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Allen and Overy LLP —Written evidence (TAS0025)
Evidence to the House of Lords EU Internal Market Sub-Committee
UK-EU trade in non-financial services
Introduction
Allen & Overy is an international law firm with around 5,200 people globally, located in 44 offices in 31 countries.
The firm works with some of the world’s leading businesses on significant international transactions and disputes. Our global network allows us to support our clients’ international strategies and makes us one of the largest and most connected law firms in the world, with an unrivalled global reach and local depth. During the calendar year 2015, the firm advised on over 1,500 deals globally, a level unmatched by any other law firm in the world. We are also the only firm to have advised on USD1tn worth of deals in each of the past five years.
We have a substantial presence in the UK and in the rest of the EU, with offices in London, Belfast, Belgium, the Czech Republic, France, Germany, Hungary, Italy, Luxembourg, Netherlands, Poland, Slovakia, and Spain. We also have an office in Seoul, South Korea (among numerous other non-EEA offices).
Around 1,805 of our people are based in London, 400 in Belfast, and 1,520 in the other EU jurisdictions. The remaining staff are based in the US, Latin America and the Asia Pacific region (including Australia). We also have seven people in South Korea.
The expansion of the firm globally in the last forty years has its roots in early days of the firm’s operation. In Allen & Overy’s first 48 years following its foundation in the 1930s, the firm advised clients on international transactions from London, but the strong and growing international dimension prompted the firm to become one of the first UK practices to establish international offices. We opened our first in Dubai in January 1978. This laid the foundations for the development of the firm as a leading international practice.
In the late 1980s and early 1990s, two factors began to shift the focus away from London towards the international market: client demand and the changing flow of economic capital. As corporations and financial institutions expanded their international operations more and more, they looked to their legal advisers to be on hand in the countries where they conducted business. In time, opportunities arose from the collapse of communism in the Soviet Union, and Central and Eastern Europe. The development and expansion of a single European market, along with borderless trading, made it imperative that the firm established a presence in the European economies and financial centres that were the source or destination of new capital flows.
The firm’s expansion has continued rapidly since then such that today our global coverage allows us to combine our international resources and sector expertise to work on cross-border transactions and disputes directly in the markets and regions important to our clients. It is one of the key reasons why clients choose Allen & Overy over other providers of legal services in the market.
We are pleased to have been given the opportunity to respond to the questions raised by the Committee and have set out our responses below. We would be happy to respond to further queries or appear before the Committee if that would be of assistance. If so, please contact Daniel Shurman (Partner and head of Allen & Overy’s Brexit group) and/or Karen Birch (Counsel and member of the firm’s Brexit group).
Sectoral overview
Please provide us with an overview of trade in your sector. Please include a summary of the significance of the sector to UK trade in services, including employment statistics (linked to trade if possible), the volume and balance of trade, value added and Foreign Directive Investment (FDI), and UK strengths and specialisations in the sector.
Trade in the legal services sector and significance to UK trade in services
Allen & Overy does not produce independent data on trade in the legal services sector nor as to the significance of the legal sector to the UK’s trade in services. We are, however, aware of analysis produced by other bodies that may assist, including:
The City UK Paper indicates in its introduction that around 314,000 people are employed in private practice in the legal sector and that the sector generates 1.6% of UK gross value added. It also highlights the leading international role played by UK-based law firms, stating that this is evidenced by the sector’s trade surplus, which was worth GBP 3.4bn in 2015. The City UK Paper goes on to report that gross fees generated by law firms in the UK in 2014/15 amounted to £30.9 bn.
We would also note in this context the significant contribution made by entities and individuals outside private practice who provide legal services in the UK and who support the legal services sector, including the courts, barristers, in-house lawyers, providers of legal education and training, translators, transcribers, legal reporters, mediators, arbitrators, expert witnesses and technology providers.
UK strengths and specialisations in the legal services sector
The biggest strength of the UK legal services sector in the commercial context comes from the fact that UK lawyers can generally advise on English law and on resolving disputes in England, which are perhaps the most common choices of law and courts made by parties globally when negotiating international commercial transactions. English law is a global public utility, regularly chosen (and in many areas market standard) even where the parties to the transaction have no direct connection to the UK because it is certain, predictable, sophisticated and flexible – so it can develop and grow to deal with innovative deal structures and changes to the commercial environment. Similarly, the English courts are among the most highly respected forums for resolving disputes globally due to the quality and transparency of the process and the standard of decision making. According to research carried out by Portland Legal Disputes on judgments issued by the English commercial court in the 12 months to the end of March 2015, 63% of the total number of litigants were foreign nationals, 22% of whom were from continental Europe.
