Written evidence submitted by the Law Society of England and Wales (EUK0017)

Executive summary

The Law Society

1. The Law Society of England and Wales is the independent professional body that works to support and represent its 160,000 members, promoting the highest professional standards and the rule of law.

Reasons for submitting evidence

2. The Law Society is responding to this inquiry as part of our contribution to the developing national debate on the UK’s relationship with the EU. We are contributing to the debate 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;

• the EU forms the world’s biggest single market. Access to that market is as important for legal services providers as it is for any other part of the UK service economy.

3. The Law Society has recently published two reports relevant to the Committee’s inquiry. In the first report[1] we commissioned Oxford Economics to provide an independent assessment of the potential effects of a UK withdrawal on the legal sector relative to the wider UK economy. The economic model provided by Oxford Economics generated baseline forecasts for the legal services sector and alternative forecasts that estimated the impact of EU disengagement on the sector over the period to 2030. The research did not distinguish between different parts of the legal sector, but looked at the sector in macroeconomic terms.

4. In our second report entitled The EU and the legal sector[2] we looked at:
    

• the impact of the EU on specific areas of law;

• the impact of the EU on the business of law and England and Wales as a global legal services centre and jurisdiction of choice;

• the impact of alternatives to the existing membership of the EU if the UK were to leave the EU.

Both reports are being sent in hard copy to the Committee secretariat. We hope that the Committee members will find these reports helpful. For this reason, we will here focus on highlighting the main conclusions.

5. First report - main points

• the legal services sector would be disproportionately disadvantaged compared to the whole UK economy if the UK were to leave the EU;

• the legal sector would continue to grow, but the rate of growth would be affected by a UK withdrawal from the EU;

• the negative effects on growth in the legal services sector compared with the UK economy as a whole are due to the sector's reliance on intermediate demand from sectors which are likely to be adversely affected by a UK withdrawal from the EU, such as financial services;

• the scale of those negative effects would depend on withdrawal negotiations and subsequent UK government policy actions.

6. Second report - main points

• for all parts of the legal sector there would be uncertainty. The short and longer term implications and possible benefits or otherwise cannot be predicted;
   
• 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 would affect those individuals and firms working with that client group;
   
• the consequences of a UK withdrawal from the EU 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;

• 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;

• 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.

Response

The economic value of the UK legal sector

7. The UK legal sector makes an important contribution to the domestic economy worth £22.6bn[3]. 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)[4]. Any adverse impact on the legal sector therefore has wider implications.

8. Some key facts:

• The UK is the largest market for legal services in Europe with 20.3% of the total European market and accounts for around 7% of the global market for legal services.

• Three of the largest five law firms in the world based on headcount have their main base of operations in the UK.

• Five of the largest ten law firms in the world based on gross fee revenue have their main base of operations in the UK.

• 200 foreign law firms have offices in the UK – half are from the US.

• 314,000 people are employed in UK legal services – generating 1.6% of UK GDP and a net export surplus of £3.1bn in 2013.

• The European legal services market had total revenues of $184.5bn in 2013, representing 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 EU and the legal sector

9. 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 legal sector are linked to the wider UK economy and market forces. Many of these issues have a crossover with EU membership and EU law, and indeed the UK (and London in particular) is often seen as a ‘gateway’ to Europe for international companies wishing to establish in the EU.

10. The impact of a UK withdrawal from the EU 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 a UK exit 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.

The EU and the financial services sector

11. The financial services sector is of particular importance to the UK economy generating more than 10% of the UK’s total Gross Domestic Product. In 2013 financial services produced 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.[5] The UK had an overall trade in goods and services deficit of over £72.4bn in 2013.[6]

12. The financial services sector is a key purchaser of legal services in the UK. Between 2009 and 2014, financial services accounted for 43% of the total value of transactional work deals amongst the Top 50 City law firms.

13. If the City of London‘s position as a world financial centre were to 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 firms might adapt to changing circumstances by moving their centre of operations away from the UK.

14. The EU is particularly important to law firms who work with the financial services sector. In terms of client impact, a UK exit 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.

15. 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.           

16. 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 exit negotiations, EU regulatory requirements for off-shore jurisdictions might become more stringent.

The EU and business impact on other law firms 

17. Whatever their differences in size, area of practice or business model, all law firms are affected by EU membership, either directly or indirectly. For some, the EU will be an integral part of their business model, especially where their client-base has a significant or growing EU dimension.

18. Many small and medium law firms in England and Wales specialise in specific areas of law, where clients may not be significantly affected by EU law or by changes in the UK’s relationship with the EU. Firms specialising in other areas, such as immigration law, might benefit directly from a UK exit, as it could greatly increase work in relation to visa applications of EU nationals.              

19. Some firms may find that one or more areas of law in which they practise are significantly affected, and that they will need to 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.

