feedback after completion. Some firms involve their project managers more directly with clients on pitches and cost negotiations, as a show of commitment to the project in hand.

Although not a new phenomenon (Baker & McKenzie have been using non-legal project managers on deals since 2010), Hogan Lovells, Herbert Smith Freehills and Linklaters have all made moves to expand their use of project managers in the past 12 months. This demand is also seen in the market, with Herbert Smith hiring a four-strong non-legal project management team from Berwin Leighton Paisner in October.

By offering greater efficiency and certainty on costs, and freeing up billable hours for partners, the better integration and utilisation of legal project managers on deals is a trend only set to grow over time.

Knowledge Management (KM)

The provision of knowledge, information and documentation assistance by law firms to their clients is of growing importance. Since helping one of our financial institution clients recruit their Global Head of Knowledge Management in 2014 and financial institutions and corporates alike looking to improve their own efficiencies and legal infrastructure in this area, the need for law firms to advance their own KM structures is imperative.

Knowledge Management, whether the production of learning and training materials or the internal management of firm documentation, is essential for clients to gain a quality service. Due to the time limitations placed on in-house counsel, from a client’s perspective, a law firm who is continually looking to add value through their KM team and push this agenda will come out ahead of those who are seen as less active and innovative in this area. Furthermore, the ability to offer these services at an international level is a distinct advantage for law firms in gaining significant panel instructions from global businesses.

Beyond the use of KM for purely Business Development and brand promotion, it can also be revenue-generating with the creation of bespoke KM tools to track legal and regulatory developments, such as A&O’s Rulefinder and Navigator at Simmons & Simmons.

As such, Knowledge Management – if structured correctly – can be leveraged with clients to provide a service of better value, and differentiate the firm in a competitive market. Law firms need to develop an outward-facing KM team to work with Partners and Business Development teams, whilst delivering high-quality learning and training provisions for clients.

Business Development

The growth of law firms on an international scale through lateral recruitment, mergers and office openings has thrust the role played by Business Development (BD) into the spotlight both in London and internationally. Our work with clients to build their Business Development teams across jurisdictions has raised our awareness of the importance of having a specialist, integrated and proactive business development function and the investment that firms are making to build their capability in this area.

There have been great strides made in the last ten years by many firms with regards to Business Development and how it is viewed internally. With the continued advancement of the industry, Business Development functions have had to become more connected with the business and move from a back office to a front office advisory function. The expectation and demands of today’s business environment means that law firms are having to recruit more specialised Business Development professionals with industry knowledge to focus on specific sectors and clients. Firms that do not continue to drive the development in this sense will soon be left behind in the market.

For international law firms with growing businesses and complex clients spanning multiple jurisdictions, the role of a coordinated Business Development function can help a firm both continue to increase revenue streams whilst gaining exposure to new clients. As such, the investment made into this function should be seen by law firms as a valuable long term commitment to their clients and therefore their own business.

Client Relationship Management

The way in which law firms manage client relationships is evolving alongside the various advances being made in both Business Development and Knowledge Management. To complement the traditional role of the client relationship Partner, we are regularly hearing more about how law firms are allocating more resource and responsibility to dedicated Client Relationship Managers.

Similar to those in legal project management, these individuals are from a non-legal background and work alongside the relationship partner to add further depth and focus to service and support their clients. Fundamentally, clients of law firms know that whilst having a relationship partner is important, they are still a business generator that have to produce revenue for their firms. Therefore clients visibly see these two roles as complementary to each other, and with a heightened level of commercial and personal service when Client Relationship Managers are employed in tandem by their panel firms.

In-house counsel within our network have noted that firms who have employed dedicated relationship managers have a clear differentiator in the market, compared to those who just employ the client partner model. Having Client Relationship Managers who are dedicated to firm clients, and with a goal to develop, integrate and expand the relationship further, adds emphasis to a firm’s commitment to their clients and their needs both domestically and internationally.

Consulting

The final way in which we have seen law firms look beyond legal services as their main client offering is through the establishment of standalone consultancy arms. This trend turns the idea of bespoke legal advice on its head, as firms give advice to in-house legal teams on how best to manage their legal services and become more involved in the commercial aspects of their clients businesses.

