EVENTS AND ROUNDTABLES > CITY OUTLOOK: A LONG TIME IN POLITICS
City outlook: a long time in politics
Oh for the days when politics was the last thing on the minds of City advisers. For years, British politics was an ignored backdrop for a legal profession used to a globalist, free-market agenda since the 1980s. How quaint such times seem in a national economy and City now overshadowed by Brexit and a convulsing political dynamic in a country once famed for stable one-party government.
Teaming up with NatWest, Legal Business gathered a group of senior City lawyers on the evening of the UK’s general election on 8 June to gauge what is on the agenda for the UK’s largest law firms. If nothing else it was striking how concerned – and disenchanted – City lawyers have become with the political classes and uncertainty… even speaking just hours before it became clear that the Conservative government was to lose its working majority.
Alex Novarese, Legal Business: Let’s start on the general election. Everyone assumes that the Conservatives are going to win. What does that mean for the City?
Ian Cox, Herbert Smith Freehills: That’s a big assumption. If it is roughly where we started from or within ten to 20 seats of where we started from, then it leaves Theresa May much weaker. It has been a disastrous campaign, and anything other than a 60/80-plus majority puts her and the City in a worse position, if we are talking about possible outcomes of Brexit. She will have far less freedom to face down the more recalcitrant parts of her party unless she comes out of this stronger. I am pretty pessimistic that we, the City, are now better off than eight weeks ago leading into the next two years of negotiation.
Alex Novarese: Has the campaign taken the shine off the government?
Ian Cox: I cannot think of anybody in the Tory party who has come out of this fairly well. If you have come out of the campaign having performed worse than Jeremy Corbyn you have not had a good campaign.
Daniel Naftalin, Mishcon de Reya: If she gets a substantially increased majority then she has a mandate to fight a bit harder for the City, and push through some of the policies she believes in. She will end up fighting harder for the City of London than she indicated during her election campaign. I agree the campaign has not been fought well, but I hope that she will have learned a few lessons from it.
Alex Novarese: It has been claimed in recent months that the Conservatives are now less open to hearing from the City. Is that your sense?
Chris Hale, Travers Smith: I know from the City of London Law Society’s attempts to lobby the government on Brexit-related issues that it is difficult to obtain a voice. If that is a reflection of wider government listening to the City, then yes.
Ian Cox: My experience is similar. I do not know whether that is a reluctance to listen, an ambivalence to the message or simply because they are so overwhelmed.
Chris Hale: There is an element of that and the government has not organised itself as well as it could on Brexit. Each department is rather siloed and not talking to the others, even on overlapping issues. There is an element of being completely overwhelmed by the task in all of this.
Alex Novarese: Looking at the Conservative manifesto, do you have any thoughts about the impact of specific policies?
Keith Froud, Eversheds Sutherland: Policies seem to be changing on a fairly regular basis. The campaign has been a disaster. I don’t understand how you can’t turn up to the [election] debate. If they don’t get the majority they were expecting maybe they will listen more to business.
Chris Hale: There is protectionist language in the manifesto. If followed through, it would not be good news for the City.
Alex Novarese: Is the anti-globalisation message window dressing?
Alastair Morrison, Pinsent Masons: It feels defensive. A lot of clients talk about how if you go to Downing Street you have to take your partner and not ask difficult questions. She has to learn the craft of being a prime minister. She has a lot to think about in that regard.
Helen Burton, Ashurst: It is a rather unfortunate time to be learning the craft.
Alex Novarese: Are there any bright spots in the front benches?
Chris Hale: David Davis has surprised me on the upside. He is a more flexible, impressive individual than I had thought when he took office. He is the one particular positive for me among the Conservative front bench.
Andrew Saul, Osborne Clarke: He has performed well in debates and during interviews in relation to the Brexit negotiations.
Peter Hasson, Clyde & Co: One of the issues that has been totally underestimated is just how much Brexit changed the traditional lines of politics. Theresa May has been trying to reach out to the Brexiteers of the North, and take on UKIP to build a bigger a majority. It may work. At the moment, it looks like a complete disaster. She has a very unstable political coalition, because she has a bunch of MPs who are broadly in favour of staying in, to the extent you get any sense of own personal political views, it is the vicar’s daughter, one nation Conservative, with more interventionist views. The dangerous thing that comes out of this is a weak government, which gives those people who want a hard Brexit a much stronger influence. The only way that Corbyn could possibly be able to form a government is there being a massive turnout of young people. If that happened the Brexit decision is much more likely to come into question, and you are likely to get a much more interesting approach to Brexit.
