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.

After ten months of deliberation, HSBC’s board are expected to meet on Sunday to decide whether to shift the bank’s headquarters from London.  Moving the bank’s domicile will determine its tax base, lead regulator and lender of last resort – issues all considered critical by the board and outlined in the eleven factors said to be influential in their decision making. With Canada, the U.S., China, Australia, Singapore, France and Germany touted as possible destinations, commentators consider HSBC to most likely to return to its roots in Hong Kong if it decided to relocate its headquarters.

Despite this, in recent weeks the rhetoric has shifted to the likeliness of the bank remaining in the UK. To an extent, this is not surprising as the political conditions today are far more favourable than when the review was launched. Things have calmed with the with the election of a Conservative majority in May, and Chancellor George Osborne’s decision to reduce the bank levy which wiped 10% off HSBC’s profits last year. The further axing of ex-FCA Chief Martin Wheatley, and other decisions to drop the reverse burden of proof to be implemented within the Senior Managers Regime have also served to create a more favourable domestic regulatory environment.

On the other hand, the Brexit debate continues to loom on the UK’s political landscape, with any decision to leave the European Union likely to damage the country’s financial industry. Further regulatory change through the implementation of ring-fencing rules is expected to cost the bank an additional $2 billion as it relocates the headquarters of it’s from London to Birmingham. Both the bank levy, albeit reduced, and incoming ring-fencing requirements duplicate other domestic measures aimed at the same problem—silos, capital surcharges, “bail-in” bonds and liquidity buffers.

Furthermore, current volatility in the Chinese stock market is considered by those close to the situation to be of little consequence to decision making, with the board considering the future of the bank in the next 20 to 30 years. Asia currently accounts for 60% of the bank’s profits, and there is little contention that over time this region will grow at a faster rate than Britain. The bank must also consider the possible acquisition of rival Standard Chartered by a Chinese institution – a move many consider to be inevitable. If this were to take place, Standard Chartered would become the only foreign notes-issuing bank in Hong Kong if HSBC decided to stay in London, with HSBC losing out on this valuable franchise.

Although analysis has shown that moving to Hong Kong would not ease HSBC’s tax bill or capital level by much, or insulate it totally from Britain leaving the European Union, the bank would avoid the UK bank levy, intrusion by Western regulators and be physically closer to its biggest markets. But the biggest worry remains a geo-political one, in that Hong Kong is a territory and not a country in its own right. Whist being a favourable regulator, the Hong Kong Monetary Authority (HKMA) both lacks the crisis toolkit of a central bank and does not possess a credit line from America’s Federal Reserve to supply it with dollars, HSBC’s operating currency. In instances of crisis, with a balance-sheet nine times bigger than Hong Kong’s GDP, HSBC’s ultimate backstop would be mainland China’s government – an option far less favourable to that in the UK.

Therefore, despite a persuading argument to pull it overseas, it appears that on this occasion the grass is not greener on the other side for HSBC.

On Monday, Wragge Lawrence Graham & Co (WLG) became the latest UK law firm to introduce targets for female partnership. Keeping in line with others in the industry, the firm has committed to increase its proportion of female partners from 20% to 30% by 2026. This mirrors targets set by Linklaters, Berwin Leighton Paisner and Baker & McKenzie set to expire in 2018, and commitments made by Norton Rose Fulbright, Herbert Smith Freehills and Pinsent Masons to improve female partnership numbers over the long term.

The move has been prompted by Wragge’s impending merger with Canadian firm Gowlings, who have a current female partnership rate of 27%. This greatly exceeds progress made in the UK and Canadian market more generally, where average female partnership numbers currently stand at 22% and 20% respectively. However, the boost in female partnership numbers at Gowlings have been achieved without the introduction of female partnership targets, with the targets introduced by Wragge applying exclusively to their partnership when the firm’s merge under an umbrella structure to create Gowling WLG at the end of the month.

Diversity Targets – To implement or not to implement?