With six such consultancy ventures set up since last year, and firms with more established consultancy services further expanding their offering, each firm has taken a different and distinct approach to building this part of the business to best service their client’s needs. This includes the ability to provide contract lawyers (a service that has ballooned within major law firms since BLP initiated Lawyers on Demand in 2007), to the implementation of more specific technology and IT change management projects (Bird & Bird’s Baseline and Denton’s NextLaw Labs) and even sector specific offerings as seen at RPC Consulting and DLA’s Noble Street.

However, the response of some firms such as Eversheds and Addleshaw Goddard has been to take a more full-service approach, offering wider legal efficiency advice centred on their clients businesses. This includes advice on legal spend, process analysis, legal risk analysis and panel management advice alongside themes already discussed such as legal project management, KM and Business Development.

The expansion of Eversheds Consulting, established in 2010 and which now runs four business lines (a financial services regulatory compliance service, Eversheds Ignite, a contract lawyer service, Eversheds Agile, and a separate flexi-lawyer offering for financial services regulatory compliance clients), is testament to how firms can offer greater service to their clients. With revenue climbing year on year, it pays for firms to be business solution providers and not just legal service providers.

Conclusion

Whilst much is being made currently of firms’ plans for expansion and lateral partner recruitment, it is important to assess the validity of a law firm’s business to support their growth plans. Lateral recruitment and growth can enable and provide increased revenues, yet it is the infrastructure of law firms that will underpin this growth or impede it if it is not fit for purpose.

In the ever changing environment that law firms work within, it is those who continually assess their internal capability and client delivery services that will thrive in this highly competitive global marketplace. Whilst firms continue to judge themselves on their annual PEP performance, there is the potential to remain blinded to the need to address change within their businesses. We understand that there is a fine balance between giving clients what they desire and the costs of running their businesses, however, those that continue to push the boundaries of innovation and client service will stand a better chance of seeing the client recognition that, in the long term, will provide them with a strong foothold to continue to deliver of their firm wide ambitions and revenue growth.

By Tom Spence, Director at Fides Search

With the level of competition continuously increasing in the legal industry, we are constantly challenging ourselves to figure out ‘what good looks like’ and how we can separate ourselves from the rest. Ultimately, it boils down to how you keep a client happy and deliver a first-rate service, as well as constantly testing ‘is there a way we could be doing this better?’

From advising general counsels on their dispute resolution and regulatory legal services, we found that major institutions are often selecting their law firm advisers not on the basis of technical expertise alone, but on their ability to deliver a solutions orientated service.

The challenge in defining quality of service is that each client has a different perspective, and ultimately the barometer moves depending on which client you’re dealing with. This can be characterised by the balance of good value for money, strong technical expertise and the maintenance of good client relationships across each of the firms’ jurisdictions. No longer does a firm with a lower charge out rate escape the high standards expected from those with a higher rate, with many of the GC’s that we have spoken too suggesting the exact opposite.

Through our discussions, we have managed to outline below the four key trends that GCs find most valuable from their law firms.

It’s all about the individual

There is a preconception that the elite firms in the market offer the best service, whereas the view from those instructing was quite different. When we spoke to a handful of senior decision makers within financial regulation to find out if they were altogether happy with the service they received from the Magic Circle, the question was met with general acquiescence. Notably, when the same question was asked of firms with specific regulatory expertise outside of the Magic Circle, such as Simmons & Simmons and Norton Rose Fulbright, they were not only satisfied with the capability of these firms, but also praised them for their level of service in this area.

What made these firms stand out in the eyes of their clients was the performance of individual partners, offering greater value and innovative solutions. This has enabled them to build a solid reputation for offering good client service. Regardless of a certain platform’s size and scope, if your client can see your dedication to their business, it will always be recognised.

Take inspiration from the elites

So how do elite law firms differentiate in their service to clients and how can this be emulated?

