Global London: Non-US firms in London – On standby

The issue on every European partner’s lips in our Global London report in 2016 was the outcome and fallout of the UK’s Brexit referendum on 23 June that year. Even then, just a few months before the vote, there was a palpable hope that Britain would not do the unthinkable. Those hopes were soon dashed. With the transition period ending on 31 December 2020, the UK has officially left the EU. What does this mean for the London strategies of European firms that have maintained small but effective London offices? Is it time to pack their bags?

Despite the uncertainties non-US firms based in the City have faced in the past five years, there is notable confidence over the importance of the location and the sustainability of a London practice beyond 2021.

Although many are open about their concerns, London office heads are quick to point to their successes in light of the Covid-19 crisis and Brexit and to ride through any challenges that London’s redefined status throws at them. Says Marc Klerks, who heads Benelux firm Loyens & Loeff’s City office of the effects of Brexit on business: ‘There’s been no impact for the time being, but it is a bit too early to tell.’

‘Our long-term strategy of having a permanent presence in the City remains valid as long as London remains the core legal centre in Europe following Brexit.’
Ignacio Corbera Dale, Garrigues

As our table shows, while only French market leader Gide Loyrette Nouel offers a substantial presence in London a number of European firms with a branch in the City have seen their headcount dwindle since 2016. Where the effect in terms of the number of lawyers at non-UK firms has not been substantial, it hardly shows signs of significant investment.

What has been the attitude towards a London office among these non-US firms? Ignacio Corbera Dale, partner in charge of Garrigues’ London office, notes: ‘Despite the fact that during this past year our London office has become temporarily virtual due to Covid-19, our long-term strategy of having a permanent presence in the City remains valid as long as London remains the core legal centre in Europe following Brexit.’

The point is echoed by Thomas Schulz, head of Noerr’s London office: ‘London is a global city and there is strong competition from Paris but the jury is still out. Brexit has not changed our UK strategy and the strong relationships we have established here. We just celebrated ten years in London and we are known to be available when our international clients and referral law firms need us. The changes in the UK financial services industry and the economy overall post-Covid, such as de-leveraging, will create a lot of opportunities for investors in Europe, particularly in Germany. We see strong demand for our practices in restructuring, regulatory, tech, finance and private equity acting as lead counsel from London.’

‘Brexit has had a particularly strong impact on the financial sector due to an almost complete freeze on business in the absence of an equivalent regime for the free provision of services.’
Massimiliano Danusso, BonelliErede

Ferran Foix, head of the London office of Gómez-Acebo & Pombo, does not expect that his firm’s operations in the UK will be adversely affected, as many of its global clients continue to operate from the UK. ‘Brexit will have some impact on certain administrative aspects of our London office, but nothing significant. Having an office in London has proved key for our firm, which is an independent Iberian firm with a very strong international footprint. We plan to continue providing support from London to our global clients that have interests in the Iberian market.’

It is not just the European firms active in London that recognise the importance of the City to a global operation. Says Eric Flaye of offshore firm Conyers Dill & Pearman’s London office: ‘London remains a strategically important market and Conyers continues to see great value in having an office in the City. Our core value proposition out of London has always been to provide time-zone sensitive advice and support to our UK and Europe-based clients, working closely with our leading practices in Bermuda, BVI and the Cayman Islands. Brexit has not affected our approach or continued commitment to UK and European markets.’

However, there is a practical effect for firms from EU member states as Massimiliano Danusso, managing partner of BonelliErede’s London office, points out. He says the role of a London office will change because lawyers’ roles and remits have changed. One of Brexit’s consequences has had a direct impact on the practice of law: degrees, qualifications and professional experiences are no longer automatically and mutually recognised between the UK and the EU. Indeed, the relevant EU directives (2005/36/EC, amended by 2013/55/EU) and the two directives specifically related to the legal profession (98/5/EC and 77/249/EEC) no longer apply in the UK.

‘Until the end of 2020, European lawyers were able to practise freely in the UK by registering as European lawyers – but now they must register as foreign lawyers unless they are qualified solicitors, as is the case for various professionals in our London office,’ adds Danusso. ‘And anyone who wishes to do confidential legal work such as litigation, real estate sales or inheritance will need to take the solicitors qualifying examination to obtain a licence. This will inevitably lead to a reorganisation of work. Nonetheless, we believe that Italian law firms’ London offices will continue to play a crucial role in internationalising the practice of Italian law in the coming years.’

The beating heart

But what of London’s status as a global financial hub? Regardless of the practical hurdles that firms face in operating in the City now, are foreign firms resident in London concerned that Brexit will erode that status and they may have to look elsewhere to set up shop?

‘I doubt whether the EU alone will be able to create the efficiency the London financial markets offer. The question of location is also not a simple zero-sum game.’
Thomas Schulz, Noerr

The widespread belief is that in the medium to long term, any impact – most probably negative – on London’s position as a global hub will depend on the decisions to be taken by the relevant financial and legal players about their presence in London. Schulz comments that the EU-UK trade co-operation agreement neglected financial services and no equivalence has been declared by the EU. Some services and products have already moved to other European centres: Frankfurt is a winner on the banking side, Dublin on asset management and Amsterdam on platforms.