The inclusion of female partnership targets as part of a wider Diversity & Inclusion (D&I) strategy is subject to much contention within law firms. A firm’s announcement of female partnership targets demonstrates a clear commitment to the issue from senior management, which creates accountability to enforce change that filters down to practice heads and partners. Unlike other initiatives, the introduction of female partnership targets provide a concrete benchmark against which the impact of other policies to improve gender diversity can be measured. More broadly, the introduction of female partnership targets, and discussion of what needs to be improved to achieve them, increases visibility of the issue amongst firms and prompts dialogue about how best to enforce change.

Despite this, the introduction of female partnership targets also risk alienating other (majority and minority) segments of the workforce, or at worse enforce positive discrimination. Women themselves often dislike the idea of female partnership (or boardroom) targets, and the associated tokenism this brings as opposed to promotion based on individual hard work and merit. Other strands of diversity, such as BAME, disability and social mobility are also not ordinarily measured by targets. More fundamentally, some commentators question whether female partnership targets are realistic, and if such numbers are even achievable by UK law firms. For example, findings from The Lawyer’s Diversity Audit revealed that female partnership numbers across the UK100 have remained at the same level as they did in 2010.

The Canadian example

This brings us back to Gowlings, and a select number of other Canadian firms, who have increased their proportion of female partners without the introduction of targets. As well as women making up close to a third of Gowling’s partnership (119 of 433 partners), women also lead over half the firm’s offices and one of the co-managing partners is a women. Furthermore, Gowlings only committed to a firm-wide D&I initiative in 2014 – four to five years behind the majority of the UK legal market. So what accounts for the firm’s progress, and what, if anything, could be transferable to UK law firms?

Closer inspection of the Canadian legal market reveals that, although a gender gap in partnership definitely still persists, more consistent gains are being made across the province-based law societies. For example, in Ontario of the 41% of the legal profession that are women – 23% of them are partners. A reason for this is the number of larger scale province wide initiatives that do not comparatively exist in the UK. The best example of this is the Justicia project, which after initially being established to survey gender diversity in private practice, now provides resources and toolkits on issues such as pathways to partnership, flexible working and business development. The project also developed a template to help the 57 participating firms to accurately track their gender demographics for the long term. For firms participating in Justicia, the proportion of female equity partners rose by 67% in 2012, 80% in 2013 and 44% in 2014.

Gender diversity initiatives in Canadian firms themselves also differ in approach to those often implemented in the UK, such as women’s networks and mentoring schemes. As well as greater participation in province-wide initiatives, law firms place greater emphasis on training – especially increasing skills of business development. The ability to generate business and spot opportunities for growth underpins the success of any lawyer to make it to partnership, but can be overlooked in favour of networking or mentoring for example. Blake Cassels & Graydon, a Canadian firm with 25% female partnership, introduced a ‘Make it Rain’ training programme where successful partners ran business development training sessions with mid-level associates.

Finally, another insight into the success of Canadian law firms to advance female lawyers comes from the demand from their clients. Similar to the US, general counsel have become much more explicit in their desire to see diversity in the teams of lawyers that service them, asking directly for a firm’s demographics, the gender balance of the team they are working with, and the initiatives in place to increase gender diversity in the future. Beyond this, GC’s from a number of Canadian corporates established Legal Leaders for Diversity and Inclusion (LLD), a public interest group to lobby for a more inclusive legal profession across all strands of diversity. As part of this, corporate clients agree to consider diversity in their purchasing and hiring practices, and to encourage their external legal counsel to do the same. In 2013, in a commitment to promote diversity in their firms and work with LLD and other general counsel, sixteen leading Canadian law firms came together to create The Law Firm Diversity and Inclusion Network (LFDIN) to share ideas about how best to increase diversity and inclusion in the sector.

Conclusion

By looking at the Canadian example, it is clear to see that increased female partnership numbers have come from the greater push of external factors on law firms, rather than internal firm initiatives alone. This does not deny the individual effort of Canadian law firms, which has undoubtedly been great, but states that such effort has grown out of a wider culture of accountably bred by clients and diversity organisations. This has been successful in the absence of firms setting female partnership targets – as in this context, they were simply not needed.

This provides important transferable lessons to the UK legal market about ways to increase gender diversity, upon which progress has started to stagnate. The implementation of intra-firm and regional based projects could easily be replicated in the UK, and to an extent has already been achieved in increasing access to the legal sector by PRIME. Building upon the success of the 30% Club, a more pointed legal-based public interest group comprising large clients and their general counsels could also serve to provide the greater push needed to ensure gender, and other diversity stands continue to be addressed by law firms.