Simply put, the pre-eminence of the Magic Circle in today’s legal environment can be distilled down to their international reach and delivery of a consistent, reliable global service. Therefore we have identified one of the key markers for quality of service being the resource of law firms to be able to act whenever an issue arises, and to do so with the same quality of service as would be expected from any other of their international offices and on par with the leading domestic offering.

Law firms must market their international capability along the lines of consistency of service across their respective regions. However, in the modern legal landscape these international offices will only thrive if the firm’s global clients trust the quality of the people in other jurisdictions. This has a cumulative effect on the other offices in the network, and can under-pin or undermine future business development if a standard of service to clients cannot be maintained.

PEP means nothing

One value law firms often measure themselves by is Profit per Equity Partner (PEP). PEP is an indication of profitability but it is misconstrued to think that the greater the PEP figure the greater the level of service. In fact we could argue the potential for an inverse relationship between PEP and service. Does a high PEP figure always attract the best calibre of lawyer, is it a barometer that the lower your PEP the worse the lawyering is? No, is the simple answer.

Increasingly, firms outside of this elite are gaining a seat at the table, and are challenging the market by focusing on service and delivery and a value-based proposition to be executed by quality lawyers.

We consistently witness the diversification of panels, as major institutional clients recognise the increase in value and service quality when you instruct an alternative to the Magic Circle. Efforts have been made by these firms to strategically invest in human capital, establish meaningful client relationships and improve service levels through the use of technology and innovative resourcing models.

Hire the right people

Strategic hiring is a key enabler for firms aspiring to improve their service and in turn market share. This can be achieved by being attuned to your clients’ needs and developing your capability in whichever areas are best suited to serve your client. Although this is more of a long-term approach to improving the service you deliver, it is a great method to further reinforce the long-lasting relationship you have built with your client. One example of this is how US firms are expanding their regulatory practices in London, by adding key regulatory figures to their offices in order to serve their top banking clients. These firms include Gibson Dunn & Crutcher, with the hire of James Perry from Ashurst, Latham & Watkins, who brought on Rob Moulton also from Ashurst, and Cleary Gottlieb Steen & Hamilton with the hire of Bob Penn from Allen & Overy.

Whilst these significant ‘headline making’ hires are important and provide a clear strategy and ambition to not only clients but the legal marketplace, other lower profile hires can be just as effective. We have seen through certain strategic hires both in London and internationally whereby firms invest in younger partners or Counsel type figures there has been immediate reward through client instruction and appreciation of talented sensible hires. This point is important to acknowledge as while the ‘headline making’ hires are pleasing on the eye and from a PR perspective, well thought through and strategically planned investments whether big or small will always make an impact on clients.

The law firm market is becoming less binary, and traditional law firms are needing to work harder to retain and build new client relationships. With increasing pressure coming from new legal services providers, such as the Big Four, it is important to ensure you’re keeping your clients happy by not only providing reputable practice area expertise and geographical presence, but by convincing them of your attentive client service, showing you are truly observing and listening to their needs.

If you would like to find out more or discuss this topic further please contact Director Ed Parker, T: +44 (0) 20 3642 1872 E: eparker@fidessearch.com

Following our insight last week on the immediate aftermath of Brexit and the reaction from our clients on the continent, this week we further develop this line of thinking to assess what the reality of Brexit might mean for law firms operating throughout Europe.

As has been widely reported in the legal press this week, one initial change we can expect to see in London is a slowing of the pace of growth and investment from US firms as they assess the possibility of growth in mainland Europe. This is despite a number of US firms committing to mid-term growth strategies in London.

Although US firms are often quick to seize opportunities in new markets, according to those we have been speaking to this week, development of US practices on the continent might not be that simple.

With the immediate impact of Brexit causing the dollar to gain significant ground on both sterling and the Euro, we could see a significant opportunity for US firms to pick up European talent and build their businesses accordingly, as those who are remunerated in sterling open their mind to the perceived safer haven of US firms who compensate in dollars. This is particularly the case for partners at UK firms who have seen both their remuneration and capital contributions diminish overnight.

