Welcome back to the Fides Weekly Update. Here we provide you with analysis of the week’s biggest news stories in legal and compliance. Scroll down to see our regular Movers & Shakers of the week.
This week:
1. KWM bailed out by partners with £14m cash injection
Yesterday saw the announcement that King & Wood Mallesons (KWM) will receive a major boost in capital as partners vote to inject £14m into the firm.
With 98% of the legacy SJ Berwin partnership voting in favour of the move, this comes as the third stage of the firms’ strategy to strengthen its business in Europe and the Middle East. This included a strategy overhaul in which the firms’ 17 practice areas were streamlined into three core divisions and a partnership review due to axe 15% of the European partners.
To recapitalise the firm, KWM’s partners have been asked to pay in an extra £4,000 per point they have on the 20-60 point remuneration ladder, doubling each partners’ total capital contribution to the business from £4,000 to £8,000 per point. This means that those on the bottom of the ladder will pay around £80,000 into the business, while those at the top of the equity will inject £240,000 into the firm with partners given the option of injecting the cash or allowing the sum to be deducted from their share of past and future profits.
Meanwhile, salaried partners have been asked to pay capital contributions for the first time in the firm’s history. Despite not traditionally being assigned profit points or being able to vote in partnership decisions, salaried partners have been asked to contribute £60,000 to the business.
Many consider this long overdue as it follows a period of increased financial strain that has seen KWM increase its loan with Barclays by £5m to £25m. The firm also moved to a monthly profit distribution system in February following repeated delays in quarterly payments, having only 25% of the profit payments for 2015-16 being made before this date. The firm also faced a significant hike in its London rent after a 10 year deal made by legacy SJ Berwin came to an end in May.
Unsurprisingly, this has led to a further string of partner exits across KWM’s European offices who have been picked up predominantly by US firms. The departure of the region’s COO Rachel Reid for Taylor Wessing in January as been followed this month with the move of former chief finance officer Jeremy Cross to Cadwalader Wickersham & Taft, with litigation duo Elaine Whiteford and Greg Lascelles joining Covington & Burling.
On the continent, investment management partner Hilger von Livonius moved to establish the Munich office of K&L Gates, whilst the firm lost a six-strong private equity team in Paris – including KWM Paris managing partner Christophe Digoy – who left to launch the office of Goodwin Procter.
Moving forward, the question remains as to whether contributing capital will stem future partner exits or is rather indicative of an inherently dysfunctional business model. Increasing the capital contribution of partners – especially salaried partners – enhances vested interest in the firm’s success and makes lateral partner exits more challenging due to the increased capital partners hold in the business. However, with the continued loss of prominent lawyers across Europe, it will be interesting to see whether this phase of their strategy leads to long term success or merely plugs financial issues in the short term.
2. FCA proud supporters of innovation
Last week, the Financial Conduct Authority (FCA) kicked off London Fintech Week, affirming their plans to get to grips with regtech and announcing their objective to foster innovation rather than obstruct it.
Speaking at the annual fintech conference, Christopher Woolard, Director of Strategy and Competition at the FCA, said that one of the regulator’s top priorities in 2016/17 is to facilitate innovation in ‘regtech’ – technologies that will help financial services companies fulfil their regulatory requirements. Woolard claimed that it is beneficial to both consumers and regulated companies to improve the technology used in achieving regulatory compliance. For banks and financial institutions, regtech could make regulatory reporting much more transparent, whilst also minimalising the time and resources utilised. Conversely, for consumers, this type of innovation has the potential to change business models and increase competition, allowing for better and more efficient services in the market.
The FCA is attempting to stay ahead of the curve by encouraging the integration of ground-breaking technology with current regulatory systems. Their response to the emergence of technology has been promising, with the UK regulator organising a number of regtech roundtables; collaborating with fellow regulators on enabling innovation, and issuing a Call for Input in order to learn more about the potential compliance solutions regtech could offer.
Meanwhile, the more pressing concerns for the FCA has to be regulation of the fintech space. Fintech companies are struggling to navigate through the complex regulatory landscape, as many of their products cannot be clearly defined under existing regulation. Creating and implementing a compliance framework is challenging under these conditions, and the FCA must adapt regulation to suit the needs of fintech companies if they want to avoid hampering innovation.
The FCA have noted the need to consider changes to regulation for the emerging fintech market and launched Project Innovate, an initiative that helps those developing new products to better understand financial services regulation, whilst also learning how regulation can be adapted to suit new products. One of the most well received applications from this project is the regulatory sandbox, a programme where businesses are able to test new innovations in a live environment before applying for FCA authorisation.
It is clear disruptive technology is here to stay in the financial services industry, and has become increasingly prominent in regulation. Within compliance, the furthest advancements are being made in automating AML & KYC processes, whilst innovation in data analytics capabilities is also advancing quickly. With the amount of activity in this space, we expect that this innovation will make fundamental changes to the regulatory landscape and possibly ease some of the compliance burden for financial institutions. We have already seen where technology has affected regulatory reporting and this is perhaps the start of a wave of technological changes which can affect financial services broadly.
Movers & Shakers of the week
Moves
Latham appoints senior A&O finance partner
Stephen Kensell departs Allen & Overy after 22 years at the firm to join Latham & Watkins in their London office
Ashurst loses CFO
CFO Brian Dunlop leaves Ashurst, yet to take on another opportunity
Lloyds finds new GC from FCA
Tom Spender has joined Lloyds Banking Group as its new general counsel for group litigation, regulatory and competition legal. He joins from the Financial Conduct Authority where he was director of retail and regulatory investigations.
Bakers hires four partner-strong team in Germany
Baker & McKenzie have strengthened their German offering with Taylor Wessing corporate partners Thomas Dormer and Tim Heitling. They will be joined by senior associates Claire Polte and Daniel Neudecker, who will also join the firm as partners.
Mayer Brown boosts Brussels capability
Former Hunton & Williams partner Geneviève Michaux has moved to Mayer Brown in their Government & Global Trade practice in Brussels
HFW bolsters insurance practice in London
Leading insurance partner Christopher Foster has joined Holman Fenwick Willan’s insurance and reinsurance practice from Herbert Smith Freehills’ in the City
Office Openings & Closings
Pinsents opens in South Africa
Rob Morson and Shane Voigt have left Bowman Gilfillan to launch Pinsent Masons’ first Africa office in Johannesburg
Mergers & Alliances
Norton Rose forms Kenyan alliance
Norton Rose Fulbright and Kenyan firm Walker Kontos have entered into an alliance, to be formally launched in October