Seven ways Brexit will impact international law firms

brexit-shattered-glass-1_SMALLBrexit will not happen for at least two years, but the markets are already in turmoil.

The value of sterling slumped by more than 10% to just $1.32 on Friday – its lowest level for more than 30 years and the largest single-day fall in history.

Equities markets across Europe suffered massive losses, with more than £120bn wiped off the FTSE 100 in frantic early trading.

The banking sector was particularly hard hit, with shares in Barclays, Lloyds and RBS crashing by at least 30%. Rating agency S&P has said that it is likely to downgrade the UK’s sovereign credit rating.

But what does Brexit mean for large international law firms?

1) Lots of lawyers are going to be very, very busy

The result has been bad news for currencies, markets and British Prime Minister David Cameron, who announced his resignation.

But law firms are braced for a Brexit bonanza. Lawyers are already receiving floods of inquiries from clients trying to work out what the result means for their businesses.

Most major firms are running 24-hour hotlines to deal with the massive levels of client demand. Once this initial frenzy subsides, lawyers will then play a crucial role in helping clients navigate one of the largest programmes of regulatory and legislative reform ever seen. The event has once again shown the degree to which the legal sector is insulated against wider economic and market malaise.

2) Transactional lawyers might want to book a holiday

While trade, regulatory and financial services lawyers can ‘look forward’ to 80-hour weeks for the foreseeable future, transactional lawyers may be left checking to see if their phones are still working. Investors don’t tend to react well to market uncertainty, so they’re not likely to relish the prospect of doing deals in such volatile conditions. Even before the vote, the market uncertainty caused by the referendum saw a significant decrease in transactional activity as deals were postponed and investors withdrew funds.

The total value of initial public offerings on European exchanges in the first six months of the year was down by more than half when compared with the same period in 2015, according to financial markets platform Dealogic.

M&A activity fell by a similar amount and private equity work has all but dried up. It had been hoped that a remain vote would lead to a release of pent-up investor demand, resulting in a strong second half of the year, but deal lawyers may now have to weather another steep and prolonged slump in dealflow.

3) Law firm financial performance will be affected

Transactional practices are key drivers of law firm revenue generation. That engine is now likely to splutter. The sort of advisory work that firms did in the run-up to Brexit can be profitable and is a great way of strengthening relationships with clients. But it doesn’t bolster the bottom line in the same way as big-ticket transactions, which can keep entire floors of lawyers across multiple practice areas busy for months.

Given most UK law firms have fiscal years that ended on 30 April, the Brexit-related malaise is likely to have led to a soft end to the 2015-16 financial year. Much remains uncertain but the impact on the current fiscal year is likely to be worse.

4) London lawyers suddenly won’t look so expensive to foreign clients

Well, not as expensive as normal, anyway. The pound lost a tenth of its value in just one day after the Brexit result became clear.

Economists predict that it could fall by as much as a fifth overall.

One London-based partner joked that the UK, traditionally home to some of the world’s most expensive lawyers, may now become a “low cost jurisdiction”.

A weak pound would also be good for UK exports and may even help drive M&A by presenting foreign buyers with relatively cheap targets, offering a potential silver lining for transactional lawyers.

Finance officers will likely be less happy. Law firms had been carefully reviewing their currency hedging strategies ahead of the referendum, but the significant devaluation of the pound will still pose a challenge – particularly for firms that have sizeable numbers of partners paid in foreign currency out of a centralised, sterling-denominated profit pool.

It will also pose a headache for financial results.

5) Scores of lawyers might be shipped off to Ireland

One of the more esoteric effects of a Brexit is that lawyers risk losing their rights to European Union (EU) professional legal privilege. This is of particular concern to UK competition lawyers, who may also no longer have the right to plead before the European Court of Justice in Luxembourg.

In an attempt to protect these rights in the event of a Brexit, several major law firms, including Allen & Overy, Freshfields Bruckhaus Deringer, Hogan Lovells and Slaughter and May, pre-emptively moved to register lawyers in Ireland ahead of the vote. Others may now follow suit or seek similar workarounds, although much depends on whether new agreements are negotiated before Britain formally leaves the EU.

6) US firms might need to restructure their European offices

Some partnership experts claim that the European operations of some US firms may need tweaking, post-Brexit.

Many of these offices were established as affiliates, under an EU directive that allowed US law firms to open offices in EU jurisdictions that would otherwise not permit them to work freely in partnership with local lawyers.

This directive (The Establishment of Lawyers Directive 98/5/EC) will no longer apply when the UK withdraws from the EU.

The firms will then be at the mercy of local bar rules, many of which – particularly those in France and Luxemburg – take a staunchly protectionist approach when it comes to foreign attorneys practising on their turf.

7) London offices of US firms might start getting smaller over time

Arguably the most important question for law firms – and the hardest to answer – is the degree to which Britain leaving the EU will weaken London’s position as one of the world’s key financial and business centers. The UK capital is currently used by many international organisations – including global law firms – as a gateway to Europe, with the city boasting more European headquarters of non-EU corporations than anywhere else on earth, according to UK government data.

London is particularly heavily populated by US and international banks, with the EU’s so-called passporting regime allowing them to run the bulk of their European trading operations out of the UK. But passporting, which also applies to a range of other businesses, including asset managers and insurance companies, will no longer be possible once Britain leaves the EU.

Citigroup, Goldman Sachs, JPMorgan Chase and Morgan Stanley, which collectively employ more than 36,000 people in the UK, warned before the vote that they would shift their business away from the country in the result of a Brexit.

These financial institutions are major drivers of work for international law firms. If banks and other important clients start to reallocate resources from London to other European locations, law firms would have to consider shifting the focus of their own investment. So some attorneys could find themselves literally shipped off to Dublin after all.