The implications of this will become more important in the future, as by 2020 women are expected to account for more than half of the solicitors in the UK, for the first time becoming the majority gender in the profession. As such, law firms cannot afford to ignore the financial, resourcing and moral implications of not getting their gender diversity initiatives right.

Female partnership targets or not, ultimately gender diversity initiatives need to be tailored to a firms’ organisational culture, existing D&I initiatives and current level of gender balance. Whilst it is positive that Wragge Lawrence Graham & Co have joined the host of other UK law firms in publicly announcing their commitment to increasing gender diversity, we stand to learn a lot from the Canadians about how best to see these targets through.

Fides Search strives to push the boundaries of recruitment and consultancy work, thought leadership is central to this. We focus on our client’s objectives and challenges and aim to help them achieve their goals through our approach and insight. Diversity remains a challenging topic for our private practice and in-house clients. This blog forms part of a Diversity series that we will be reporting on throughout the year, with a more in-depth article on Gender Diversity in the legal sector to be released to celebrate International Women’s Day on the 8th March. Please contact research@fidessearch for further details

Over the last few years, due to the globalisation of the legal market, top-class UK firms have been altering their partner remuneration models and, in some cases, breaking lockstep for big ticket hires. Many argue, however, that it is now time for a more drastic overhaul of firm lockstep structures where more competitive and lucrative systems are implemented that will bring UK firms in line with their fellow global elites.

The London legal market is becoming more competitive year on year, due to the continued influx and expansion of US firms as well as a host of non-legal firms who have been granted Alternative Business Structure licenses. These entrants offer attractive alternative options to many partners looking for new opportunities in an alternative, and arguably more commercial environment. Therefore, UK firms are coming under threat, particularly due to the evident gap in profitability compared to their US counterparts.

The last of the UK’s law firms to adapt to this new reality was the Magic Circle. Whilst they have begun to take on some aspects of performance-based remuneration, such as Freshfields’ second-tier lockstep ladder and Clifford Chance’s addition of ‘superpoints’, it may be necessary for Magic Circle firms to radicalise their models to continue to attract and retain star performers. There has been some evidence of this, as Freshfields broke their lockstep last June to take on Kirkland & Ellis high yield partner Ward McKimm.

Freshfields are leading the magic circle in the move away from the lockstep model and it will be interesting to see how the other firms react. Due to obvious challenges the magic circle face in considering a complete overhaul of their partnership structures, it is not surprising that they have stopped short of this. They are instead restructuring the bottom of the equity and adding gates rather than adopting the US compensation mentality in its broadest sense.

Although the Magic Circle have a very secure market position in London, entering the US market and addressing the nature of how they compensate their partners will be a challenge. Freshfields have certainly paved the way with their strategy to enter the US market. They have shown they are not afraid of making high-profile hires in establishing a reputable footprint by hiring a three partner team in 2014 from Fried Frank in New York, which included their the firm’s global capital markets practice head, Valerie Ford Jacob. As law firms tend to follow market trends set by others, we predict that 2016 could see other Magic Circle firms possibly following suit in this space. Clifford Chance in particular have also amended their lockstep to become more flexible and as such, are capable of making the same headway across the Atlantic.

The Silver Circle have been more ambitious with regards to the flexibility of their models, introducing modifications to their lockstep models much earlier. However, given their market position, this strategy forms part of a more protectionist perspective, as they struggle to retain many of the best performers and a modified lockstep allows them to compensate top earners more effectively. Nevertheless, even with significant changes to their remuneration structures, second tier firms will continue to struggle in attracting big ticket hires as they do not have the profitability to compete with Magic Circle or US firms.

Whether we are discussing Magic or Silver Circle firms, it remains to be seen what impact these foreseeable changes could have on firm culture. It is well-known that operating an eat-what-you-kill model intensifies competition within a firm, and has the potential to discourage teamwork and collaboration, something which has been fostered by top UK firms since their outset. Law firms have also worked hard to implement favourable agile working policies, but the implementation of a merit-based system could risk creating a work-life balance adverse to what they are trying to achieve.

