THE EU AND THE LEGAL SECTOR

Transcription

1 THE EU AND THE LEGAL SECTOR OCTOBER 2015 THE LAW SOCIETY OF ENGLAND AND WALES

2 The EU and the Legal Sector FOREWORD The Prime Minister has promised an in/out referendum within the next two years with some reports suggesting a vote as early as June 2016 to decide whether the UK should remain part of the European Union (EU). If the UK s relationship with the rest of the EU were to change as the result of significant renegotiations, or the UK choosing to give up its membership, the effects would be felt throughout the legal profession. Changes in the UK s relationship with the EU would have implications for the legal sector s contributions to the UK economy. The UK has three distinct legal jurisdictions: England and Wales, Northern Ireland, and Scotland. The Law Society of England and Wales represents, supports and promotes 160,000 member solicitors. Lawyers working in different geographical areas of the UK and in different branches of the legal profession have their own membership organisations, many of whom will also form a view on this important issue. This report by the Law Society will form the basis of future engagement with our members. It sets out the issues we expect to see raised in the run-up to, and following on from, the referendum. The report project team conducted a series of qualitative interviews with individuals from law firms around England and Wales. Interviewees were asked questions about how the EU currently affects their firm, their clients and their employment practices, and what they thought about the various alternative models, should there be a change in the UK s relationship with the EU. We also sought their professional assessment of the main models for future working should there be a change in Britain s relationship with the EU. In most cases this report refers to UK statistics, as this is how the majority of data is recorded. The exception to this is where the report refers to the Law Society s membership. In terms of our membership, at the time of writing, there are 130,382 Practising Certificate holders in England and Wales (and 160,394 members on the Solicitors Roll). There are 9,542 law firms in England and Wales, ranging from sole practitioners to large international firms: 90,300 of our members work in private practice. Approximately one fifth of our members work in-house. The City includes about 550 firms, and employs around 25,800 members. Some 6,000 of our members work in foreign-owned firms, or abroad. We are indebted to those firms who kindly agreed to be interviewed, and to members of Law Society committees and others who gave generously of their time in contributing to this report. 2 The Law Society of England and Wales

3 October 2015 CONTENTS EXECUTIVE SUMMARY 4 Introduction to the report 8 THE UK LEGAL SECTOR AND THE EU 10 The EU and its institutions 10 The internal market 11 The legal sector and financial services 14 THE BUSINESS IMPACT OF BREXIT 17 ON THE UK LEGAL SECTOR Impact on City firms 20 Impact on other firms 21 Impact on Wales 22 Views on alternatives to the EU 23 Choice of law and England and Wales 24 as a jurisdiction of choice THE EU S IMPACT ON AREAS OF LAW 26 AND ASSOCIATED RIGHTS Overview 26 Anti-money laundering 28 Civil justice 29 Company law 32 Competition and state aid law 34 Consumer law 38 Criminal justice and policing 40 Employment law 48 Environmental law 51 Equality law 53 Family law 54 Financial services 56 Human and fundamental rights 59 Immigration law 60 Intellectual property law 63 Tax law 67 APPENDIX 1: 69 THE EUROPEAN UNION EU institutions and law-making 69 Balance of Competences Review 71 Subsidiarity and proportionality 71 Impact assessments 72 APPENDIX 2: 73 THE INTERNAL MARKET, TRADE AND INVESTMENT Free movement of goods 74 Free movement of services 74 Freedom of establishment 75 Free movement of persons 76 Free movement of capital 77 Trade and investment 78 APPENDIX 3: 81 LAWYERS PRACTISING AND ESTABLISHMENT RIGHTS IN EUROPE APPENDIX 4: 83 RENEGOTIATION, WITHDRAWAL AND ALTERNATIVES TO THE EU Does reform require renegotiation? 83 The withdrawal process 85 Alternatives to EU membership 86 ADDITIONAL INFORMATION 90 Who we spoke to 90 Categories of work undertaken by solicitors 91 in England and Wales (January 2015) Abbreviations 93 Other UK legal representative bodies 93 Further reading 94 Executive summary UK legal sector & the EU Impact of Brexit EU s impact on areas of law Appendices 3