Another key strength is the ability of the UK legal services sector to advise on highly complex transactions and disputes.
It is also important to note that the popularity of English law and the English courts and the fact that the UK has a world class and competitive legal services sector does not only benefit legal services providers – it also contributes to the UK being a highly attractive location for global businesses. Together with the predictable and benign English legal regulatory regime (ie the law that applies to entities operating in the UK irrespective of the law chosen in their contracts) and the availability of other professional services and business support providers, it makes the UK an attractive proposition for corporates considering where to locate their operations.
The City UK Paper states that English law “underpins and enables the business of doing business and has a clear influence on critical decisions, including where to headquarter global operations….The ongoing development of English law, in the context of increasing international competition from other jurisdictions and the rise of international arbitration, in applying and adapting its principles to changes in global trade and investment is critical to the international attractiveness of the sector across the UK.” It also notes specifically that the “importance of the UK’s internationally respected legal system was cited by HSBC as one of the key factors in their decision in February 2016 to remain headquartered in the UK rather than re-locate to Hong Kong”.
This creates a virtuous circle for the legal sector as law firm activity is driven by client demand. Entities that choose to base themselves in the UK are more likely to find that they are subject to English law legal obligations and to choose English law to govern their relationships with third parties. They are also more likely to use the English courts (or London seated arbitration) as a forum for the resolution of their disputes.
EU and market access
How and to what extent does the EU facilitate enhanced market access for your business/in your sector? Is there a harmonised Single Market framework that allows you full access to other member states’ markets? If not, how (and how well) does the Single Market function in your sector?
EU facilitation of access to markets in the EU
As discussed in the Law Society Brexit Paper there are four key directives which aim to facilitate the free movement of lawyers and legal services within the EU:
The 1977 Directive deals with fly-in fly-out business, i.e. the temporary provision of legal services from one member state in another member state.
Article 49 TFEU and the 1998 Directive allow lawyers to establish, ie to set up an office or offices, in another member state on a permanent basis using their home title and subject to certain obligations, e.g. as regards registration, professional indemnity insurance etc. Many UK law firms have established branch offices of their UK entities within EU member states. Firms may well rely on the freedom of establishment under Articles 49 et seq of the TFEU or the 1998 Directive to do this (although in certain jurisdictions any foreign entity may have a right to establish a branch or permanent establishment provided it complies with applicable requirements, e.g. corporate registration, tax filings).
The Professional Qualifications Directive sets out conditions for recognition of qualifications and access to a regulated profession by different member states.
These directives apply across the European Economic Area (EEA). Together they provide very effective access for the UK legal services sector to other member states’ markets (and to Switzerland), in addition to or alongside access that exists at a national law level. See also the analysis below in relation to other EU rules that in practice facilitate the operation of the legal sector and access to markets.
EU facilitation of access to non-EU markets
The UK legal sector also benefits from access to non-EU markets provided pursuant to free trade agreements (FTAs) entered into between the EU and third states. For example, access to the legal market in South Korea is permitted only for entities based in a jurisdiction which has a free trade agreement with South Korea. UK law firms therefore rely on the EU/South Korea FTA in order to establish themselves in South Korea.
Allen & Overy’s position
The City UK Paper indicates that the largest international law firms headquartered in London (of which Allen & Overy is one) have between 45% and 65% of their lawyers based outside the UK and that many other London-based firms have between 10% and 20% of their lawyers overseas. It also states that nearly 7,000 solicitors from England and Wales are located outside the jurisdiction.
As indicated above, Allen & Overy LLP and its affiliates have approximately 5,200 employees globally, located in 44 offices in 31 countries (including 12 EU member states and South Korea). The firm has a global presence because that is what the firm’s client base requires. It is therefore vitally important to Allen & Overy’s business model that we are able to have a global offering as it allows us to support clients doing business globally.