Alex Novarese: Let’s look at protectionism. Let us think about what is going on in America and the rhetoric under Trump.
David Higgins, Freshfields Bruckhaus Deringer: The important thing to remember about Brexit is that we look at it through little Englander eyes. In the wider world people are not too fussed. Given what is happening in France and Germany, it is not at the top of their worry list. They are looking at a Trump scenario where Trump has said that he is not that interested in Europe. There will arguably be a more cohesive Europe without the UK given Macron and Merkel, which is an interesting dynamic that we have not had before.
Though with China it slightly depends on what Trump does, but if China softens and Trump does not do anything stupid then that creates an interesting dynamic. Then you have the Middle East, which Trump has managed to complicate in quite a short period of time with what is going on with Saudi and Qatar.
Asia will be a difficult market if you look at house prices in China and all of the macros. Asia will be a difficult market for law firms for the next few years.
Alex Novarese: Where are the opportunities for Freshfields?
‘We can decide what we want but you are negotiating with a counterparty who will tell us to bugger off. We must not kid ourselves that Brexit is going to be any easier.’ David Higgins, Freshfields Bruckhaus Deringer
David Higgins: The US will be a huge opportunity, even in an isolationist setting. Europe does become a big opportunity. In the UK it will be slightly different services, in terms of regulatory developments and coping with Brexit. Whatever we may debate about in terms of the internal machinations of the Conservative Party, there is another side of our negotiation. We can decide what we want but you are negotiating with a counterparty, in terms of Macron and Merkel, who will tell us to bugger off. We must not kid ourselves that it is going to be any easier.
The US will be an opportunity. There will be different opportunities between the UK and the rest of Europe. There will still be opportunities in the Middle East, because the current difficulties will die down. It is more about Saudi internal politics and regional GCC power. Asia will be about picking your spots.
Alex Novarese: Let us explore the possibility of getting a more integrated EU with the UK coming out. What is the law firm response?
Keith Froud: I expect there to be further investment in Europe by London firms. I don’t think we should overstate the demise of globalisation because technology and many other things counter that. Whatever happens London will remain a powerful hub in lots of ways and the UK will remain a very significant economy. But I also think that Germany and France in particular will be areas of investment.
Helen Burton: There does not seem to be one individual European city that has come to take precedence. Even financial services are considering going to Dublin, Luxembourg, Brussels, Paris, Frankfurt or Berlin. The fact that it has been so dissipated plays to the fact that London will still remain central.
Andrew Saul: One possibility is that organisations outside Europe will increasingly want to have two points of entry into Europe: one in the UK and one in the EU. So, there is an opportunity for firms which have a European platform. Our sense is London will still be a pre-eminent financial centre because of the skills, infrastructure, reputation and history.
Chris Hale: The likelihood is that some of the gloss will be taken off the City, but it will remain the pre-eminent financial centre in Europe.
Alex Novarese: Do insurance, regulated banking and private equity all stay?
Chris Hale: What some private equity houses are thinking of doing is setting up, with Luxembourg the favoured location, an office that gives them access to EU money, while ensuring as much as possible of what they have done remains in London. That may be an evolving debate because of EU concerns, which are growing, about letterbox offices.
Helen Burton: The main thing is whether English law will still be prevalent. English law versus New York law is a global issue. You see that playing out in Asia as much as you do over here. If English law becomes less dominant it will not be European law that takes its place but New York law.
Sandra Wallace, DLA Piper: I agree. That is possibly what President Trump thinks as well. His scepticism around Europe, while gathering protectionist policies around himself, may partly be down to that. I am trying to be optimistic that Angela Merkel and others have no intention of punishing us. She will see there is merit in doing a deal.
Alex Novarese: How do people feel about English law’s resilience?
Peter Hasson: If you look at areas we are involved in, the global trading areas, English law is probably the dominant contract law all over Asia and everywhere else. That is not something that has been derived from Britain’s position in Europe. If you look at the insurance industry, there is only about 20% of the insurance business done out of London that relates to Europe. The rest is international. That gives very strong foundations to English law on the global stage.
Chris Hale: I largely agree with that, but there are issues that we hope will be dealt with in the Brexit negotiations about the enforceability of contracts, and the forum for disputes and so on derived from Rome and Brussels conventions, which have helped the advance of English law in the EU.