However, this view fails to take into account a key financial factor. If the Euro weakens (as it has) against the Dollar, that the revenues and profits generated by US firms in Europe will decrease. As we have seen, US firms have been more focused in recent times on London due to the greater profit margin on offer in the City, which will not change with Brexit. Furthermore, a partner being paid in Dollars and billing clients in Euros offers US firms more problems when it comes to profitability. On the other hand, whilst law firms should not look to expand and contract based on exchange rates, one positive for UK firms to take from Brexit is their continental partners just got that little more profitable with the sterling’s slide against the Euro.

Whilst there will always be opportunities for US firms to make strategic investments, we feel the likelihood of substantial growth on the continent unlikely, at least in the short term, following Britain’s decision to exit the EU. For UK firms, businesses able to think clearly and implement an international strategy enabling them to take advantage of European opportunities will best be able to navigate this uncertainty.

So whilst there are clearly still no answers at this early stage following last week’s news, the debates have begun and we here at Fides are keen to engage fully to advise our clients and contacts accordingly. Amongst the turmoil of Brexit there will be gains to be made.

Written by Tom Spence, Director at Fides Search

Consultants Barrie Lee and Max Alfano discuss how Brexit can impact the in-house legal and compliance market

The phrase, “a week is a long time in politics” coined by former British Prime Minister Harold Wilson has never seemed as relevant as it does today. The UK voted to leave the European Union, David Cameron stepped down as Prime Minister and the England football team also no longer felt the need to be in the European Championship, although most would have predicted this early exit. A Brexit, on the other hand, we did not.

So where do we go from here and what have been the initial reactions from the market? Are we at the beginning of a new dawn, a prosperous era for our country where we forge our own new path, or is this the beginning of the end? A long, turgid drawn out break-up full of acrimony and hate? The level of uncertainty created is palpable, as banks scramble to speak with their respected law firm contacts and consider potential contingency plans that have been outlined over the last few months, assessing their viability. Those in our regulatory lawyer network in particular have been under significant pressure in discussing and advising on the issues that this has created.

Across our compliance network, it has been noted that Brexit has added an additional variable to anyone considering their next opportunity. Career development, salary, scope and breadth of role are all of high importance throughout the due diligence process of your next employer, but now a bank’s strategy to relocate to avoid passporting issues needs to be considered. We’ve heard rumblings of Frankfurt or Dublin, which isn’t going to be viable for everyone, and institutions still feel the pressure of the FCA to deliver on the current pre-Brexit hiring strategies as a move of any kind is still a few years in the making. There has been much speculation in the press about banks’ contingency plans, relocating outside of the UK to a European hub, with HSBC moving 1,000 heads to Paris as one example. Clifford Chance comment that this is looking at the worst case scenario, and perhaps somewhat conveniently, it takes two years for a bank to plan and implement a change in operations whether it is nearshoring or offshoring. To put a finger on a single preferred location is a difficult question. Simmons & Simmons noted that there is not one European regulator which could handle the sudden influx of new registrations, moving away from a central European hub for banks.

We have previously discussed in an earlier blog, which considered the implications of Brexit, how our time zone, language, sophisticated legal system and high calibre workforce has allowed our country to flourish and be a dominant force in global banking. Last Friday’s result has not changed this and it should be for those same reasons that our economy, whilst may stagnate in the short term as expected, has the tools to capitalise on this new world and flourish. This is to be supported by the role of experienced, highly skilled compliance officers, who now more than ever have the ability to provide the bank with assurance and calmness to provide the most pertinent and recent advice.

Taking a view from an asset management and funds perspective, there are quite a few points which we can speculate on; however, much is still to be decided in light of the deal which will be struck between the UK and the EU. Hedge funds however are largely unconcerned with the move as their position will remain under the guideline of AIFMD, due to their status remaining as AIFs, even in their new standing as a third party to the rest of Europe. Hedge funds, in typical fashion, went around lacing their palms in the days running up to the vote. According to Marshall Wallace, Odey & TT international shorting UK stocks, the consensus from their side of the fence has been fairly consistent, with many hedge funds being strong advocates of the leave camp through the build-up. One commentator from a leading trade association commented that “the nature of their business is largely London, NY & Hong Kong, the rest doesn’t always matter”.  Hedge funds will therefore look to capitalise on any situation and work with the position they gain.