The main practising entity is Allen & Overy LLP (A&O LLP), an English limited liability partnership through which the majority of partners practise law in Belgium, France, Germany, Korea, the Netherlands, the People's Republic of China, Qatar, Singapore, the United Arab Emirates, the United Kingdom and the United States. In the United Kingdom, A&O LLP has offices in London and in Belfast. The Belfast office provides support services to members of the Allen & Overy group globally. We understand that in a number of EU jurisdictions, A&O LLP would be permitted to operate as a matter of local law even absent EU legislation, but the EU laws discussed above nevertheless facilitate access in those jurisdictions because they generally impose fewer restrictions on practising rights than would exist as a matter of national law, they apply consistently across the EU and they are less likely to be subject to change than national rules.
In other jurisdictions we practise through subsidiary companies and partnerships established under English or local laws including in the Czech Republic, Hungary, Italy, Luxembourg, Poland, the Slovak Republic and Spain. In terms of statistics, Allen & Overy has approximately:
The position regarding the physical location of Allen & Overy’s EEA nationals (as opposed to lawyers qualified in the EEA) is discussed below.
Do other aspects of EU membership help or impede the ability of your business to operate (eg, access to justice, horizontal legal regimes, free movement of persons, mutual recognition of professional qualifications, regulation and standards)?
Overview
Other aspects of EU membership help Allen & Overy and the UK legal sector more generally to operate, including (among other things):
We consider the benefits of each of these aspects of EU membership in more detail below.
Free movement of persons
As indicated above, there are many UK qualified lawyers in the legal sector who are currently located outside the UK. At Allen & Overy, a number of UK nationals are currently located outside the UK. Similarly, a number of nationals of other EU member states are currently located in the UK. These nationals comprise both lawyers and non-lawyers (the latter including for example HR, finance and business services specialists). The firm’s senior partner is a Belgian national based in London.
Allen & Overy’s workers also move on short and long term assignments between the offices on a frequent basis – indeed around 7% of our people globally relocate to a jurisdiction other than the jurisdiction in which they were originally employed every year. The top place of origin and destination for those moving jurisdictions within the firm is London. Paris is in fifth position.
The flexibility of being able to move people around the network is important to Allen & Overy and others in the legal sector as it allows firms to be responsive to client demands and also builds organisational cohesion. Indeed, a core part of Allen & Overy’s global strategy is to enhance agility across our global team, in order to maintain a truly international workforce who will be able to better respond to the challenges our clients face globally. Our people can also gain immensely both from a professional and personal perspective from international assignments, and the firm aims to offer opportunities across our network. It is one of the reasons why many of the best lawyers are attracted to working at the firm. In terms of statistics, Allen & Overy has approximately:
Mutual recognition of qualifications
The EU’s rules on mutual recognition of qualifications regulate the ability of EEA lawyers to practice in other EEA states – these rules are referenced briefly above in the context of access to markets and are discussed in more detail in the Law Society Brexit Paper. As indicated above, they are part of the package of EU laws that facilitate Allen & Overy and other UK firms having effective access to continental European markets.
Rights of audience
UK qualified solicitors currently have the right to appear and argue before EU tribunals such as the CJEU on behalf of their clients. That right exists for lawyers qualified in an EEA member state. Article 19 of the Statute of the ECJ states that:
“Only a lawyer authorised to practise before a court of a Member State or of another State which is a party to the Agreement on the European Economic Area may represent or assist a party before the Court.
Such agents, advisers and lawyers shall, when they appear before the Court, enjoy the rights and immunities necessary to the independent exercise of their duties, under conditions laid down in the Rules of Procedure.”
Privileged legal advice
UK qualified lawyers can currently give advice that is protected from disclosure (on grounds of legal privilege) in the context of certain EU investigations, in particular competition investigations brought by the European Commission. It is of critical importance to clients involved in investigations of this type that advice from their lawyers is not disclosable. The CJEU’s judgment in C 155/79: A M & S Europe Ltd v Commission of the European Communities (and related decisions) restricts this privilege to lawyers qualified in the EEA.
Data transfers
The EU data protection regime makes it easier for law firms and clients to transfer personal data across borders within the EEA. For example, it enables lawyers to carry out due diligence on client documents in EEA jurisdictions other than the jurisdictions in which those documents are held, and to exchange client and HR data between offices, with no greater compliance burden than would apply if the documents were retained in one jurisdiction.
