Fides Weekly Update – 28th October 2016

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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This week:

1. Upcoming trends in the legal sector: PwC Annual Law Firm’s Survey Released

This week saw the annual release of the PwC Law Firms Survey, which marks its 25th anniversary this year. One of the most extensive insights into the UK legal sector, this week’s newsletter highlights the report’s key findings and suggests how this will impact future trends in the industry.

Overall, the survey found revenue and profit growth in 2016 to have been modest, reflecting challenging market conditions and a sector saturated with supply outstripping demand. Whilst global fee income increased across the board, the Top 10 at least, this was attributable to foreign exchange rates.

There has been continued growth in UK revenues across most firms, although achieving profitable growth across the sector has been challenging, with all bandings in the Top 50 firms reporting reduced net margins. The same also holds true for the expansion of UK firms into North America, with average margins being as low as 10% in comparison to 35% last year.

Key challenges to net profit include continued pressure from clients for fixed or contingent fees alongside higher staff costs as a result of increased headcount and/or increases to base salaries to attract and maintain top talent.

The survey found PEP performance to be flat (on average) across the Top 50 firms, whilst the profit performance of the Top 25 continues to lag significantly behind that of the Top 10. This suggests further consolidation of the mid-tier, with firms reconsidering their global strategy in terms of structure and international coverage.

Regarding people, firms have continued their focus on recruitment into 2016 with headcount increasing both domestically and internationally in Top 50 firms. Increased demand for top talent and the influence of US firms within the London market has led to inflated salary costs, with average full-time fee earner cost increasing by 10% in the Top 10 and 21% in the Top 11-25.

Greater diversity and inclusion within the sector remain a key theme, with the gender balance at partner level remaining disappointing at 17% and 18% in the Top 10 and Top 11-25 respectively. The introduction of gender pay gap reporting in the UK from next year will force firms to better consider the flow of diversity through their organisations in the future.

Unsurprisingly, the impact of Brexit features heavily on the survey’s findings. Regarding employment, the Brexit vote has clearly influenced firms’ outlook on performance and headcount needs, with some institutions delaying salary reviews or putting in place salary freezes.

As can be seen with the recent fluctuation of the pound, exchange rate movements exacerbated by the global volatility of the Brexit vote, now pose a significant risk to global law firms. Impacting not just financial results, but the remuneration of global partners, inter office transactions and the negotiation of single-currency contracts with clients, law firms need to consider exchange risk and risk mitigation and consider hedging mechanisms to protect against volatility (As seen with the overhaul of associate salaries at Akin Gump)

Information security, in particular cyber-attacks, were also identified as another area of risk that needs to be better managed by law firms, 73% of all firms surveyed suffering a security incident this year – most commonly through phishing attacks (84%) and infection by viruses / software (55%).

Information technology systems also play a critical role in helping law firms identify opportunities to increase efficiency in areas such as pricing and resource management which directly impacts profitability. With the utilisation of technology being critical to enable the future delivery of innovative services to clients, the fact the majority of firms outside the Top 10 do not consider their IT systems to be a ‘strength’ is worrying.

In looking to the future, the survey concluded that it would take positive responses and significant financial investment by law firms to overcome the challenges faced by the sector. In particular, the need to invest heavily in new technologies and processes to streamline workforce models and the management and deployment of resources emerged as key strategic priorities for the future.

As such, the onus is now on firms to be agile in adapting to change and utilising difficult market conditions.

To read the full report, please click here.

2. ‘A very sorry history of scandals’: The FCA opens consultation on future mission

The Financial Conduct Authority has launched a public consultation on its mission statement which aims to set out the organisation’s priorities for the 56,000 firms and the 130,000 approved persons that it regulates.

“Our mission will set out a framework within which we prioritise our work, ensuring we focus our resource in the right places,” said chief executive Andrew Bailey, as the regulator tries to move on from a “very sorry history” of financial scandals and subsequent record-breaking fines.

The mission statement, open for consultation until the New Year, does not intend to relax the regime but rather be clearer on what things meant.

Mr Bailey’s first major policy initiative since taking the job in July, the mission statement does not reposition the FCA as either pro-city or pro-consumer and will serve to guide the agency through the UK’s post-Brexit relationship with the EU.

The document pledges to intervene sooner to protect particularly vulnerable consumers, make regulation clearer and be more active against financial organisations committing misconduct outside of the FCA’s remit (Such as payment protection insurance and interest-rate hedging products). What role the FCA plays in financial compensation schemes is also to be discussed.

Regarding enforcement, the mission statement said redress would play a more important part in any sanctions for wrongdoing, but added that just because an investigation was launched did not mean a penalty would be automatic. The organisation also promised to review the use of its ‘private warnings’.

This consultation on the priorities of the FCA comes at a critical juncture, as research released by think tank New City Agenda earlier in the week concludes that the FCA risked sleepwalking into the next financial crisis unless it stood up to politicians and stopped watering down rules.

Since the ousting of Martin Wheatley last year the regulator has been accused of taking the pressure off the banking sector and relaxing its enforcement regime. Markets thrive on stability but with June’s EU referendum result and the government’s decision to delay triggering article 50 until early 2017, institutions have been operating in turbulent times.

Encouragingly, the recent positive profit announcements by UK and U.S banks shows a strong showing for many business areas that last year underperformed which is a relief to shareholders as the remain campaign painted predicted apocalyptic downturns.

The FCA, with Andrew Bailey at the helm has a window of opportunity to provide the markets with a sense of direction and stability with a clear message on its approach and focus for the future and hopefully his first meaningful strategy will deliver this.

3. Movers & Shakers

Appointments

Mark Rigotti confirmed as sole CEO at Herbert Smith Freehills

After the Anglo-Australian firm announced that it was phasing out its joint CEO leadership structure, Rigotti is confirmed over Leydecker to hold the post solo.

DLA appoints new London Managing Partner

Corporate M&A partner Tom Heylen has been appointed as managing partner of DLA’s London office succeeding Lord Clement-Jones who is stepping down after six years in the role.

Moves

Clifford Chance disputes veteran to join Dechert’s London base

Dechert has recruited Clifford Chance (CC) litigation partner Stephen Surgeoner in a boost for the US firm’s London office.

Latham magic circle hires continue with Allen & Overy M&A star

M&A partner Edward Barnett joins Latham’s London office after 20 years at A&O

KWM halts recapitalisation programme after the resignation of four London partners

The firm confirms the resignation of UK investments funds head Michael Halford, private equity partner Jonathan Pittal, corporate partner Andrew Wingfield and former managing partner Rob Day.  It has since emerged that Wingfield and Day have joined Proskauer Rose.

Kirkland takes US private equity partner from Freshfields

New York-based corporate partner Doug Bacon joins Kirklands Huston office

Willkie Farr to launch London competition practice with KWM partner hire

Philipp Girardet joins the London office of Willkie Farr with senior associate Rahul Saha

Partner Promotions

Ropes and Gray adds two to partnership in 11-strong promotion round

Ropes & Gray has made up London lawyers Andrew Howard (Tax) and David Seymour (Real Estate) in a reduced global round

Taylor Wessing confirms two London partner promotions

Josef Fuss (Corporate) and Gareth Lawson (Finance) made up in 15-strong global promotions round

Office Openings & Closings

Clyde & Co close Libya office amid political instability

read more

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