According to Bloomberg, on the first trading day of the year, the impact of Britain’s withdrawal from the EU became clear as billions of dollars of buying and selling shares found new homes on exchanges on the continent. At equities trading venue Aquis Exchange, 99.6% of European stock transactions shifted to Paris. Another exchange, Cboe Europe, saw 90% of that business move to Amsterdam. Bank of America, JPMorgan Chase, and other big companies moved staff and money to cities such as Paris and Frankfurt to make sure they can continue doing business with European clients.

However, Schulz adds: ‘I doubt whether the EU alone will be able to create the efficiency the London financial markets offer. The question of location is also not a simple zero-sum game. There is a growing fintech scene and changes have been proposed for the UK listing rules to allow more flexibility for PE exits and SPACs. I expect the UK government to find further ways to attract business and professionals with regulatory and tax changes. Our global clients rightly expect a leading European firm like Noerr to be part of the local financial community. PE clients will always have a considerable base in London for their pan-European investments.’

Danusso says Bonelli is certainly witnessing increasing interest in Brexit’s effects from both sides: European clients based in London or with business in the UK and British clients operating in the EU. ‘We expect this trend will only intensify in the coming weeks. Brexit has had a particularly strong impact on the financial sector due to an almost complete freeze on business in the absence of an equivalent regime for the free provision of services. From our end, this entails in-depth study of complex issues such as reverse inquiries and the effects of lifecycle events on existing contracts, in order to come up with solutions to allow our clients to provide financial services and to enter into new agreements.’

Foix says that Brexit will obviously have an impact on the role that London plays as a financial hub for Europe and could also have a diminishing impact on the choice of UK law as the governing law in cross-border transactions. ‘We have already seen financial institutions moving part of some teams to locations in continental Europe such as Frankfurt, Paris, Madrid and Milan for regulatory reasons. We have also seen an increasing relevance of other European exchanges in the capital markets area. We are also perceiving an increasing use of Spanish and Portuguese law as the governing law in certain transactions with international clients, not necessarily as a consequence of Brexit but because such clients have become more familiar and comfortable with local laws. However, London’s position as a global investment, financial and legal hub is very solid and we expect that it will continue to be very relevant going forward.’

‘We see no reason to change our strategy. The vast majority of our mandates have international streams and even after Brexit London will remain a key financial hub in Europe.’ Martin Geiger, Hengeler Mueller

There is a sense that there will be some shift from London towards the home markets of major Euro Elite firms. As Klerks says: ‘Our London office represents our firm in London, which still is and is likely to continue to be one of the most important international financial centres and therefore an important part of our firm’s strategy. Inevitably, the UK leaving the EU will mean changes in where our clients conduct their business and how. This can mean that, at some stage, business will shift from the UK to one of our home markets or from one home market to another. For example, our Netherlands (especially Amsterdam) and Luxembourg offices have seen a steep increase in demand from trading firms, asset managers, fund management. In addition, more international clients seek access to the Amsterdam Stock Exchange. Whether these are temporary changes or of a more structural nature, is difficult to say at this stage.’

London Wall

Ultimately, the overarching feeling is that things will not change drastically for the non-US firms in London. But the outlook is more opaque than many would care to admit. While London’s status as a global financial hub was established by the Big Bang deregulation of banks brought in by the Conservatives in 1986 – an evolution that changed the UK legal profession forever and led to the launch of Legal Business – there is palpable fear again that amid posturing with the EU over backstops, trade agreements and even Covid-19 vaccinations, London’s pre-eminence will suffer death by a thousand cuts under the same governing party 35 years later.

Mairead McGuinness, the EU commissioner for financial services, has warned that Britain’s financial sector will never again have the same access to the EU as it did when the country was a member of the bloc. She has said that Brexit makes it even more urgent for the EU to develop its own capital market to cut reliance on the City of London.

Such is the nature of Brexit that New York now benefits from greater equivalence with the EU than London. The feeling of many is relying on equivalence to save financial services in London is delusional. However, in November 2020, the City of London Corporation said it had received 7% more land planning applications by developers and investors than in the same month the previous year – a sign of confidence in the UK capital.

The City is – and will remain to be – vitally important to law firms. This is summed up best by one of Germany’s leaders, Hengeler Mueller. London-based partner Martin Geiger says: ‘We see no reason to change our strategy. The vast majority of our mandates have international streams and even after Brexit London will remain a key financial hub in Europe. A lot of our clients, particularly PE firms, funds and the investment banks financing them, have headquarters or key operations in London and our office helps to foster our strong relationships with them.’ LB

mark.mcateer@legalease.co.uk

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Non-US firms in London – change in number of fee-earners 2016-21