Commercial end of year review—life in 2015

Commercial end of year review—life in 2015
Back in the office? Struggling through e-mails? Waiting for your coffee to kick in?

'Yes', 'yes' and 'unfortunately so'?

Then why not take a few minutes out and check out our 'life-in-2015' interview with our panel of leading experts. They look at the most important developments and challenges that commercial lawyers faced last year.

There's plenty in it which will inform how things will pan out this year, which will doubtless be another challenging year for the profession.

The experts are:

A view from the market

What is your take on the industry in 2015?

Tony Williams: 2015 has generally been a good, if not particularly robust, year for law firms. I think they will be building on the progress made in 2014 and many firms are reporting a significant and sustained recovery from the downturn.

However, the picture is not universal and there are clearly some firms that are struggling. In addition, clients are continuing to be more demanding, both in terms of pricing and the quality and business mindedness of the advice that they are given. This is making it challenging for firms to achieve profitable growth.

There has been an improvement in big-ticket M&A in 2015, but this is increasingly dominated by the leading US and UK firms. Mid-market and smaller M&A has often been constrained.

Firms are certainly now better run than they were in the past, but various wobbles through 2015, including the weakness of commodity prices and concerns about China growth, have tended to dampen some investment sentiment.

Accordingly, while I expect some firms to continue to improve in both revenue and profitability in 2015, that rate of improvement is likely to be relatively low.

Viv Williams: The market conditions have remained buoyant with most firms seeing approximately 30% increase in new instructions.

This, however, only papers over the obvious cracks in many practices. We have a small number of failures and a few high-profile ones, yet we still have an ageing, male-dominated profession that seems reluctant to change. I have received more enquiries from firms I saw back in 07/08 this year, who recognise they have a problem but have battened down the hatches following the crash of 2008, but are only now realising they are seven years older and still have the same issues with succession and exit—in fact, they are exacerbated.

The change in legal aid contracts will also affect a large number of firms who will no longer have a contract in 2016.

For the winners, good news—or is it? Significantly more work means a greater need for working capital and they receive nearly 9% less for the privilege.

For the losers we could see 500 firms close or be intervened—not a good start for 2016

How has the market changed over the past 12 months?

Tony Williams: The market has actually been slower changing than I anticipated. Clearly, quite a number of larger firms have been developing on-shore process centres and there has been much more activity in relation to project management and process mapping. The initial results of these projects seem to be encouraging and as a result, this looks like being a trend that will continue and indeed accelerate in future years.

In the US it looks as though 2015 will be a record year for law firm mergers, mostly domestically and primarily with a view to broadening and deepening the larger firms footprint across the US, with the exception of the activity of such firms as Dentons, cross-order merger activity has been a bit more subdued, although we have seen the Gowling Wragge Lawrence Graham & Co combination.

Firms are certainly looking at international development, but seem understandably very nervous of establishing green field operations, which many have found relatively expensive and also may take longer to produce a return than anticipated. As a result, quite a bit of international development has been focused either on bolt-on mergers or on acquiring teams or offices. Examples include Cooleys establishing in London, when it took most of the London office of Edward Wildman and supplemented that with a team from MOFO. Another example is Greenburg Traurig’s acquisition of Olswang’s Berlin office.

Client pressure both in relation to the pricing of legal services and the quality of business focus of the advice given is continuing, although different clients are moving at different speeds in relation to these issues. Accordingly, although the direction of travel is reasonably clear the speed of that travel for specific legal markets is relatively uncertain. By way of example, in the UK, a clear majority of legal work even in relation to high-end matters is conducted on a fixed fee or capped fee basis. Whereas in the US, the majority still appears to be primarily on an hourly rate basis, although that hourly rate may be discounted for certain clients. It is unclear how long this Atlantic divide will continue.

Viv Williams: Very little, interest rates remain low and no increase is on the cards for the foreseeable future. This means that most firms with high gearing have been able to service their debt. We have somewhere between two and 3000 zombie law firms—the walking dead that will need to merge or close down in some organised way.

Perhaps more significantly is the change of attitude of the regulator. The decision was made earlier this year to remove the high impact team that provided a form of business support to struggling law firms. This team helped avoid numerous interventions or failures but the decision has been made that a regulator should regulate and who can argue with that? What we have seen is a significant rise in Solicitors Disciplinary Tribunals—a 67% increase which further indicates the regulator is regulating individual solicitors and not firms. A catalyst for change?