4 The EU and the Legal Sector EXECUTIVE SUMMARY The Prime Minister has promised an in/out referendum within the next two years to decide whether the United Kingdom should remain in the European Union. This report assesses the possible effects of a UK withdrawal from the EU on the legal profession and on the practice of law. The UK legal sector makes an important contribution to the domestic economy worth 23bn annually. 1 The report project team conducted a series of qualitative interviews with individuals from law firms around England and Wales. Interviewees were asked questions about how the EU currently affects their firm, their clients and their employment practices, and what they thought about the various alternative models, should there be a change in the UK s relationship with the EU. This is the start of our discussion with the legal sector and those interested in its future. This report encourages our members to reflect on their own position in a changing landscape and to join the debate to ensure we take every opportunity to shape the future through vocal and valuable contribution. Even in the short term, the position is unpredictable. The UK has been a member state for more than 40 years. A renegotiated relationship would see a time of unprecedented and unpredictable change both for the UK and to the structure of the EU itself. The term Brexit has been coined to refer to the possible withdrawal of Britain from the European Union. There is speculation about a Brexit bonanza for lawyers in unravelling the legal complexities of any changed relationship with the EU but the longer term effects are unclear. Uncertainty will, itself, have a business impact, as clients and business decision-makers seek to mitigate their risks. That impact is likely to be felt much sooner than the referendum. The Law Society of England and Wales is contributing to the national debate on the UK s relationship with the EU for two reasons: the EU is founded on the rule of law. The EU s authority is based on legal agreements the Treaties and EU law affects UK legislation and legal practice, the court system and the rights of individual citizens and businesses, and the EU forms the world s biggest single market. Access to that market is as important for our members legal services providers as it is for any other part of the UK service economy. The European legal services market had total revenues of $184.5bn in The Law Society has also previously published proposals for the next steps in developing the EU in EU Priorities This report is designed to start a discussion with our members about the potential impacts of remaining in a renegotiated EU or withdrawal. The research underpinning this document was conducted with assistance from our specialist committees and some of the firms whose members we represent. 2 Our initial discussions on the impact of the referendum show that: for all parts of the sector there will be uncertainty. The short and longer term implications and possible benefits or otherwise cannot be predicted. Members should begin work now to anticipate what those effects might be. the effect on the legal sector ultimately depends on the impact on clients. the effects of an EU exit on the financial services sector are likely to be far-reaching. This will affect those individuals and firms working with that client group. some areas of the UK would be seriously affected if there are changes to EU economic support for agriculture, business start-up or regeneration in their region. Wales is likely to be hard hit in this scenario with consequent effects for legal practitioners in the area unless the UK government were to replace the economic support by a grant or other means. changes to the UK s relationship with the EU could result in little, if any, influence in the legislative decisionmaking process, while the UK remains bound by the content of the EU legal framework. under alternative relationships with the EU, such as that held by Norway, continued access to the internal market would require the UK to remain subscribed to the relevant EU legal framework, without a right to influence change in that framework figures. Source: ONS GVA by industry estimates released 30 June Further details on qualitative research methods are on page 90 of this report. 4 The Law Society of England and Wales

5 October 2015 Impact on areas of law and rights We have found a significant variation in the likely effects on different areas of law dependent on the different scenarios of renegotiation or exit. It follows that clients and the individuals and firms servicing those clients legal needs will be affected differently too. Some areas of EU law would still have an effect on the UK, post-brexit. UK companies doing business in the EU would still be bound by aspects of EU law, including competition rules regarding mergers and EU product standards for example, for electrical goods and pharmaceuticals. The UK also has to meet wider international obligations, regardless of EU membership, for example on human rights and in environmental law, although these might be different in degree. The UK courts might still choose to follow the rulings of the Court of Justice of the European Union (CJEU) regarding the interpretation of EU law even if not obliged to do so, to prevent contradictory rulings resulting in legal uncertainty. The impact on business Legal services do not exist in a vacuum. They exist to serve the needs of clients, and clients needs vary widely, from individuals needing advice on employment or family law to IT start-ups wishing to protect their intellectual property rights, from councils seeking to follow procurement laws to major international corporations wishing to set up or expand their business in the UK or across the wider EU. The impact of Brexit on law firms and the legal sector would therefore depend largely upon their client base, the wider economy and market forces. Some firms have a client base directly affected by the EU the financial services sector, for example. The business impact on other firms is likely to vary, and in many cases would be less important than general economic conditions such as interest rates, the strength of the property market and economic growth. In Wales and some regions, there is a clear link between EU membership and the health of the local economy, as a result of EU grants and project funding. Were the UK s relationship with the EU to change, any subsequent changes in funding would have a direct effect in those areas. England and Wales as a global legal services centre The EU is of particular importance to firms who work with the financial services sector. The City of London s position as a world financial centre could be significantly adversely affected by the UK s disengagement from the EU. This would, in turn, pose significant risks to the City s current position as a global centre for conducting legal business. Larger law firms might adapt to changing circumstances by moving their centre of operations away from the UK. England and Wales as a jurisdiction of choice The consequences of Brexit for England and Wales as a jurisdiction of choice that is, a centre for resolving commercial disputes as distinct from conducting business transactions are less clear, or at least, less immediate. There are strong pull factors towards London that are independent of EU membership. The greater risks might lie in competition from rival international jurisdictions and the pressure for local law to be applied in others: in Russia, for example. Alternatives to the EU If the referendum were to result in Brexit, there would be a period of negotiation in which to settle the terms of that withdrawal and to formulate a new relationship with other EU member states. As in any other relationship breakdown, much would depend upon whether the split was amicable. There would also be further negotiations regarding relationships with third parties. The natural starting point of a discussion on what the future might look like is to examine existing relationships between the EU and other non-member states: EEA/EFTA 3 membership (e.g. Norway) EFTA membership with additional cooperation on the basis of bilateral agreements (Switzerland) Customs Union (Turkey) WTO 4 membership augmented by a Free Trade Agreement, or Executive summary UK legal sector & the EU Impact of Brexit EU s impact on areas of law Appendices WTO membership only. 3 European Economic Area/European Free Trade Association. 4 World Trade Organisation. 5