With the major listed asset managers conversely, their struggle has already started to hit home. At what was already a difficult time for the asset management industry, with profits being squeezed and significant outflows, after the vote there were a number of redemptions whilst also taking a massive hit in share price. Looking ahead, another challenge we envision is whether the EU will recognise the UK in terms of equivalence. If not, passporting along with marketing, could potentially be a logistical problem and, in turn, the UK UCITS funds could be viewed as AIF’s to their EU investors. Luxembourg or Dublin would act as possible homes for many of these organisations, with M&G already looking at Dublin as their new centre. A lot of this will also come down to the FCA and how far they’re willing to go in keeping to EU laws. If they differ or become more lenient on certain laws after article 50 then equivalence could present a problem. It seems likely for a BAU situation and EU Regulation to still apply to the UK for the foreseeable future.

Much was made in the build up to the referendum, with plenty of “fearmongering” from both sides. We now must recognise that the only way to really make a positive outcome is to collaborate and pool our resources to continue to make sure the UK remains a financial & professional services global powerhouse. There will undoubtedly be regulatory challenges and we have already experienced a slower market from a transactional perspective. However, there will be opportunities to capitalise on from a legal and compliance outlook, once the relationship between the UK, the EU and beyond becomes clearer.

The UK asset management market has seen the greatest number of outflows since the recession in January this year, with investors growing increasingly frustrated with volatile markets. The impending referendum with debating on a potential Brexit has only added to potential woes. Global Stocks dropped significantly with fears of China’s slowing economy & currency depreciations. Seemingly, with ‘banker bashing’ becoming a subject of a bygone era, focus has turned towards the asset management industry, with the FCA continuing front to back reviews of firms not least looking at justification for management fees. The continuing struggles of asset managers can be highlighted by the UK firm Aberdeen Asset Management falling from the FTSE 100 into the 250 and assets under management (AUM) dropping by 38bn from last year. So with this in mind, what should the asset management market be expecting over the next year and is it as bleak as it first appears?

The mere thought of a potential Brexit is leaving the markets flat, with the fixed income and equity market’s both underperforming nearly half way through the year. Despite this, several high profile supporters of Brexit have emerged with Alexander Darwall (Jupiter) and Peter Hargreaves (Hargreaves Lansdown) both committing personal funding to the No campaign. Strangely enough, they are not the only two within the fund management world to be in support of a Brexit, with fund managers the largest contributors to the No camp. However, as it is well documented, should a Brexit happen, the distribution of UCITS Funds as European vehicles will have to be re-packaged along with other significant EU Funds. David Harding of Winton and Manny Roman of Man Group see this to be one of the many factors to keep a united Europe and committed significantly to the Yes camp. Conversely, Moody’s have commented that a UK exit “would pose little threat to asset managers’ creditworthiness and have minimal impact on the management of institutional assets.” However, in a time where AUM on the whole is on the decline, a shift in the status quo would surely create more uncertainty in the already volatile markets. Simmons & Simmons noted, in their seminar on the topic, that there are counties (Switzerland / Norway) who hold particular relationships with the EU which allows them to trade as “third-country firms” that may allow for a similar arrangement in the UK. However, no relationship of the sort is promised for Britain and for a No vote on 23rd June would not put the UK at the top of the list to be given any favours by the remaining EU member states. In the same seminar, they also highlighted the capacity of other regulators within the EU, showing how no one nation within the EU could cope with a sudden influx of new registrations, from the sheer volume of financial institutions HQ in the UK.

