Legal and financial services

The United Kingdom’s referendum decision to leave the European Union (EU) has now been formally put into action with the triggering of Article 50 of the Treaty on European Union, notifying the EU of the UK’s intention to leave. A two-year process of negotiations has begun, to culminate in final withdrawal from the EU in March 2019.

The likely post-withdrawal relationship will involve a “hard Brexit” — a withdrawal from the single market consequent to the refusal of the British government to countenance continuing free movement of workers to and from the remainder of the EU. Financial and legal London has been thrown into uncertainty regarding where they will stand thereafter, and some institutions are beginning to preempt the final deal by establishing bases elsewhere in the EU to preserve access to the single market.

The way in which events will unfold is difficult to predict, but upheaval is likely. This is true both in the immediate to medium-term effects upon the structure and provision of legal and financial services, and in longer-term cultural changes in regulatory environments and political centers of gravity. Those working in the localization field should be aware of the opportunities this change presents, while firms and institutions looking to adapt to the new circumstances will need to manage their localization strategies with a new intensity.

The looming divorce

Withdrawal from the European single market, and with it the ability to offer goods and services tariff-free across the EU, is not a necessary consequence of withdrawal from the EU. Other countries such as Norway and Iceland trade freely with the EU via membership of the European Economic Area (EEA), abiding by the four freedoms: free movement of workers, services and capital, and freedom of establishment within other member states. Switzerland, also party to the four freedoms, is not an EEA member but rather has a series of bilateral agreements allowing it to trade with the EU on similar terms. What such countries do not possess, however, is the power to influence the legal and regulatory regimes established within the European Union, and they must merely adjust themselves to any changes in those regimes to continue trading.

The British, though, are on a path toward complete rejection of the four freedoms — particularly free movement of workers. British Prime Minister Theresa May is aware that the main driving force behind most (not all) opposition to remaining within the European Union was antipathy toward mass immigration from other EU countries (perhaps also conflated in some voters’ minds with the entirely separate subject of immigration from outside the EU). She is not willing to risk antagonizing that section of the electorate, nor those of a similar mindset within her own Conservative party, by agreeing to withdrawal from the European Union on any basis that continues to allow free movement from the EU.

Politicians from the other member states, as well as politicians and officials at the EU itself, have been clear from the start that there can be no cherry-picking of obligations by any withdrawing member state. To allow the British to get the benefits of the single market without the responsibilities and burdens borne by other members would fatally undermine the EU, and thus the British will be faced with a “take it all or leave it all” situation. The British, faced with a choice between losing single market membership or accepting the free movement of workers from other parts of the EU (particularly from the more recent additions in central and eastern Europe), have chosen the former. Thus, the United Kingdom is on course for complete withdrawal from the single market, confirmed by the Prime Minister in a speech on January 17. With London having long been the financial powerhouse of the EU, and an important legal center, minds within and around London’s Square Mile have been concentrated on how best to preserve their status after ties with the single market are severed.

Financial services on the move

Prior to the referendum, there were dire predictions by pro-remain politicians and business figures of a mass stampede of large institutions and corporations from the UK in the event of a vote to leave. So far, such an exodus has not materialized, but it should also be pointed out that the UK hasn’t left the EU yet. What we are seeing is a move by major law firms and financial institutions to Brexit-proof themselves. Access to the single market is of vital importance, and the first steps are being taken toward at least having a foot in both camps.

In March, Lloyds of London, the world’s biggest insurance market, announced the establishment of a subsidiary in Brussels. Although not a huge operation — beginning with a staff of about 60, with only a handful moved from London— it is indicative of a shifting of the center of gravity from London toward cities in other EU member states. Lloyds wishes to continue underwriting insurance policies from across the EU and EEA, and having a subsidiary in Brussels should allow them to do so. Although only a very small proportion of their revenue is in a class threatened by Brexit; they expect London to continue being the base for the vast majority of their operations.

Hopes of maintaining the current system of “passporting” financial services throughout the EU (allowing institutions operating under the regulatory system of one member state to trade freely across the entire EU) have disappeared, and Lloyds has acted to mitigate the potential damage. Other large insurers such as the Royal London Mutual Insurance Society and AIG have also acted to establish subsidiaries within the EU — in Dublin and Luxembourg respectively.