6 The EU and the Legal Sector Should the UK decide to leave the EU, perhaps the two most likely options in terms of trade would be: attempting to join EFTA and participate in the internal market through the EEA agreement, 5 or a more distant relationship, with certain rights emanating from membership of the WTO and the possibility of negotiating a Free Trade Agreement (FTA) to remove or reduce some of the barriers to trade which would re-emerge following the UK s decision to withdraw. Under a WTO regime, the UK would lose its access to the internal market, would no longer be bound by, or benefit from, the right of free movement of people, and would not have to contribute to the EU budget. Further agreements might need to be considered for co-operation in areas including justice or policing or in cases where the UK would be interested in participating in a specific EU programme. A detailed description of these relationships is in Appendix 4 but in summary the following points are clear: the greater the access that non-member states have to the internal market, the more they must comply with the EU s market rules; these are familiar and this would mitigate some of the changes discussed above. new arrangements would need to be made for co-operation in areas such as criminal justice. EEA membership would require acceptance of the four fundamental freedoms; 6 even the Swiss model includes the free movement of persons. EEA membership would require the UK to make a contribution to the EU budget. the UK would not automatically fit in to any of the different relationships except the WTO-only scenario; EEA or EFTA membership would depend on negotiation with the existing members. the UK could not rely on the strength of the EU s voice in wider trade or regulatory negotiations. there would be no guarantee that there would be a seamless move to any alternative form of relationship. many aspects which are perceived by some as disadvantages of EU membership, for example immigration and red tape, could not be avoided without losing access to the benefits of the internal market. Under the EEA/EFTA option, the UK would retain access to the internal market and all the fundamental freedoms, including that of the free movement of people, would continue to apply. The UK would also be bound to contribute to the EU budget, albeit at a reduced rate, in return for market access and would take on new funding obligations in relation to EFTA. It would, however, lose all influence as part of the EU legislative process. no state outside the EU has any real voice in the EU legislative process; for the UK, that would mean giving up representation in the European Parliament and on the European Council, and its right to veto where unanimity is required. 5 The UK is a signatory to the EEA agreement, but it is unclear how a decision to leave the EU would affect this. 6 Under the 1957 Treaty of Rome, goods, services, capital and people are supposed to be able to move freely across the Union s internal borders. 6 The Law Society of England and Wales

7 October 2015 Alternative relationships a summary Renegotiation within the EU EEA/EFTA ( Norway ) EFTA + bilateral agreements ( Switzerland ) Customs Union (Turkey) Participation in the internal market Yes Yes but not in relation to CAP* and CFP* Yes, subject to the terms of those agreements and very limited participation in relation to financial services Limited Application of internal market freedoms Subject to the CJEU s jurisdiction A say in EU legislation Contribution to the EU budget Yes Yes Yes Yes Yes No, but EFTA Court follows the CJEU Yes No, but No Yes, reduced follows the EFTA Court No WTO only No No No No No WTO plus FTA No No No No No *CAP Common Agricultural Policy CFP Common Fisheries Policy No No No Yes, reduced No Executive summary UK legal sector & the EU Impact of Brexit EU s impact on areas of law Appendices 7

8 The EU and the Legal Sector Introduction The question of whether the UK should remain in the EU is to be the subject of a referendum within the next 18 months. Membership of the EU has had a profound effect, whether for good or ill, on the nation, particularly in respect of our economy and our law. It is crucial that decisions on the question are made on as informed a basis as possible. This report provides: an initial analysis of the value of the EU to the legal sector in England and Wales. It is a legal and economic, not a political, analysis. discussion of the legal process for withdrawal and the main alternatives to the EU. analysis of how the application of the law and the rights of businesses and citizens might be affected by a UK exit from the EU. Scope of the report This report is not a commentary on national sovereignty versus EU integration; the effects positive or negative of EU rules on immigration between member states, or the implications of Brexit for the UK as a political union. Similarly, other sectors of the economy will have their own specific views on how renegotiation or Brexit might affect them. This report aims to start a discussion with our members about the potential impacts of remaining in a renegotiated EU or of an EU exit. The report has been informed by Law Society specialist committees and by interviews with a range of firms, but it does not claim to represent the individual views or opinions of our diverse membership. We will be surveying our membership over the coming months about the impact on their firms and their clients of remaining in or leaving the EU, rather than how they would vote in a referendum or the wider political aspects of the national debate. This report will provide a platform for this membership engagement. Qualitative research The project team conducted a series of qualitative interviews with individuals from law firms around England and Wales. Interviewees were asked questions about how the EU currently affected their firm, their clients and their employment practices, and what they thought about the various models should there be a change in the UK s relationship with the EU. Where quotes are given in the report, firms are described as: City firms London firms (non-city firms operating in the capital) specialist firms regional firms firms in Wales foreign firms. Although general counsel are a very important part of the business legal sector, there were naturally constraints on what general counsel interviewees could say to us without straying into areas of commercial sensitivity, as they are in the unique position of acting for a single client. Consequently, the report does not cite general counsel interviewees, although those interviews contributed to our understanding in compiling this report. 8 The Law Society of England and Wales