The regulatory landscape that surrounds many of these issues stands fairly similar to that of last year; AIFMD, UCITS V, MAR, EMIR and MiFID II/ MiFIR is still ever prevalent in everyone’s minds, but for the vast majority there is still uncertainty of what MiFID II will look like. A senior regulatory professional from a global fund when asked on the topic, commented “the biggest change for buy-side firms will be that they have to think like the sell-side” a trait that is not always forthcoming within asset managers in particular.  A recent survey by Funds Europe found that of 50 AM firms, only 18% had begun implementation of MiFID II, regardless of the delay. The same survey also highlighted that the two biggest concerns for asset managers surrounding MiFID II was change to the Distribution Inducement Ban, and wider market infrastructure, both of which drastically change the way business is conducted. Product Governance is also key, however the FINMA has implemented a product governance rule which could be used as a template in an almost blueprint-like capacity. With all regulatory pressures, it can be easy to chastise regulators and condemn them for the over exposure, one global CCO commented recently however that “there will never be a COO or CEO who does not think that there is not enough regulation”.

Like with most challenging markets, there are also opportunities and there has been an increase in M&A activity across the asset management market. Roger Altman of Evercore predicted, whilst speaking to Bloomberg, that there would be more action across M&A market within funds: “It really depends on the type of asset management, because right now you’re seeing big outflows of assets from a lot of big, long-only-centered managers and into passive hands, into index-fund-type hands” Altman said. “But I don’t think it’s surprising to see asset-management transactions. There have been really quite a few of them.” He went on to mention that due to the relative stability there is more openness to change and develop. For example, GAM are currently looking to on-board THS (boutique Fund Manager) and add a potentially exciting other string to their bow. Whilst Old Mutual are looking to sell off their US Asset Management business and set out an IPO for the UK Wealth Management arm.

With performance a major issue for concern, and firms such as Henderson GI, who made the most of good markets in previous years, are now starting to struggle into 2016 – it could be said that they were not looking at contingency plans after squeezing profits in China. Firms, such as Jupiter and Schroders have capitalised on others shortfalls and rallied coming into the start of this year. The impact on hiring has taken an effect across the market, a number of senior redundancies across Legal & Compliance, leaving it fairly flat and new headcount especially across Legal & Compliance being left thin. This is perhaps to be expected with the last couple of years, bringing high levels of hiring within the space, and asset managers in particular looking to hold on to talented individuals and upskill internally.

With the UK asset management industry accounting for a little over 4 trillion in AUM, as well as being the second biggest to the US (30 trillion), it would be difficult to see a complete shift of focus to another European centre should a Brexit ensue. However, there could be a shift from many European and global firms perhaps to hubs like Ireland, Luxembourg or even the Netherlands, whilst also slowing the UK economy at a time when the markets are already proving to be a challenge. Regulation in particular will continue in a similar pattern, with a watchful eye on MiFID II and the impending implementation stage, many commentators also expect closer focus on surveillance as MAR (Market Abuse Regulation) comes into effect. Asset managers remain concerned with spend across legal and compliance departments which has resulted in minimal movement in senior positions, but we anticipate after the annual summer hiring hibernation, markets to rally with more movement at the senior end. Of course if a vote for Yes is the result after 23rd June.

For any further insight or questions on this paper please contact Max at Fides Search, malfano@fidessearch.com :+44 (0) 20 3011 0698

As results for Q1 2016 are gradually released by the major global banks and financial institutions, there is one question we are all asking: how much have they been affected by depressed oil prices?

Oil prices have been on a downward spiral, and oil producers and lenders alike are desperately seeking for ways to lift the price. Prices set a 2016 high on Thursday at $47.22 a barrel, after having reached twelve year lows in January 2016 at a mere $28 a barrel. The worldwide glut in the oil markets has caused this depression in prices, pushing the cost of crude oil down by 70 per cent since mid-2014. The abnormally high supply coming from the Middle East and a period of serious US production has clashed with the reduction in demand from emerging markets, given their slowdown in economic growth.

Reducing supply and alleviating existing stockpiles is becoming more imperative; however, freezing oil output has proved difficult as we saw from the recent unsuccessful OPEC meeting. The meeting that took place in Doha a couple of weeks ago, in the hopes that all major oil-producing countries would agree to freeze production and thus bolster prices, failed to reach an agreement. It was reported Iran failed to attend the meeting, causing a reluctance for fellow oil-producers to agree on a freeze in their production. The New York Times reported that “Iran had ruled out a production freeze and on the eve of the meeting decided not attend the Doha gathering”.