The EU and law firms in Wales

20. As a result of EU grants and project funding in Wales there is a clear link between EU membership and the health of the local economy. Although many small and medium law firms in Wales are not directly affected by the UK’s relationship with the EU, the Wales economy had benefited from EU funding. Were the UK’s relationship with the EU to change, any subsequent changes in funding would have a direct effect in those areas. Law firms are concerned that the loss of such funding - unless made good by a UK government - would damage the Wales economy, and therefore have a detrimental knock-on effect on law firms.

Choice of Law of England and Wales as a jurisdiction of choice

21. London's reputation as the leading global centre for the provision of international legal services is underlined by the fact that over 80% of claims issued in the Commercial Court involve at least one party from outside England and Wales. A UK withdrawal could have a detrimental effect on the jurisdiction and the use of English law around the world.

22. There are undoubtedly 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. On the other hand, it is equally possible that if London becomes less popular as a financial centre, businesses might look to other major jurisdictions for their legal services, particularly where these coincide with other financial hubs. This move might, in turn, lead to a decline in the use of English law and England and Wales as the jurisdiction specified in international contracts. This would not be an immediate event, but it is a possible outcome in the longer term.

23. Parties to international commercial transactions are generally free to choose which law they wish to govern their contracts, and to designate a particular forum to determine conflicts that might arise. Although the two often coincide, they are in fact separate considerations so a contract may be governed by English law but designate Switzerland, for example, as the forum for arbitration if any disputes arise under the contract. English law has a good reputation as the law of choice for many commercial contracts and the UK courts’ jurisdiction enjoys international recognition as a world class centre for dispute resolution. 

24. English law is perceived to be certain and clear. It is this reputation that explains why English law is chosen by many businesses as the governing law in their international transactions (which otherwise may have little or nothing to do with the England). Given the pervasiveness of EU law in many areas of English commercial law (in particular banking law), any withdrawal from the EU would give rise to a great deal of uncertainty as to what actually constitutes ‘English law’. Any exit from the EU would inevitably lead to uncertainty as to the status of provisions based on or derived from EU regulations and rules and which currently form part of English law.

25. The success of England and Wales as the jurisdiction of choice for the resolution of international disputes, whether through the court system or arbitration, has been linked to the success of London as a global financial hub, but it is clear that it is also attributable to other factors such as:
     

• quality and commercial acumen of judges;
• legal certainty;
• impartiality;
• English as the language of global business;
• the influence of common law on legal systems throughout the world; and
• the reputation and availability of legal advisers, particularly in London which is home to the major courts.

26. However, the market for choice of court is an increasingly competitive one. The English commercial court is currently taking commendable steps to increase its drawing power in the international disputes arena. The recent consultation document on the initiative to create a specific Financial List, with docketed judges specifically trained in financial markets, confirmed that ‘the Courts of England and Wales are committed to continuing to meet the needs of the international financial community’. [7]

27. As the UK is party to the EU regime on jurisdiction and enforcement, set out in the Brussels I Regulation, any agreement to litigate disputes before the English court currently has the protection of EU law. This means, subject to limited exceptions, that such agreements have to be respected in the courts of other member states. This is an enormous benefit to commercial parties. Furthermore, the fact that English judgments can be simply and effectively enforced across the EU reduces costs and allows speedy and effective redress for businesses across the EU. This reinforces the reputation of England and Wales as jurisdiction of choice in an EU context.

28. On a procedural level, it is likely that the service within the EU of English claims or court documents would be more difficult, and certainly less certain, if the UK decided to withdraw. There might also be increased uncertainty regarding the ability to obtain cross-border interim relief in support of English proceedings in other member states.

29. It might be argued that a UK exit from the EU could lead to English law being more attractive as the UK would no longer be required to incorporate those aspects of EU law which can prove problematic.[8]

              Conclusions

30. Legal services make an enormous contribution to the UK economy. Lawyers and law firms are affected by anything that affects their clients and EU law is relevant to many different aspects of law and a wide range of clients. In particular, the legal services sector is closely linked to the financial services sector and if a change in the UK's relationship were to affect the financial services industry, this would have a knock-on effect on those advising on the legal aspects of financial services. Similarly, Wales and some regions benefit from EU funding, meaning that EU membership has a different sort of relevance to people and businesses located there and for the lawyers who work in those areas. For some other lawyers and law firms, EU membership may be less relevant.

31. The idea of the UK, and London in particular, as a ‘gateway to the EU’ is a key advantage of the existing relationship. This also ties in with the popularity of English law for use in international contracts and England and Wales as a jurisdiction of choice. It is unclear what the effect of a change to the existing relationship might be in this regard.

32. Furthermore, lawyers and law firms have benefited from the EU provisions on freedom of establishment and free movement in their own right. Many UK firms have used expansion in the EU as a platform from which to grow their wider international business.

November 2015