9 October 2015 City firms These firms are usually headquartered in London, but have offices around the world, especially in the EU. They work very closely with European and other international clients, and tend to have international staff. They are among the largest law firms in the world in terms of turnover, and tend to focus on financial services or commercial law. Specialist firms The project team spoke to firms specialising in two specific areas of law: intellectual property law and family law. Regional firms Some regional law firms work in areas with strong economic ties to the EU, such as agriculture, which has important implications for their client population. In terms of areas of law, all interviewees recognised the relevance of EU legislation to their practice to a greater or lesser extent, but not all foresaw a direct business impact as a result of a change in the UK s relationship with the EU. Firms in Wales Participants in our roundtable in Cardiff were specifically concerned about the possible impact of Brexit on the Welsh economy and potential loss of access to start-up and other EU structural funds, as well as the Common Agricultural Policy CAP. Farm subsidies and infrastructure investment, by their nature, are regional expenditures, so naturally any reduction in EU-related spending would be concentrated in those areas. Foreign firms There are various kinds of foreign law firms operating in London, serving different clients, and with different business structures, but often with exposure to the financial services sector. Economic modelling We commissioned Oxford Economics to apply their UK macroeconomic model, and a specially commissioned extension which covers the legal services sector in more detail, to generate baseline forecasts for the legal services sector and alternative forecasts that estimate the impact of EU disengagement on the sector over the period to Estimates are achieved by looking at the effects of disengagement on UK labour supply, restrictions on trade, fiscal effects, and foreign direct investment, and how these macroeconomic factors affect the legal services sector. This modelling has the potential to provide the Law Society with an independent assessment of the macroeconomic effect over a medium-term period of EU disengagement, and particularly the specific effects on the UK legal services sector. The report UK Legal Services Sector and the EU: an analysis by Oxford Economics was published in September Executive summary UK legal sector & the EU Impact of Brexit EU s impact on areas of law Appendices 9

10 The EU and the Legal Sector THE UK LEGAL SECTOR AND THE EU The EU and its institutions The EU comprises 28 member states. The UK has been a member state since At the heart of the EU is the internal market, also known as the single market. The internal market is defined in Article 26(2) of the Treaty on the Functioning of the European Union (TFEU):... (2) The internal market shall comprise an area without internal frontiers in which the free movement of goods, persons, services and capital is ensured in accordance with the provisions of the Treaties These are known as the fundamental freedoms of the internal market. The EU has seven main institutions, five of which are relevant to law-making: European Council European Commission Council of European Union European Parliament The Court of Justice of the European Union. More detail about the EU as a law-maker can be found at Appendix 1. As set out in that section, there are some concerns about the way in which these institutions operate, particularly in relation to fulfilling legal procedural requirements and practical efficiency: the legislative process can be complex, time-consuming and not wholly transparent. there are concerns that there are opportunities for the institutions to ignore concepts such as proportionality and subsidiarity because of the political or ideological appeal of particular policies. there is a lack of expertise at the CJEU in some critical areas of EU law, notably intellectual property and financial matters. there are substantial delays in obtaining judgments from the CJEU which can create delays in dealing with cases at national level. Some of these problems are inherent in any system of government (for example, the Law Society occasionally voices concerns that initiatives from the UK government are not proportionate to the issue to be resolved); others could be addressed by improved mechanisms. Member states are responsible for transposing EU law into national law, to guarantee their citizens and businesses the rights granted to them under EU law. The Court of Justice of the European Union (CJEU) interprets EU legislation so that it can be applied uniformly across the member states. The CJEU also settles legal disputes between member state governments and EU institutions, including infringement proceedings. 10 The Law Society of England and Wales