‘Law firms need to maintain financial discipline. The model is very fragile in a highly-stressed situation.’ James Tsolakis, NatWest
David Higgins: It depends which product you look at. If you are looking at financial loan markets or debt markets that will be driven more by where the deep pools of capital are and what the efficiencies are between the New York markets and the London markets or the European markets. That will be driven by commercial rationale rather than lawyers getting together.
Alex Novarese: New York law is already making inroads, is it not?
David Higgins: For some products, yes. It depends what the product is.
Helen Burton: Yes, but it depends on where the capital is coming from. If it is syndicated in the States, then it will be New York law.
David Higgins: Our client base is looking for the most efficient capital source. Yes, they look at enforceability, but fundamentally they look at capital flows.
Ian Cox: It is worth testing the fact that Europe will become more cohesive over the next five years. There is a danger it will go the other way. Le Pen was not far off, and in five years’ time she is going to be back for another go. Italy has an election coming up with whatever that comedian’s name is. I would not be betting my hat on Europe being more cohesive in five years.
Daniel Naftalin: English law will remain resilient. Our firms remain vulnerable to the reputation and deep pockets of the big US firms but the fact that firms are still coming to the UK and hiring top talent, and the fact the US businesses remain interested in British assets is a symbol of confidence in our economy.
Alex Novarese: It also indicates we are the only country that does not block foreign takeovers.
Chris Hale: It is not just America, though. The Chinese interest in English assets has been much greater in the last 12 months and that, despite the recent Chinese government restrictions, seems set to continue.
Ian Cox: In real estate there has been a huge uptake in the last six months of Chinese and Asian money coming in. A lot of that is a currency play. However, it is also a safe haven. Asian money will still come into London. The money that may think twice is the sort that comes into London as a bridge into Europe. However, I do not fundamentally see London as a city being any less attractive than it was before.
James Tsolakis, NatWest: There are also other foreign law firms investing here and taking advantage of a weak sterling, and that is changing the competitive landscape, as US firms in particular are opportunistically acquiring the intellectual capital that sits in the City. How do firms feel about that competitive threat?
Helen Burton: The depreciation of sterling is the biggest problem there, because the money on offer has increased exponentially. I was interested to see what was going to happen, following the Brexit vote. There is still a lot of cash being splashed around.
Ian Cox: Alternatively, they are looking straight to Europe now.
Chris Hale: We can overplay the American competition angle in London. There are not that many US firms competing head-on across the board with English firms. You can almost count them on one hand.
Alex Novarese: The danger for UK firms is not that US rivals are a threat across the board but that there are half a dozen strategically-important product lines they have gained massive ground in: funds, private equity, leveraged finance, arbitration and white-collar crime. That is dangerous ground to be losing.
Ian Cox: I would agree. Where they are targeting they are making inroads, because they have the chequebook to do it. It is less the old myth that they came in, threw money around willy-nilly and went home again. That may have been the case 20 years ago. They are far more sophisticated now, and they have more critical mass within the market and more credibility in the London market.
Sandra Wallace: When they go for their specialist product lines and do not try to go outside of what they know they are making the margins.
Alex Novarese: Is anyone making any money in Asia? No?
David Higgins: Asia is about picking your spots. It is a very cyclical market. If the market is right you can make lots of money doing ECM deals. If you pick certain clients in China, you can do very well. However, to try to run a business across that big an area is a challenge. This has been the biggest impact of US firms if you talk about Asia. They have been disruptors. Some of the short-term implications of firms buying their way into the market has upset the longer-term market. People will slim down and reset how they do things.
Peter Hasson: If you try to run an expatriate business in Asia you are going to have big problems. If you have the right business model, follow the clients, and relate your cost base to what clients are prepared to pay, then you can make money.
Alex Novarese: Let’s move onto technology. Who is bullish on AI?
Ian Cox: We are just starting to scratch the surface of it. Are we monetising it? We are nowhere near.
Chris Hale: Our position is the same. We are using it in our transaction and disputes practices, but it is at an early stage.
Helen Burton: We have been using it across a range of products. It is early stages. The team have this Value of Legal Time Saved (VoLTS) [measure], which is how you are supposed to decide whether the application of our LegalTech expertise is worthwhile. The thing that has been most successful was where the VoLTS per use was quite short but at high volume it delivered a significant return. It is not one-size-fits-all. The more you put into it, the more you get out of it.
Alex Novarese: Pinsents has experimented with a few things. Has that been a happy experience?
