Tom Moore and Matthew Field size up the immediate impact of the vote on City lawyers
It was the result the profession and the City feared but did not expect as the referendum on European Union (EU) membership on 23 June ended in a shock vote to exit the grouping, triggering political and market shocks set to reverberate for years to come.
The vote, which Leave won by 52% to 48%, immediately led to the resignation of Prime Minster David Cameron while investors reacted with heavy selling. By Monday 27 June sterling had fallen to its lowest level in 31 years.
While markets stabilised as Legal Business went to press, the result sparked more questions than it answered with the advisory referendum creating political pressure for an EU exit but no consensus on how the UK should recast its relationship with the EU.
Brexit was bitterly opposed by the majority of commercial lawyers, with European integration providing the bedrock for City law firms’ globalisation during the 1990s and 2000s.
Of particular concern will be firms’ banking clients, who are facing the potential loss of access to the EU single market. Exiting the single market threatens London’s position as a key finance centre, presenting a major challenge for City advisers. Reports in the days after the vote suggested banking giants HSBC, JPMorgan and Morgan Stanley were weighing up moving thousands of jobs out of London to rival EU centres, including Paris, Dublin or Frankfurt.
Slaughter and May veteran Nigel Boardman says that he has ‘heard from banks of some contingency plans that wouldn’t be good for London if they implemented them’.
James Palmer, senior partner at Herbert Smith Freehills, says: ‘Our clients have to assume that they are not going to get special breaks.’
The only established route short of the UK ultimately staying in the EU to preserve full access for financial services would be an arrangement modelled on Norway’s EU links. This route involves the UK joining the European Economic Area, paying a substantial contribution to EU budgets and accepting its rules, including free movement of labour.
While there will be huge pressure for the Norway route to preserve access for the UK’s dominant service industries, such a path would be politically rocky, given the fractious debate over immigration during the two-month referendum campaign.
Indeed, with the Conservatives and Labour Party both facing leadership elections in the wake of the vote, politics looks set to define the outcome. Many believe a general election in the autumn is also possible.
The relatively close result and the Leave camp going back on a number of key campaign messages within days of the result also raised the possibility that an EU exit will be avoided. The mechanism for EU withdrawal requires the UK government to activate article 50 of the Lisbon Treaty, starting the two-year timetable for negotiation. This means there is some scope for exit to be delayed or even abandoned, though the government may give notice by September when a new Conservative leader is appointed.
The likelihood that uncertainty and falling investment will push the UK into a slowdown or outright recession following the vote could change the public mood to EU membership.
Market impact
With political considerations limiting effective Brexit planning, attentions are turning to the immediate economic impact. Markets were already pricing in a slowdown as Legal Business went to press while the UK was stripped of its top-grade credit rating by Standard & Poor’s and Fitch.
‘I’m very confident London will continue to be a major business and financial centre.’
Bill Voge, Latham & Watkins
The most immediate impact on City firms will be further declines in the already slowing European deal market, the traditional backbone of London law firms.
On the plus side, the consensus among City professionals is that the huge lead of London, and the absence of a credible rival centre in Europe, will protect the City for a considerable time.
Freshfields Bruckhaus Deringer head of corporate Simon Marchant says that while ‘you would expect to see some relocation of business’, there is ‘not an alternative financial centre that has got such a depth of people and skills’.
While much has been made of the supposed flood of work for law firms in handling Brexit contingency planning, until the process becomes clearer there will be a painful loss of deal work.
Law firms operating globally are also having to deal with the expectation of much weakened sterling hitting their position against US rivals.
The big four elite London firms all committed to matching Cravath, Swaine & Moore’s associate pay rises, beginning at $180,000 for first-year associates, ahead of the referendum. Freshfields Bruckhaus Deringer, Linklaters, Allen & Overy and Clifford Chance have confirmed they will keep to the pay rises.
As yet there is little talk of job cuts, though many believe law firms will take a call on whether they need to reshape themselves for the post-Brexit environment by the autumn.
Palmer adds: ‘If markets collapse, well, we always have to think about that. But we’ve not got some plan to slash London.’
However, there is also an expectation that the vote will see a pause in investment in London. White & Case London executive partner Oliver Brettle says: ‘If M&A continues downward, UK capital markets continue to be on hold, and the risk contagion spreads to the rest of Europe, it will be hard for any firm in London to have a “good” year.’
Latham & Watkins managing partner Bill Voge was more bullish: ‘The vote does not change our plans. It has not caused us to pause or have any concerns about our strategy. I’m very confident London will continue to be a major business and financial centre.’
tom.moore@legalease.co.uk; matthew.field@legalease.co.uk
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