11 October 2015 The internal market The EU is both a market in which law firms can themselves operate and in which their personal or corporate clients may wish to locate or provide goods or services. The EU is also a source of law that affects many aspects of business activity, as well as granting personal and consumer rights. The freedoms of movement of goods, persons, services and capital are at the heart of the EU. Those regarding services and persons are of considerable importance directly to the legal profession in assisting lawyers ability to offer services throughout the internal market. Freedom of goods and capital are important issues for many of their clients trading within the EU. For example The increasingly globalised nature of business, the affordability of air travel, and the possibility of providing services online mean that smaller firms are able to export their legal services more easily, whereas once this would have been the sole province of the larger international firms. Goods and services are becoming increasingly intertwined for example, the purchase of many goods, such as IT products, is often combined with continuing customer support through service agreements. An internal market for services goes hand-in-hand with facilitating the free movement of people. If a business has the right to establish a branch or business for provision of those services, it is logical that the people delivering that service are also able to reside in that location, on a temporary or permanent basis as needed. A UK manufacturing company s CEO meets a French investor at a conference who decides to provide investment in that company. Using the new investment, the company expands its operations by setting up a second factory, this time in France. They identify a suitable site and set up the factory under the freedom of establishment. One of the senior staff from the UK is seconded to France to manage operations until the factory is properly established. Two engineers from the UK are recruited permanently, along with two engineers from Germany and Poland. The free movement of people rules ensure that from conference attendance to scouting trips, secondment, and permanent moves, there are no visa requirements to fulfil. Under the free movement of capital, the money to acquire the new factory, pay salaries and buy supplies can move freely. There are no limitations on the investment, and profits can be divided as the company sees fit. Under the free movement of goods there are no tariffs on the supplies needed by the factory (which themselves come from various parts of Europe) when they cross borders. The fundamental freedoms and surrounding legislation are not intended to replace national legal systems in their entirety. Neither, in the case of free movement of lawyers, does the system allow lawyers to advise clients without demonstrating the requisite knowledge. Rather, the system attempts to remove boundaries that would prevent economic operators from moving freely across the EU in the way they believe will best allow them to carry out their business. Subject to certain regulatory requirements, England and Wales law firms are able to establish offices in other parts of the EU. In 2014, England and Wales law firms operated a total of 219 offices in EU countries and a further 245 non-eu offices globally (of 15,600 offices in total). 7 On an individual basis some England and Wales qualified lawyers have taken advantage of the internal market to move to other member states, either within their firms or to make the most of other opportunities. In 2014, a total of 1,349 Practising Certificate (PC) holders reported their main practising office to be in an EU country outside of the UK (1 per cent of all PC holders). 8 The UK is the largest market for legal services in Europe with 20.3 per cent of the total European market 9 and accounts for around 7 per cent of the global market for legal services. Executive summary UK legal sector & the EU Impact of Brexit EU s impact on areas of law Appendices 7 Source: Law Society Group management information. See Appendix 3 for further discussion of lawyers practising and establishment rights. 8 A further 4,692 PC holders reported a non-eu main practising address. 9 Datamonitor (2011). 11

12 The EU and the Legal Sector OF THE LARGEST FIVE LAW FIRMS IN THE WORLD, BASED ON HEADCOUNT, HAVE THEIR MAIN BASE OF OPERATIONS IN THE UK OF THE LARGEST TEN LAW FIRMS IN THE WORLD, BASED ON GROSS FEE REVENUE, HAVE THEIR MAIN BASE OF OPERATIONS IN THE UK PEOPLE ARE EMPLOYED IN UK LEGAL SERVICES GENERATING 1.6% OF UK GDP AND A NET EXPORT SURPLUS OF 3.1BN IN FOREIGN LAW FIRMS HAVE OFFICES IN THE UK 3.1BN EXPORT SURPLUS HALF ARE FROM THE US THE EUROPEAN LEGAL SERVICES MARKET HAD TOTAL REVENUES OF $184.5BN IN 2013, REPRESENTING AN ANNUAL GROWTH RATE OF 3.2% BETWEEN 2009 AND 2013 MARKET EMPLOYMENT INCREASED AT AN ANNUAL RATE OF 2.4% BETWEEN 2009 AND 2013 TO REACH A TOTAL OF 1.1 MILLION LEGAL PROFESSIONALS The Law Society of England and Wales

13 October 2015 The impact of the EU on lawyers goes far beyond practice and establishment rights and the ability to provide cross border services. The economic aspect of accessing the internal market and all that this means for business clients in terms of trade, regulation and expanding or moving their operations is hugely important. The EU is not merely a market. It is also underpinned by the rule of law and has its own specific justice measures. These apply both in the context of criminal justice and to wide-ranging civil justice measures, for example in resolving contract disputes. In a world where people are increasingly mobile, and relationships become increasingly international, family law cases will often have an EU dimension. The EU has its own specific competition law regime and procurement rules. Furthermore specific laws, for example in the sphere of consumer protection, employment and environmental law, may be implemented by the UK but have their current origins in EU legislation. Solicitors from sole practitioners through niche and high street firms to the largest international City operators advise their clients on all of these issues and more and will therefore be affected by any future change. [EU procurement procedures are] important to my firm because I advise on a number of major ICT projects. My colleagues and I advised X Council on the largest superfast broadband scheme in the EU, with 132m of subsidy, mostly from EU, so we had to follow an EU procurement procedure. Regional firm interviewee Some aspects of the EU have a particular resonance for firms, depending on their location or focus of practice, for example in relation to the Common Agricultural Policy (CAP), common fisheries policy (CFP), or EU regional development grants. 12 We are an agricultural practice and the CAP is massive to people, but there s much more than that. Employment law mainly comes from Brussels and the commercial and tech teams are always looking at competition law issues from the EU. Regional firm interviewee The increasingly globalised nature of business, the affordability of air travel, and the possibility of providing services online mean that smaller firms are able to export their legal services more easily, whereas once this would have been the sole province of the larger international firms. Executive summary UK legal sector & the EU Impact of Brexit EU s impact on areas of law Appendices 10 UK Legal Services 2015, CityUK Report, 2015 ( 11 Datamonitor (2014). 12 Some may also have greater familiarity with the EU s structural funds, the European Regional Development Fund (ERDF) and the European Social Fund (ESF) which are of relevance to particular regions, for example parts of Wales. 13