Investment banks are also acting in anticipation of a hard Brexit. Citibank is expecting to move many workers from London to a new operation based within the post-Brexit EU, citing the need to create a client-facing workforce there. JP Morgan is reportedly in talks to buy an office block in Dublin capable of holding 1,000 workers moved from London, raising fears of a planned mass movement of bankers out of London. Bank of America, Barclay and Morgan Stanley are also looking toward Dublin as a base for new entities that would maintain their passporting rights. HSBC is considering the possibility of moving 1,000 jobs to Paris. Goldman Sachs intends to relocate hundreds of workers to Frankfurt and Paris. In all, tens of thousands of jobs in the sector are already likely to move out of the UK and into other European cities. The European Banking Authority (EBA) is also going to have to move from London. Currently, Luxembourg, Paris and Frankfurt are all vying to win its presence and the 150 or so jobs involved. The European Commission is also looking to propose legislation moving the Euro-clearing role of London’s financial services sector to elsewhere in the EU, possibly Frankfurt, before Brexit is finalized. British tabloid newspapers have presented this phenomenon as if other countries are behaving like vultures, but it is surely the logical consequence of the decision of the British people to vote Leave.

None of this is evidence that the UK will no longer be a significant financial hub — it will be — but it is evidence of a reorientation. London will now be a hub looking outward, beyond the EU, but its role as the preeminent EU financial center will probably be taken by others. This will result in significant changes for tens of thousands of workers, as well as many opportunities. Also to be borne in mind is that this is not a one-way street. EU firms will continue to desire access to the huge market in the UK, and financial services institutions are not an exception. It is thus likely that, even with a hard Brexit, the financial regulatory environment in a post-withdrawal UK will probably not diverge too markedly from that of the EU (possibly with some striking exceptions, such as in relation to the EU’s cap on bankers’ bonuses).

Brexit and the legal sector

British law firms are currently empowered by membership of the European single market to offer their services throughout the EU, either through temporary cross-border provision of services or via permanent establishment in other member states. Individual lawyers have something of a fast-track toward professional qualification in other member states. It is likely the case that UK law firms have had the most benefit from the single market, compared to those of other member states.

Not for much longer. The specter of withdrawal from the single market threatens to put British law firms at a massive disadvantage when it comes to competing for work within the single market area. More profoundly, the status of common law as an influence on the future direction of European law is now in jeopardy, with by far the largest common law system imminently departing. With all but a couple of other member states using civil law systems, the possible development of a pan-European contract law based on civil law ideas, for example, threatens the current ascendancy of the English common law approach to contracts. This in turn threatens the ability of British firms to compete in this area. Meanwhile, the lack of a trade deal in the aftermath of withdrawal could be catastrophic for those law firms wishing to continue operating in the EU, as the legal services sector has no World Trade Organization-style body of rules to fall back on in such circumstances.

Competition/antitrust law is a particular area where British lawyers might struggle post-Brexit. Competition law is so European in character that it is often referred to as “EU law,” and British law firms might struggle to maintain access to the Court of Justice of the European Union (CJEU) if their lawyers have lost professional privileges in the remainder of the EU. Thus we see preemptive moves by many of the large firms toward establishing bases elsewhere within the EU, particularly Dublin, in order to maintain professional access. So-called “Magic Circle” firms such as Freshfields, Allen & Overy, and Slaughter and May moved to establish themselves in Dublin before the vote, such was their concern at the potential outcome. The Law Society of Ireland has since revealed a record enrollment of British-based lawyers, mostly competition lawyers anxious about having continued access to the CJEU, with 810 qualifying in 2016 (they are not required to be physically present in Ireland to remain enrolled).

Many of the large US law firms established in London via affiliates in order to secure the right to work in conjunction with local lawyers throughout the EU, will also now have to reorient their European operations in order to avoid being collateral casualties of Brexit. This will likely include the need to reduce the size of their London offices and shift workers toward other European legal centers (again, Dublin being the possible beneficiary). Indicative of the uncertainty facing both foreign and domestic large law firms is that the amount of London floorspace acquired since the referendum by major firms has dropped significantly compared with the annual average over the past decade.

The fact that tens of thousands of jobs in the financial sector look likely to move to other parts of the EU will also mean a reduction in work for large firms from blue-chip clients. Law firms lower down the pecking order will probably suffer the most, but even Magic Circle firms will be affected. Much will depend on how well the British economy can adapt to the changed situation, and on how well new markets and new investment opportunities can be opened up elsewhere in the world. For now, all we have is uncertainty.

On the upside, however, there will be a short-to-medium term silver lining in the form of business clients needing advice and services for the purpose of adapting to the post-Brexit world. The larger firms can also expect a bonanza in government contracts given the complexity and sheer scale of the legal changes being undertaken and the legal services necessary in the two-year negotiation window as well as in trade negotiations thereafter. The so-called “Great Repeal Bill” currently working its way through the Houses of Parliament will incorporate all EU law into British law, and, after Britain’s exit, there will begin the Herculean task of removing all pieces of EU legislation and regulations found to be unwelcome by whichever British governments are in power in subsequent years. London will also always be a global center for certain legal fields, particularly arbitration and maritime law.

