Hello and welcome to the Fides Weekly Update. Take a look at this week’s key trends, moves and developments in legal and compliance.
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1). Legal sector resilient in the face of uncertainty
Legal Week’s annual ranking of the UK’s 50 largest commercial law firms shows combined revenue grew 12% year on year to a new high of £22.5bn in 2017-18, up from £20.1bn last year. Average profit per equity partner (PEP) across the group also surpassed £700,000 for the first time.
Even when growth from major law firms mergers was accounted for – including tie ups between Eversheds and Sutherland Asbill & Brennan, and CMS, Olswang and Nabarro – the group still performed strongly, with total revenue climbing 8%.
Legal Business reported similar results, showing revenue generation across the UK’s top 100 firms increasing 10% to £24.2bn.
Among the standout institutions were Simmons & Simmons, Osborne Clarke, Fieldfisher, Macfarlanes and Travers Smith, which all comfortably recorded double-digit revenue increases. There was also a notable hike in revenue at DWF, up 17% to £236m, as the firm enters preparations for the largest ever law firm float.
Average PEP across the top 50 also rose to new high of £719,000, up 5% from £682,600 last year. 10 UK top 50 firms now have PEP of at least £1m, with Hogan Lovells and Travers joining the seven-figure group this year.
However, despite this, 10 firms saw PEP fall on last year and 26 achieved lower PEP growth than revenue, highlighting the struggle some firms are facing to translate revenue gains into bottom-line increases. Eighteen firms saw PEP growth exceed their revenue gains.
In terms of headcount, total lawyer numbers across the UK top 50 broke the 50,000 mark – up 3% to 51,271, with total partners up 7% to 15,238. However, total equity partner numbers climbed by only 1.6%, in part highlighting the control firms are continuing to exert over their equity.
Stripping out growth from mergers, total lawyer and partner numbers across the group each increased less than 2%, with relatively few of the largest firms focusing on headcount growth.
As always, the strong average performances across the group mark significant disparities in individual results, with the best performers tending to be smaller, less internationally focused firms, such as Macfarlanes, Travers Smith and Fieldfisher.
Despite what on the face of it appears to be a solid set of results for the last financial year, law firm leaders are heading into 2018/19 with mounting caution. Aside from concerns over the Brexit talks and the long-term outlook for the City, the profession is adapting to more demanding clients, and tech-assisted changes to working practices and business models.
2). A storm is brewing: Danske Bank investigation reopens following what the EU Commission labels “the biggest scandal” in Europe
A much anticipated report was released on Wednesday, which detailed an investigation into the suspicious activity of Danske Bank’s Estonia branch. It discloses that €234bn worth of non-resident funds flowed through Danske’s Baltic residence from 2007 to 2015, with as much as €30bn of transactions taking place in 2013 only. Věra Jourová, the European commissioner for justice is preparing to examine how such long-standing misconduct was able to occur, determining that “this is the biggest scandal which we have now in Europe”.
The 87-page report (which summarises the findings of two 300-page dossiers) conducted analysis into the 6,200 riskiest customers, ultimately citing that a significant amount of the transactions managed through the Estonian branch should have been flagged as suspicious.
It alleges the Danish bank’s senior management could have done more to avoid such a lacklustre attempt at anti-money laundering procedures, which has led to the resignation of Danske CEO Thomas Borgen. Borgen announced his resignation on Wednesday and will depart once a replacement is found. Chairman Ole Andersen has also hinted at stepping down, whilst compliance chief Anders Meinert Jørgensen left the bank in July this year.
The Financial Times reported that in 2015, Deutsche Bank ended its arrangement as a correspondent bank for US dollars with Danske in Estonia over concerns in relation to non-resident customers, whilst JP Morgan was the first correspondent bank for US dollars to terminate its relationship with Danske in Estonia in 2013.
Written by Danish law firm Bruun & Hjejle, the report insists the results are objective, however also states the findings can be regarded as neither “impartial” nor “independent” given its previous dealing with its client. It is likely that the lack of conviction in this report is what led to the Denmark Financial Supervisory Authority (FSA) reopening its enquiry into the bank’s Estonian activity.
Furthermore, during the period in which the FSA’s previous report into Danske was written and released, the Danish regulator was headed up by Henrik Ramlau-Hansen, who was also Danske’s chief financial officer from 2011 until 2016. Although Ramlau-Hansen recused himself from the Danske case, there are additional questions surrounding the actions of Denmark’s financial regulators at the time.
There is no doubt that other regulatory bodies are considering their involvement in this case. Jourová has announced her plans to collaborate with regulators in Estonia and Finland, meanwhile US financial watchdogs are assessing their strategy towards Danske Bank which, if an offensive position is taken by the SEC or DoJ, could result in much bigger consequences for the Danish bank.
Analysts surveyed by Bloomberg expect the bank’s total financial penalties to be valued around $800 million, placing it amongst some of the heftiest AML fines for the financial sector, which include HSBC’s $1.9bn in 2012 and Deutsche Bank’s nearly $700m in 2017.
3). Movers & Shakers
The former Serious Fraud Office (SFO) case controller for its high-profile battle with the Eurasian Natural Resources Corporation (ENRC) has resurfaced as a partner at US firm Cohen & Gresser’s, which only launched in London earlier this year
Simmons & Simmons, Gowling WLG and Brodies have pushed back against the Big Four accountancy firms’ encroachment into the legal market, by making senior hires from EY. Simmons has launched a TMT VAT consultancy practice with the hire of EY director Joanna Crookshank, whilst Gowling WLG have appointed EY’s Brexit lead Ursula Johnston as its new director in customs and trade. Scottish firm Brodies has also turned to EY to enhance its corporate tax and incentives practice, bringing in new partner Karen Davidson.
Sebastian Reger joins pensions sector group from boutique Sackers & Partners
Slaughter and May corporate partner David Watkins has returned to London after a seven-year stint in Hong Kong, having overseen a period of growth for its Asian offering, with six new partners and practice expansion into North Asia.
RPC has made a senior addition to its regulatory team with the hire of Sam Tate, EMEA anti-corruption head at financial crime consultancy Exiger.
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