14 The EU and the Legal Sector Finance & Banking 33% Fund/Investment Management 11% The legal sector and financial services The financial services sector is of particular importance to the UK economy, generating more than 10 per cent of the UK s total Gross Domestic Product. In 2013, financial services generated a trade surplus of 58.5bn more than all other net exporting industries combined. The next highest surplus in services was generated by other professional services, of which the legal services sector contributes 3.1bn. 13 The UK had an overall trade in goods and services deficit of over 72.4bn in Technology, Media & Telecoms 9% Energy & Utilities 10% The financial sector Real is Estate a key & purchaser Construction of legal services 32% in the UK, determining the shape of the supporting legal sector, especially Manufacturing the area around the City. Between 32% 2009 and 2014, financial services accounted for 44 per cent of the total value of Other transactional work deals amongst 32% the Top 50 City law firms. Total 100% The strength of the of which financial financial services services: industry has 44% allowed London in particular to establish itself as the financial services capital, cementing its position as a global financial centre and business hub. 15 In 2013, 34 per cent of the UK s trade surplus on financial services was derived from trade with other EU member states, compared to 30 per cent derived from trade with the US. Top 50 UK City law firms deals by industry Finance & Banking 33% Fund/Investment Management 11% Technology, Media & Telecoms 9% Energy & Utilities 10% Real Estate & Construction 5% Manufacturing 3% Other 29% Total 100% of which financial services: 44% Insurance and pensions Financial Total financial services Exports Imports Net Exports Imports Net Exports Imports Net % EU USA Global total Source: ONS Pink Book UK Legal Services 2015, TheCityUK Report, 2015 ( 14 House of Commons Library Economic Indicators Research paper14/58 4 November 2014 ( 15 The business publication Forbes ranked London first in its list of The World s Most Influential Cities London is itself the ninth largest economy in the EU. It accounts for 21.2% of the UK s GDP which compares with Paris (9.6% of France s economy) and Berlin (4% of Germany s) according to The Mayor of London s The Europe Report: a Win-Win Situation, August 2014 (pages 28-29) ( 14 The Law Society of England and Wales

15 October 2015 Passporting One of the key features of the EU internal market is the financial services passport which allows financial institutions established in one member state to establish, or provide in other member states throughout the EU, services and financial products which are regulated at an EU level without the need to apply for further full authorisation in each other state for which the passport is sought. If the UK were to leave the EU, the risk is that UK-based banks and other financial institutions would lose their passport and be required to locate within the EU for regulatory reasons to maintain their market access. Otherwise, UK-based institutions access to the EU markets would depend upon UK regulation being deemed equivalent by the EU. The financial services sector is particularly vulnerable to Brexit. This has important consequences for law firms who have clients in the financial services sector and this is why the sector is highlighted in pages 17 to 24. A more detailed analysis of the impact of EU membership on the financial services sector is given in the section on the EU s impact on areas of law (pages 26-68). Percentage of foreign bank branch assets to local assets Percentage UK Belgium Luxembourg Ireland Italy Cyprus Greece Portugal Our firm works across all sectors but a large amount of our work is done in relation to financial services. The UK s membership of the EU has been of tremendous help to financial services, and in many respects has allowed the UK to become Europe s financial centre, especially for its capital markets. City firm interviewee The UK is by far the largest centre for foreign branches of banks in the EU (see chart below): as a centre of wholesale markets, many banks from elsewhere in the EU make London their centre of European operations. Hungary Sweden Denmark Netherlands Spain Germany France Poland Executive summary UK legal sector & the EU Impact of Brexit EU s impact on areas of law Appendices 15

16 The EU and the Legal Sector Source of Foreign Direct Investment in the UK 16 EU USA Asia Rest of the world 1,000, , ,000 million 400, , Financial services are of particular importance to London but remain a major sector in other parts of the country too. The Office of National Statistics (ONS) reports that in 2012 financial and insurance services generated gross value added of 60.5bn in London but also 7.9bn in the north west; 6.8bn in the south west; 5.6bn in Yorkshire and Humber and in the West Midlands; and 2.2bn in Wales Office of National Statistics data. 17 ONS data as quoted in House of Commons Standard Note Financial Services: Contribution to the UK Economy SN/EP/ February The Law Society of England and Wales