Alastair Morrison: Yes. We are investing quite heavily in relation to different skillsets. We are looking at law increasingly being a combination of people, process and technology delivering legal solutions. Within the people component, the question is whether that just means lawyers and what else there could be. Knowledge engineers might be called legal engineers. There is data analytics. There is a huge demand for the assimilation of data and machine learning can be used to put that data into context to play back to clients in a more sensible way.
Alex Novarese: Can you quantify that? How many legal engineers are there?
Alastair Morrison: Probably in excess of a dozen now.
Alex Novarese: Still relatively small.
Alastair Morrison: It is. We have 3,000 people in our business, but, equally, you are making investments that you do not expect to make an immediate return on. The big decision for us is whether you collaborate with the various technology vendors in this space. It is a make or buy decision. We have seen successes with both approaches. It is early stages.
Helen Burton: I was talking to the head of our legal technology team earlier this week. He was saying that for the lawyer of tomorrow there is a question about how to incorporate legal tech skills into their degree, and where that path will take you. We already have people coding smart contracts – these are powered in AshurstCoin, our new digital currency developed to build our blockchain expertise.
Daniel Naftalin: We have a MdR Lab. There is a Dragons’ Den of legally-specific technology businesses. They came in and pitched, and we are investing in with a number of them. We are optimistic that this is what we should be doing and that is where the profession is going. It is very important for us as a nimble and entrepreneurial London-centric business. We looked at creating a cost centre and decided that it was not for us at the moment, but acknowledged that clients in the future will not want to pay London fees for low-grade legal tasks. We have to find a solution to that, and we think it is in technology.
A lot of firms are investing in a lot of different types of products, of which very few are going to be successful. We all hope we are going to find a Lawyers On Demand-type of business that will make us fortunes and be market leading. Clearly, most of us will fail but there are likely to be a lucky few who will hit the jackpot, and we should all be able to benefit from the technology.
Andrew Saul: The real opportunity for law firms is to use technology to deepen the relationship with the client. This includes integrating what you are doing with the client when it comes to process and project management. You become an extension of the client. That is a great way of strengthening the relationship. Law firms are getting more value out of technology than pure service efficiencies.
Alex Novarese: David, Freshfields has made a big commitment with its Manchester operation. Is that a breeding ground to play with new approaches?
David Higgins: We are experimenting with lots of different models and how we use the human side of that equation as well as the technological side. There are some parts of business which are very personal, with high quality, customised services, but other parts of our business which lend themselves more naturally to process-oriented issues, which we can monetise. We are still trying to work out the right balance. We all have to embrace that technology to some extent. Some in my firm would say it is a real driver of profitability. I am a little more sceptical as I think it might be more about defending revenue. My worry is that as technology spreads through our industry it will become harder to differentiate yourself.
Alex Novarese: These are pretty volatile times. How confident do people around this table feel that the legal industry is well placed for the next five years?
Peter Hasson: There is no fundamental threat to the law in the next five years, but it will require firms to embrace change much more than they have been in the last decade.
Alex Novarese: Do you have any final observations, James?
James Tsolakis: I am absolutely confident about the success and prosperity of the legal profession. However, I will qualify that by saying that, and King & Wood Mallesons does illustrate the point, there is an imperative that firms maintain discipline around the basic drivers of prudent financial management. The law firm model is very fragile in a highly-stressed situation.
The other imperative is to be extremely responsive to changes in the environment. The final one is to listen to what your clients are telling you, because they have lots of choices. You do need to keep reinventing yourself to remain relevant and the preferred provider.
Alex Novarese: Thank you for your time.
- Helen Burton Head of finance division, Ashurst
- Ian Cox UK, US and EMEA managing partner, Herbert Smith Freehills
- Keith Froud International managing partner, Eversheds Sutherland
- Chris Hale Senior partner, Travers Smith
- Peter Hasson Chief executive, Clyde & Co
- David Higgins Co-head of global financial investors group, Freshfields Bruckhaus Deringer
- Alastair Morrison Partner and head of client strategy, Pinsent Masons
- Daniel Naftalin Head of employment, Mishcon de Reya
- Andrew Saul Senior partner, Osborne Clarke
- Sandra Wallace UK managing partner, DLA Piper
- James Tsolakis Relationship director, head of legal services, NatWest
- Alex Novarese Editor-in-chief, Legal Business
- Mark McAteer Managing editor, Legal Business