It seems likely we will be seeing more changes to many firms’ lockstep structures over the coming year and Linklaters recent partner vote on assessing its remuneration process is testament to that, with the firm voting to maintain its lockstep structure. The varied approaches by each of the Magic Circle firms will show us over the course of the year which structure proves most successful. It could be seen that Freshfields experience fallout from their second tier after having made significant changes. Conversely, Linklaters’ lack of mobility could make their top performers vulnerable to US firms. Whether partner remuneration is amended for defensive or attacking purposes, a law firm without the ability to retain and indeed attract leading talent will face difficulties in an increasingly active lateral recruitment market.

In October 2015 we published Shifting Sands: The Impact and Consequences of the FCA’s new Regulatory Regime. This analysis identified core regulatory developments that have come to define the post-crisis era – prohibitively high financial penalties, increasing focus on individual accountability, pressures on banks to ‘self-police’ and preventative action by the FCA if they didn’t. It concluded that such developments only added pressure to financial institutions already operating under a state of regulatory fatigue.

Despite this, the fast-paced and ever-changing nature of the UK’s financial regulatory regime means that a lot has changed in the past three months, leading many commentators to hail the end of the so-called era of ‘banker bashing’. A change in approach by the FCA, the UK’s regulator of financial services firms, has been evidenced by three major changes in structure and policy; the resignation and departure of former CEO Martin Wheatley, changes made to the Senior Managers Regime (SMR), and the recent shelving of a planned inquiry into banking culture.

After being informed that his contract would not be renewed by the Treasury, the unexpected departure of Martin Wheatley in September signalled for many that the regulatory outlook was changing. Initially appointed in for his hard line on the industry, Wheatley led the FCA from its inception by pledging to “shoot first and ask questions later” when it came to banking misconduct and consumer detriment. The global search for Wheatley’s successor has been underway for the past six months, and appears to be no closer to completion with interim CEO Tracy McDermott, hotly tipped to take the role permanently, withdrawing her candidacy stating that she “did not want the job”.

Despite ‘unfinished business’ at the regulator, a recognised success of the Wheatley era was the introduction of the Senior Managers Regime, which comes into force in March. Replacing the discredited Approved Persons Regime, this framework ensures greater accountability for individual actions by more clearly defining the roles and responsibilities of those in senior functions. A mechanism for achieving this was embedded in the reverse burden of proof – the idea that when regulatory misconduct is discovered, the senior manager in charge is guilty unless proven otherwise. However, this was scrapped a month after Wheatley’s departure after major intervention by the industry and replaced with a ‘duty of responsibility’. Although it remains a statutory requirement for senior managers to take reasonable steps to prevent regulatory breaches, the burden has now been placed back on the regulator to prove that the senior manager failed to do this, bringing the SMR back in line with core tenants of the Approved Persons Regime.

Finally, New Year’s Eve saw the quiet admission by the FCA (well the FT) that it was scrapping its review into UK banking culture. Intended to determine whether change programmes were “driving the right behaviour”, the review was dropped in favour of the FCA engaging individually with banks to improve their culture, and is perhaps the largest indication that policy-makers are softening their stance towards the sector. Alongside the culture review, it has emerged in the past week that the FCA has also dropped two other studies on retail investment advice and the misuse of personal data, and Monday saw the announcement that the ‘deep dive’ investigation into HSBC’s Swiss banking arm had also been abandoned. After much political debate, and admission of Treasury Select Committee head Andrew Tyrie that the decision to halt the inquiry was “odd”, FCA chairman John Griffith-Jones and acting CEO Tracey McDermott have finally been summoned to appear before the Committee on 20^th January.

So does this mean that the era of banker bashing is coming to an end? Well, maybe. The FCA has levied record fines on the industry since it has come into existence, the key question remaining as for how long the intensity and volume of this regulatory activity is sustainable. One can also not ignore the political landscape, with HSBC due to decide at the end of this month whether to relocate its global headquarters out of London and the fact that the government needs favourable conditions to sell its enormous stake in RBS. The definitive answer to this question will only come when they announce Wheatley’s replacement, until then the search continues…