Allen & Overy regularly transfers data between EU jurisdictions in order to conduct such exercises and advise clients more generally. Indeed, a key driver for Allen & Overy opening its Belfast office was to meet client demand for cost-effective alternative resourcing models for the conduct of such exercises, without compromising service quality. The principal role of a significant proportion of the individuals in the firm’s Belfast office is conducting due diligence and other document review exercises for the firm’s clients.
Respect for English jurisdiction clauses and English judgments
One factor behind the popularity of English law and the English courts is that English jurisdiction clauses are currently respected in other EU member states and English judgments are easily enforced, pursuant to a simplified mechanism provided for in the Recast Brussels Regulation. Competition between jurisdictions for legal business is fierce – the fact that parties know that if they litigate in England, their jurisdiction clause will be respected and their judgments enforced across the EU is a helpful selling-point for litigation in the UK.
Facilitating the ability of clients to operate in the UK and conduct cross-border business
Law firms exist to service the needs of their clients. If clients are operating in the UK and conducting cross-border business, this generates work for UK law firms. It is therefore critically important to law firms that barriers to cross-border trade are minimised.
Exiting the European Union
What specific issues does the UK exiting the EU raise for your business/sector? Please be as specific as possible.
EU and non-EU market access
If Brexit results in UK law firms losing the benefit of the EU’s current rules on access to EU markets discussed above and of the EU’s FTAs with third states, this will have a negative impact.
Firms with branch offices of their UK entities within EU member states which rely on the EU rules on freedom of establishment may no longer be able to practise (or at least practise as effectively) through those branches. Whilst local law may assist for some firms in some areas, it will not always be sufficient to allow firms to continue to operate in precisely the same way as currently.
For example, some jurisdictions place restrictions on non-EEA lawyers holding ownership interests in local law firms as a matter of national law. Given the complexity of international law firm group and ownership structures, it is common for English-qualified partners to have interests in multiple group entities. If, post-Brexit, the UK is in the same position as other non-EEA jurisdictions, this may mean English qualified partners can no longer be partners in these entities.
Some firms operating in the EU may therefore need to restructure. This could involve, for example, establishing local subsidiaries in place of branches (or perhaps establishing one entity in an EEA state with branches in various other EEA states) and/or replacing UK qualified partners with EEA qualified partners. This will increase costs and the administrative burdens placed on firms and will reduce flexibility. It may ultimately encourage business to move away from the UK.
Similarly, firms with branch offices in jurisdictions which have a FTA with the EU may need to reconsider their ability to practice in those jurisdictions. For example, A&O LLP Foreign Legal Consultant Office in South Korea is established under (and dependent on) the EU-Korean FTA. Once the UK leaves the EU, the current office licence could possibly be cancelled by the Korean Ministry of Justice for lack of meeting the requisite establishment criteria. In those circumstances, Allen & Overy would need to consider any available restructuring options.
Free movement of persons
If Brexit results in the removal of the automatic right enjoyed by workers within the EEA and Switzerland to come to work in the UK and bring their family and the rights of UK nationals to work in the EEA and take their family, this will have an impact on individuals and also more generally on the ability of Allen & Overy and other firms to do business in the UK and the EU. As indicated above, the flexibility of being able to move people around the world quickly in order to respond effectively to client demands (which may be urgent and unpredictable), build corporate cohesion and attract talent is critically important for international law firms and a core part of their corporate strategies.
Mutual recognition of qualifications
Non-EEA lawyers are generally more restricted in their rights of practice in EEA jurisdictions than EEA lawyers and therefore English lawyers may cease to be able to practise in those jurisdictions or may find additional restrictions and hurdles in doing so post-Brexit.
As indicated above, Allen & Overy LLP has a number of English lawyers practising in our non-UK EEA offices. The firm’s ability to continue to base English lawyers in such jurisdictions may therefore be adversely affected post-Brexit. Similarly, the rights of Allen & Overy’s non-UK EEA-qualified lawyers to practise in our UK offices may be adversely affected depending on the terms of any new arrangements which are put in place.
Rights of audience
Absent any special arrangement, Brexit is likely to result in UK qualified lawyers losing their current right to represent or assist parties before the CJEU.