17 October 2015 THE BUSINESS IMPACT OF BREXIT ON THE UK LEGAL SECTOR The UK legal sector makes an important contribution to the domestic economy worth 22.6bn. 18 Legal services have both a multiplying and an enabling effect on business growth and stability. For every 100 jobs in the legal services sector, 67 are supported in other areas of the economy. Every 1 of output of the UK legal services sector underpins 2.39 of output in the UK economy as a whole (based on 2010 data). 19 Any adverse impact on the legal sector therefore has wider implications. Legal services do not exist in a vacuum. They exist to serve the needs of clients, and clients needs vary widely: from individuals needing advice on employment or family law, to IT start-ups wishing to protect their intellectual property rights; councils seeking to follow procurement laws, major international corporations wishing to set-up in the UK. The prospects for the legal sector are linked to the wider UK economy and market forces. THE UK LEGAL SECTOR MAKES AN IMPORTANT CONTRIBUTION TO THE DOMESTIC ECONOMY WORTH EVERY 1 UNDERPINS 2.39 OF OUTPUT IN THE UK ECONOMY AS A WHOLE OF OUTPUT OF THE UK LEGAL SERVICES SECTOR The impact of Brexit on the UK legal sector could be felt in a number of ways depending upon firms level of exposure to the EU. First and foremost, those firms whose clients would be directly affected by Brexit would themselves feel an impact. Firms which have already exercised their right of establishment in EU countries or which offer cross-border services and advice on cross-border legal issues are also very likely to be affected, as would those firms which recruit legal or support staff from the EU. Firms which currently operate only in the UK but which are contemplating taking advantage of the right of establishment in the future might lose that option. Some firms may find that one or more areas of law in which they practise are significantly affected, and that they will need to adjust and advise clients accordingly, but without having any impact on their business model. For others, none of these factors may be present or might be only peripherally important. 22.6bn FOR EVERY 100 JOBS IN THE LEGAL SERVICES SECTOR 67 ARE SUPPORTED IN OTHER AREAS OF THE ECONOMY Executive summary UK legal sector & the EU Impact of Brexit EU s impact on areas of law Appendices Economic value of the legal services sector, Law Society,

18 The EU and the Legal Sector Impact on financial services clients In terms of client impact, Brexit is widely considered to pose a clear and present risk to the financial services sector; it follows that the part of the legal sector that depends upon financial services is also at risk. The EU internal market for financial services relies on mutual recognition through a single passport, which enables financial services providers in one member state to operate in another without requiring them to go through full authorisation procedures in each further member state. If the UK were to leave the EU, the risk is that UK-based banks and other financial institutions would lose their passport and be required to locate within the EU for regulatory reasons to maintain their market access. Otherwise, UK-based institutions access to the EU markets would depend upon UK regulation being deemed equivalent by the EU. As the UK has such a large EU trading surplus in financial services, the UK s former EU partners might not see any advantage in granting such recognition of equality. The EU would no doubt want to preserve the benefits of membership for those countries remaining in the union, and every concession made to the UK would undermine those benefits. If political relationships were to deteriorate during the Brexit negotiations, EU regulatory requirements for off-shore jurisdictions might become more stringent. The think tank Open Europe summarised what it calls the bottom line for the financial services sector: Financial services are the most exposed sector and where a deal will be hardest to negotiate. Britain may be forced to choose between third country status with restricted EU market access, or somehow remaining a member of the single market (like Norway), i.e. EU rules but with no formal votes. Given the mobility of the sector, there is a higher risk of businesses relocating particularly foreign firms using London as an entry point to the single market. 20 Our interviews with firms who work with the financial services sector echoed that assessment. The biggest impact would be on the perception that London s ability as a key global financial centre to lead transactions across the EU will be compromised It will come down to people saying I can set up in Frankfurt or London, I ll go to Frankfurt. Will we be the principal destination for overseas FDI for other countries into the EU? I doubt it. City firm interviewee We follow financial services. If they stay, we stay. If they move, we move. If we don t have passporting, it s detrimental. A lot of our clients do cross-border lending. They lend to Germany with their London branch. If that was restricted, because of additional regulatory processes, they would do that business somewhere else, just for ease of doing the business. If they are all back in Germany, then there is no point in us being here. Our business is people driven, if people aren t here anymore, neither would we. City firm interviewee If the financial services industry is badly affected by Brexit there could be a knock-on effect on linked sectors, such as legal, accounting and consultancy services. 20 Open Europe: What if? The consequences, challenges and opportunities facing Britain outside the UK, March 2015 ( 18 The Law Society of England and Wales