Even without the production freeze however, there may be hope for a natural decrease in supply. Many argue that such a pickup in production is purely seasonal and down to a US driving period in oil production. The US has been the biggest force behind the drastically high oil output after US shale drillers bombarded the market. Their production hit its peak in April last year at 9.7 million barrels a day and has since been on a gradual decline. The continued decline may encourage fellow oil producers to also decrease output and hopefully rebalance the markets.

Regardless of this outcome, banks with large energy loan portfolios have had to build up reserves to account for the losses they have and will continue to experience from plunging prices. Wells Fargo, Citigroup, Bank of America Merrill Lynch and JP Morgan Chase are the most exposed to the energy sector as they released the most loans during the oil boom, making them more vulnerable to the fall in prices.

Energy financing was perceived as low risk when these loans were first handed out as oil prices were at record highs and showed no sign of abating. Now these banks have billions of dollars’ worth of exposure to the struggling energy industry, particularly because they offset the risk of their energy loans by demanding oil and gas as collateral. This collateral is rapidly losing value and banks have been adding further layers to their capital buffers in an attempt to cushion the losses from these underperforming loans.

Wells Fargo, whose business relies considerably on the mortgage industry, have added a further $200m to its reserves against losses to its loan portfolio. Combining the bank’s total loan portfolio with the $23 billion worth of unfunded commitments to oil and gas companies puts Wells Fargo’s total exposure to the oil and gas sector to an impressive $42 billion. Similarly, Bank of America doubled its reserves, increasing it by $525 million from the end of last year to $1 billion in March.

Forecasting the prosperity of global banks who are deeply vulnerable to the losses of their energy portfolios will be difficult, but can be largely attributed to the wellbeing of the energy sector. Banks will be scrutinising the results that energy companies are bringing out, as their profitability is so dependent on the earnings of the oil and gas producers. BP was the first of the “supermajors” to report their earnings, revealing profits of $532 million, 79 per cent down from the same period in 2015, but also showing a $339 million increase since postings in the previous quarter.

BP’s Exploration & Production (E&P) operations took a toll on their earnings, as the department is costing more than it’s earning. Those who are likely to fare better in the energy sector are those with less exposure to E&P, as this is the area of the industry most affected by oil prices, and those who are well-diversified in their trading. Companies such as Cargill are expected to do well, by turning their attention downstream, moving away from energy-linked businesses.

However, amongst all the souring loans and tumbling oil prices, investors have something to look forward to in the energy sector – the proposed Saudi Aramco IPO. News broke in October last year of plans for an IPO listing of Saudi Arabian Oil Company (Aramco), Saudi Arabia’s state owned oil company, estimating a possible value over $2 trillion. The sale will likely be less than 5 per cent of the company and focus on the sale of their downstream assets i.e. their refinery businesses, as opposed to the parent company, which holds their excessively lucrative crude reserves. Bloomberg analysts have stated that JP Morgan and HSBC are likely to win the IPO as they are the top ranked lenders in Saudi Arabia for IPOs.

Aramco expects the oil supply-demand balance to bring recovery to oil prices by the end of 2016, but this IPO could aid their economy in financing the $98bn budget deficit the Kingdom suffered in 2015. Nevertheless, it remains to be seen what effect this IPO will have on the Kingdom in the long-term. Taking Aramco public is financially desirable, but it’s doubtful that it would have much of an effect on the Saudi royal family’s enormous total wealth. This shows that their thinking goes beyond monetary gain and demonstrates an intention to reduce the economy’s reliance on oil and increase transparency in the Saudi market by publicly announcing earnings. This IPO supposedly plays a small part in “Saudi Vision 2030”, released by Saudi government on Monday, which includes regulatory, budget and policy changes that could result in an overhaul of their economy if the proposed reforms are indeed executed.