Legal development and practical impact

What legal developments have had the biggest impact on your practice in 2015?

Marcus Pearl: The principal legal development we have seen this year has been the increased regulatory scrutiny on the procurement of technology and services in the financial services sector. Guidance in the form of ‘considerations’ issued by the FCA in July 2014 on what regulated financial services institutions should be considering when procuring critical technology services, has recently taken on greater relevance. This has led to more robust contractual terms being negotiated between regulated firms and their suppliers, particularly around audit rights, data segregation and protection and exit arrangements. For instance, firms now need legal advice to help them implement properly documented and regularly ‘rehearsed’ exit plans, to provide them with a smooth passage out of the outsourcing without undue disruption to their business, while ensuring continuous regulatory compliance.

Third party IT systems must not only provide ‘business continuity’ (recovering from an incident), they must also be ‘resilient’ (capable of withstanding critical failures). The Bank of England has also recently made IT procurement a Board issue, stressing the importance of firms having effective systems to ensure resilience against cyber threats to their business.

Given the continued growth in cloud computing and the fallout from the decision by the Court of Justice of the European Union (CJEU) to render invalid ‘Safe Harbor’ arrangements for the transfer of personal data to the US (following C-362/14 Maximilian Schrems v Data Protection Commissioner), it is clear that IT procurement will continue to demand Board attention. This has, in turn, had an immediate impact on the legal advice required.

Further, the FCA has recently clarified how regulated firms can outsource to the ‘cloud’ safely, and oversee the life-cycle of their outsourcing arrangements, which will go some way to address the perceived lack of transparency over the use of a firm’s data by cloud providers.

Peter Watts: The three most important developments have come late in the year so, while they have featured quite significantly in our work over the past 12 months we expect to see their impact really take off in 2016.

The outcome in Cavendish Square Holding BV v Talal El Makdessi and ParkingEye Ltd v Beavis has a potentially wide ranging impact on commercial law at a B2B and a B2C level. The judgments reinforce some of the trends we have seen in the practical approach over recent years, although they also raise as many questions as they answer.

The Consumer Rights Act 2015 (CRA 2015) enhanced and codified a range of consumer rights. Importantly, it clarifies the application of consumer law principles to the growing market for digital content—everything from apps to streamed video—as well as providing enhanced rights for consumers to challenge business in the areas of faulty goods and services and unfair terms. Indirectly, this feeds through supply chain contracts so isn’t just an issue for consumer Ts & Cs. The new rules making it easier to bring US style class actions for breach of competition law has certainly got people talking, even if the tangible impacts are still work in progress.

Finally, many commercial arrangements these days involve handling data one way or another so the ongoing Safe Harbor saga inevitably leads business to look again at the way they organise themselves and their business relationships on that front.

How have these affected your ongoing cases and working life? How have you dealt with these on a practical level?

Marcus Pearl: Due to the increased regulatory oversight in IT procurement, we have noticed a distinguishable appetite now to put in place the right contractual terms to comply with the spirit of the FCA guidelines (despite it not having the status of regulatory rules), particularly given the FCA’s tendency to undertake thematic reviews into different areas of regulated activity. This applies equally to new entrants to the UK banking market and technology companies providing these solutions. We are being increasingly called upon to advise both firms and technology providers on the most effective way of complying with such guidelines and how best to avoid enforcement action for non-compliance (such as penalties).

One of the key issues for the industry is concentration of risk. We are therefore getting more involved in commercial and operational due diligence to verify that a potential supplier’s solution is tailored to the firm’s needs. We have therefore been advising firms to validate their procurement targets and scoring matrices against the regulatory principles with which they should comply. We are increasingly seeing less immediate down-selection to single providers, with negotiations often ongoing with reserve bidders. Our advice has also increasingly extended to helping clients develop compliance matrices to enable firms to identify quickly the main regulatory, contractual and operational risks in their procurement and to track and validate regulatory compliance obligations. We are also advising firms on their existing contracts to verify compliance.

Peter Watts: Because our commercial work covers everything from strategic agreements to consumer terms, as well as briefing clients on the changes, we’ve seen widespread impacts in practice.

We work quite a bit with businesses who are launching new, often digitally driven, business models so CRA 2015 and Safe Harbor, in particular, come up all the time in helping them structure their business processes and their contracts.