19 October 2015 The Mayor of London has also acknowledged the risk: There is a big fear in the City about what would happen if the UK left the EU. Hence the City is not keen to embrace such a risk. On the face of it, the case for the City to remain in the EU may appear compelling. while offering an upbeat assessment of how the City might respond: Despite all this, history shows us that the City has retained its competitiveness by evolving to suit the circumstances of the time, embracing change and being open to trade. Outside the EU, it is possible that despite all the uncertainty the City retains its international competitiveness, overcoming the initial phase of uncertainty. 21 In its comprehensive assessment of eight different UK- EU scenarios conducted for TheCityUK, Clifford Chance reached a rather different conclusion:...the creation of the integrated EU framework for financial services has had a marked and highly positive effect for those UK-based services businesses with an EU-wide or global reach, and an equally positive effect for their clients. It is easy to take this common legal framework and set of legal freedoms for granted To abandon this for some untried, unknown and unpredictable alternative would carry very significant risks. It is clear from the scenarios examined in this paper that from a legal perspective the interests of UK financial services are most effectively safeguarded through continued membership, and reform, of the EU. 22 In an October 2013 study by TheCityUK of the views of 101 financial and related professional services leaders on the EU, 84 per cent said that staying in the EU was the best option for the competitiveness of the UK as a financial centre; 37 per cent said that Brexit would be fairly or very likely to lead to some relocation. 23 The Financial Times (US banks plan ahead for UK exit from EU) 24 has reported that Wall Street banks were drawing up preliminary plans to move some London-based activities, to address concerns that the UK is drifting apart from the EU. The article cites Bank of America, Citigroup and Morgan Stanley, while saying that banking executives were reluctant to speak publicly about the issue. A partner at law firm Shearman and Sterling is quoted in the article: London could essentially end up as an offshore financial centre. That would mean that there was a need for a big onshore financial centre in Europe and the obvious candidates would be Frankfurt or Dublin. The Association of Foreign Banks has stated that: If Britain withdraws from Europe, then foreign banks may reassess their reasons for maintaining their business in Britain and may decide to continue their business elsewhere. Following the 2015 UK general election, Deutsche Bank was the first to say publicly that it is considering its options. 25 Executive summary UK legal sector & the EU Impact of Brexit EU s impact on areas of law Appendices 21 The Europe Report: a Win-Win Situation August 2014 page A legal assessment of the UK s relationship with the EU: a Legal Perspective pages (available at assessmentoftheuksrelationshipwit.html). 23 The City Speaks: A milestone study of the views of financial and related professional services leaders on the EU TheCItyUK October 2013 (available at thecityuk.com/research/our-work/reports-list/the-city-speaks-a-milestone-study-of-the-views-of-financial-and-related-professional-services-leaders-on-the-eu/). 24 FT 17 August See

20 The EU and the Legal Sector Impact on City firms The following quote is typical of the views of City firm interviewees on the business impact on them of the UK leaving the EU: Negative, negative. Incredibly negative. In the short term for me it would be a boost because of the chaos that would ensue, we d have a lot of work, but on the medium/long term, as a market, the fact we re members of the EU has a significant impact on what we do: trade, financial services, competition, our position would be very negatively impacted, and that s not even taking into account the businesses that would withdraw from the UK market as a result of the change in relationship. City firm interviewee From another perspective, a European law firm operating in London told us: We work for private equity firms, but also [major US and UK banks]. For those firms London is the central hub of EU work, if that would decrease, then people would move. The reason we are here is proximity to our clients. Foreign firm interviewee There is a distinction to be made between the impact on the legal sector and the impact on individual law firms. The scenarios set out above describe circumstances in which England and Wales (notably the City of London) could see its standing as a global legal centre damaged as client business is drawn away to other centres. However, the international firms concerned would adapt to new circumstances. They might do so by moving offices or headquarters to the EU, by focusing on different markets, or by restructuring their organisations. They would effectively follow their clients, and to that extent in the long-term might well maintain the same relationships, but with a much-reduced base in England and Wales. This could have implications for the legal sector s contribution to the UK economy, and at a personal level, on England and Wales qualified lawyers who are working in those firms. If we vote ourselves out of the EU, that s not the immediate death of the office, as we rely on London being an international centre, and English law s dominance. I don t think the end of the UK in the EU would be the end of that. London would continue to dominate. London firm interviewee We would not have a battleship sized law firm if the City was not here. We d have more of an aircraft carrier to launch legal teams all around the world from here. City firm interviewee We would lose jobs, quite clearly, because some people work in supporting the big deals, so if the deals fall through, so do the jobs. City firm interviewee Some interviewees were concerned that the impact on jobs would diminish the attractiveness of London and of the legal profession. This is a slow drain, it won t happen overnight, London will become less attractive, we ll attract less talent, certainly from overseas. If we re trying to attract the best and brightest from university, we offer the opportunity to work internationally, on big sexy mega deals, we re competing against the banking industry, the accounting/consulting one, and we would lose out to them. We might see a decrease in attractiveness of the legal profession as a whole. London firm interviewee 20 The Law Society of England and Wales