Despite difficult market conditions and an oil price crash, banks remain cautiously optimistic about their global markets businesses. They claim sufficient capital has been put in place to cover future losses and that any hits made to their revenues won’t be enough to make much of a dent. First quarter results from energy companies have also been better than anticipated and their resilience could indicate a quicker turnaround in the oil markets than expected. This coupled with the industry providing what will be the world’s biggest IPO, double the size of the Alibaba IPO, could bring the energy sector back to the forefront of the global economy.

In a period where many banks have been selling off their energy businesses, those who chose to keep their assets will be well-positioned to reap the profits if the sector rebounds. During such market uncertainty, it will be interesting to see whether those with the biggest risk appetites will sink or ride the wave to profitable shores.

The EU referendum debate looms large as David Cameron attempts to persuade the British public that the United Kingdom is better placed in continuing its membership with the European Union. After many years of heavy regulatory burden and an immigration issue that has escalated and shows no sign of a resolution, does Britain need the EU as much as the EU needs Britain? Last week I listened to a webinar run by Herbert Smith Freehills (HSF) which considered the topic of a Brexit, with the public referendum scheduled for the June 23^rd and the implications for leaving European Union for Financial Services Regulation. The UK’s continued participation in Europe after four decades in the bloc has seen a plethora of parties pushing its agenda to leave or remain, seldom has there been such indecision.

Britain has the fifth largest economy in the world and is the fourth largest military power. We play a leading role in international affairs as a prominent member of the G7 one of five permanent seat-holders on the UN Security Council. Britain has the largest share of cross border bank lending globally, the second largest Asset Management industry and the third largest insurance industry. As such, of the 358 global businesses headquartered in Europe, only 80 are located outside of the UK. Our Financial Services sector accounts for almost a quarter of the EU’s financial income and 40% of EU Financial Services exports. This gives rise to the question, while there will undoubtedly be a period of uncertainty as new treaties and trade agreements are negotiated, are we well positioned to thrive once free of the shackles of the European Union?

So what are our alternatives? Should Britain vote to leave, a two year Lisbon Treaty would ensue as we negotiate our (br)exit. As highlighted in the HSF webinar, there are a few obvious routes similar to Norway and Switzerland – who incidentally are included in the top 10 wealthiest nations on Earth – such as joining the European Economic Area (EEA) or European Free Trade Association (ETFA), but none of these routes would cure our immigration crisis and are not seen as particularly viable options as our economy and population differ vastly to the current members.

The Financial Services sector has seen a seismic shift since the financial crisis, leading to severe pressure and workload from the European Commission to implement a raft of regulatory change and new legislation. As a result, the Legal and Compliance professions have seen a huge boom, particularly in compliance – a function previously viewed as a back office afterthought now thrust in to the mainstream media and to the top of any board’s agenda. Should we leave the EU, how would these areas be affected again?

As discussed in the HSF presentation, the UK would continue to take part in the European debate for future regulation albeit with reduced authority and persuasion having decided to leave the EU. We have seen significant growth in areas such as government affairs, EU Policy and lobbying, so what price, if any, will these areas have to pay as a result of a vote to leave?

From our discussions with senior figures in banking and private practice, the general consensus is that a vote to leave would have a huge detrimental effect on the UK economy. Indeed of the 500+ participants of the presentation, 80% voted to stay. High level strategic meetings are taking place now to discuss these issues, but of the 278 global businesses currently located in the UK, commentators fear a mass migration of business out of Britain should we leave the EU. Two thirds of the participants felt their current organisation would stay, which leaves a large number considering relocating. How would this affect our UK economy? Our time zone, language, sophisticated legal system, and high calibre workforce has allowed the country to flourish but that may not be enough to entice global institutions if exit negotiations stagnate or stall.

As you can see, there is much to consider and this review only scratches the surface. Outside of the Financial Services sector, we cannot ignore the underlying political debates currently dominating public consciousness. With immigration issues considered to have become the main argument, and the rise in prominence of minority political parties such as UKIP, this is not just an economic issue but a socio-economic problem. Would leaving the EU solve our immigration issue? Is the nation equipped with all the right facts and information to make the most informed decision come June 23^rd? The countdown has begun to what could be the one of the most important decisions in our country’s recent history and only time will tell whether it was the right one.