Of course, clients with existing businesses also take a fresh look when things change and we’ve already had quite a few queries to examine shareholder agreements and other contracts in light of Cavendish Square, as well as updating consumer terms.

Have all of the expected developments of 2015 come to pass?

Marcus Pearl: There was once a time when the procurement of cloud software solutions was a big deal. This is no longer the case as cloud arrangements become more commoditised and shrouded in less mystery. While this development may have been inevitable a year ago, the pace of regulatory change could not have been fully foreseen and we now have regulatory pronouncements on how firms can buy from the best technological innovators, without falling foul of the obvious risks of doing so.

We could not have foreseen the decision late October 2015 by the CJEU to render invalid ‘Safe Harbor’ arrangements for the transfer of personal data to the US following the Maximilian Schrems v Data Protection Commissioner case. However, we had assumed that there would be a swift renegotiation to ensure a meaningful commercial solution, particularly given the immersion of US corporate life in Europe. However, the inertia has been unprecedented, with a set of amendments only expected in early 2016. This has left a vacuum as to how best to advise exporters of data to the US to continue to do so without falling foul of the CJEU decision. We have dismissed Binding Corporate Rules as the answer and are advising on the validity of standard contractual clauses as a viable alternative.

Peter Watts: Generally yes. What we tend to see is that developments and trends are borne out, but the speed of impact is more difficult to predict. To take an example (although not really a legal development as such), drones and 3D printing continue to move forward, but their penetration and practical impact on the commercial work we do has perhaps been slower than some has expected. However, I’m confident that it is only a matter of time.

Clients and business developments

How has your business developed in 2015? Has this been a good year for work in your area?

Marcus Pearl: Our focus on IT outsourcing, particularly in the financial services sector has noticeably assumed a more regulatory flavour, for all the reasons as described above. We have had to tailor our transactional skills appropriately to ensure that our clients’ deals are complying with the spirit of increased regulatory scrutiny. This has stimulated more engagement with our clients’ senior stakeholders—including at Board level—for whom the regulatory framework in which they inhabit is becoming increasingly important. They are getting more involved in the weeds of deals and at an earlier stage. We have also interacted more with the FCA and even the Bank of England on the detail of our deals, which is unprecedented for external lawyers.

2015 has been a great year for us—we have advised on one of the biggest IT outsourcings in the financial services sector. We continue to advise businesses on their strategic operational transactions, products and services and continue to learn what matters for them.

Peter Watts: 2015 has been great for us. We’re always busy, but it is particularly enjoyable when there are lots of interesting new things going on and we’re operating at the cutting edge. Given the way the economy has been going, that has been a stand-out feature for us this year. Adding Chambers to our existing Legal 500 Band 1 ranking for UK Commercial helps as well, of course.

How has the profile of your clients developed? Can you identify any trends in your clients or types of cases?

Marcus Pearl: In the financial services sector, we have acted for an increasing number of asset managers, funds, challenger banks and other entrants to the market. Our clients are increasingly global and want global solutions, whether that’s an implementation of a trading platform, a back office integration of operational functions or an IT infrastructure project. We have to advise on not just the regulatory requirements under English law, but the local variances of data protection legislation across Europe. We find that our clients are looking to us to project-manage the entire deal, in whatever jurisdiction that deal may take it. We have seen an increased demand for our services from Fintech companies, some of whom are at a different part of their business lifecycle than the traditional financial services clients for whom we act.

We advise on these issues to clients in other sectors too, acting for both providers and buyers of technology. Data privacy issues are prevalent in everything we do. Our clients are both multinational and emerging—they all need quick, nimble and tailored advice on how best to meet the regulatory framework to enable them to grow and stay ahead of their competitors. We work as partners to our clients to help them achieve these goals.

Peter Watts: Our commercial clients have always been pretty diverse given our strength across a range of industries. However, one consistent trend we are seeing is the increased importance of new business models. This doesn’t just mean disruptive new entrants to the market, although we have our fair share of those. Established players are also pushing through fundamental changes in the way their industries work. Fintech, Connected Cars and Digital Health are three high-profile examples but we’re seeing these across a very wide range of industries.

So what do you think? Do let us have your thoughts below. And before I forget, a Happy New Year to all our readers!

Interviewed by Lucy Trevelyan. The views of our Legal Analysis interviewees are not necessarily those of the proprietor. This interview first appeared in Lexis®PSL Commercial in December 2015.

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