The localization angle

The upheaval being caused by the decision of the UK to leave the EU, and the movement of legal and financial service providers to new areas of the EU, provides opportunities for those working in the localization sector. Though the proposed or possible adjustments involve relatively culturally homogenous countries, there are significant adaptations necessary. Even a shift of workers from London to Dublin, two cities that were once part of the same United Kingdom, requires cultural, political, legal and other adaptation — even a cursory knowledge of some Irish Gaelic terms and titles used in the political and legal fields.

Legal localization will become much more of an issue in years to come — specifically for firms wishing to straddle both common law and civil law jurisdictions.  With the largest common law influence on European law about to be removed (only Ireland and Cyprus will remain as common law systems among the 27 EU member states), EU law is liable to adopt an increasingly civil law character. Firms selling in to the single market, or lawyers looking to maintain a professional presence there, will need to adapt to this new development in European legal culture, should it occur.

In terms of financial services, the preeminence of London has meant that the more freewheeling, light-touch regulatory approach commonly found in the anglophone world has had a huge influence on the culture at the EU level. This can be expected to change. It is highly likely that firms looking to enter the single market from abroad will be faced with an increasingly complex and stringent regulatory environment, making adaptation more expensive and requiring more detailed expertise. Legal and financial localization will become ever more key for firms looking to thrive in the new EU.

The departure of the UK also moves the EU’s cultural center of gravity further east. The EU was culturally and politically dominated for most of its existence by the original member states. In other words, Western Europe. The accession of many formerly Soviet-dominated states as well as the Balkan states has begun to change that culture, and with the UK gone, there is now a central European core with a strong eastern component. This will have consequences for future decision-making at the EU level, and it will be useful for firms in the legal and financial sectors to anticipate this.

When Lloyds of London chose Brussels as the base for its new subsidiary over Dublin and Luxembourg, high among the reasons was the fact that Brussels is a city with a multilingual workforce. French, Dutch and German are official languages in Belgium. The influx of jobs from London into what will, in likelihood, become a less anglophone EU political, legal and business environment, will require workers with language skills, including translators. It will also require the services of those who know how to help the incoming firms and workers to adapt to specific local circumstances.

The localization opportunities will not be confined to the requirements of law firms and financial institutions looking to maintain a presence within the single market, of course. With Brexit comes the opportunity for a new level of engagement by British-based financial and legal entities with markets across the world. The need to adapt to local circumstances; to navigate the legal and regulatory environments in so many new jurisdictions; and to do so in a culturally sensitive manner, will require expertise and advice from many quarters of the localization sector. The shift in emphasis from engagement with a relatively homogenous economic neighborhood toward tapping new and hugely diverse global markets means that the legal and financial sectors in Britain will have to be on top of their localization game. We might well see this manifesting itself in changed recruitment procedures and internal restructuring. This process will be complicated by the coming restrictions upon non-British EU nationals working in Britain, as well as an overall reduction in all types of immigration (a key Conservative government pledge). External hires or outsourcing in those new marketplaces will become key for crucial localization purposes.

For years to come

The bald truth is that nobody knows how profoundly, or to what timescale, Brexit will change the center of gravity of the legal and financial services industries currently based in the United Kingdom. Much of what is predicted by commentators and politicians is based upon political prejudices rather than upon anything firmer. With two years of negotiations yet to commence, and further trade negotiations after that, the precise nature of the final arrangements are extraordinarily difficult to predict. Perhaps the positions of those sectors will remain largely unchanged, with new subsidiaries elsewhere serving only as legal and financial technicalities.

It is, however, possible to see that some things are likely. Chief among those is that the European Union will not allow, for obvious reasons, the UK to get better benefits than its own members have, and that the UK in turn will not sign up for free movement of workers from Europe, thus forsaking all the other freedoms attendant with single market membership. Withdrawal from the single market will at the very least cause foreign institutions using London as an entry-point to the EU, as well as many British firms, to move a significant proportion of their workforce to other jurisdictions within the EU. To what extent we can only guess. A conservative estimate says tens of thousands of people on the move or positions reallocated. Significant cultural changes in the political, legal and financial environments following the British departure seem a logical conclusion.

Combined with the need for the UK to establish new markets elsewhere in the world, there is scope for significant input from those working in localization fields. Opportunities in this regard are likely to manifest themselves for many years to come.