One possible solution for English and Northern Irish qualified lawyers is to obtain a certificate of admission in the Republic of Ireland, i.e. to obtain dual qualification as an Irish solicitor. The process for doing so is based on the specific, bilateral and reciprocal arrangements between Ireland and the UK. This may enable the relevant lawyers to continue to have a right to argue before EU tribunals.
More than 20 English-qualified lawyers in Allen & Overy have applied for certificates of admission in the Republic of Ireland to protect their position post-Brexit. This number may increase depending on the direction of travel regarding the new arrangements between the UK and the EU.
However, if there any technical arguments that this solution is deficient (for example as a result of future legislative or regulatory changes) then clients may not instruct UK lawyers who seek to rely upon it. Furthermore, even with this apparent solution, the necessity of this practice could lead to a loss of prestige of the UK legal sector and a loss of business.
Privileged legal advice
Unless an agreement is reached, legal advice provided by UK lawyers to their clients would cease to be privileged in the EU investigations referred to above. UK qualified lawyers could seek admission in the Republic of Ireland with a view to avoiding this risk – see the discussion immediately above in this regard.
Data transfers
It looks likely that the new General Data Protection Regulation (GDPR)will apply before the date of Brexit, bringing the UK within the new, more onerous, data protection regime. Post-Brexit the European Commission may ultimately recognise the UK’s new data protection regime (which will likely be similar to the GDPR regime) as ‘adequate’. This would allow data transfers to continue in the same way as they do today. However, there may be some delay in achieving a decision on adequacy and until such confirmation is provided organisations (including law firms and their clients) that move personal data from the EU to the UK will, under EU law, need to implement compliance mechanisms to ensure adequate protection for the transferred data (e.g. standard contractual clauses approved by the Commission). This exercise will add time and costs.
UK headquartered law firms (and their clients) may also lose the benefit of the one-stop shop model under the GDPR (depending on the terms of any agreement with the EU).
Popularity of the English courts and English law
The prospect of Brexit has already led some parties and commentators to question whether English jurisdiction clause are now less attractive due to perceived uncertainty as to whether English jurisdiction clauses and judgments will be respected in the EU post-Brexit. Although the concerns expressed are largely unfounded, any move away from including English jurisdiction clauses in commercial contracts will have a negative effect on the UK legal sector.
Similar issues have been raised in relation to English law – there appears to be a perception among some parties that English law is now less certain and predictable. Again, the concerns expressed in this regard are largely unfounded, but a move away from including English governing law clauses in commercial contracts will negatively impact the UK legal sector.
A significant proportion of A&O’s people advise on English law, including the vast majority of the firm’s London-based lawyers and a significant number of lawyers based in other jurisdictions around the globe. Indeed, 1,134 of the firm’s lawyers globally are qualified to advise on English law.
Facilitating the ability of clients to operate in the UK and conduct cross-border business
As indicated above, law firms exist to service the needs of their clients. If law firm clients move away from the UK, decrease their presence in the UK or conduct less cross-border business, this will have an impact on the demand for English law advice. Clients regulated outside the UK are significantly less likely to need UK regulatory advice from lawyers. Further, if clients move away from the UK they are likely to become familiar with other legal systems and less likely in practice to include English governing law and jurisdiction clauses in their contracts.
Future UK-EU trade relationships
What would the impact be for your business/sector of leaving the EU and operating on WTO (GATS) terms? To what extent would businesses be able to continue to trade in services as at present? How would your business adapt to this specific scenario? Are WTO terms an attractive option?
See the analysis above, which is drafted on the assumption that no special arrangement is agreed between the UK and EU.
Would leaving the EU but remaining a member of the European Economic Area (EEA) retain present levels of market access for your business or not? Is this an attractive option?
This would be ideal from a market access perspective as it would allow the UK legal industry to retain broadly the same access to EU markets as currently. It does however give rise to the risk that the UK would be forced to implement future EU legislation which may conceivably be unhelpful to the legal sector, without any ability to influence the terms of that future legislation.
Is a negotiated UK-EU Free Trade Agreement (FTA) an attractive option? How confident are you that the needs of your business/sector, including but not limited to market access, would be accommodated in such an agreement?
Whether a UK-EU FTA would be an attractive option depends on what terms are agreed in the FTA.
We are not entirely confident that the needs of the UK legal sector would be accommodated in such an agreement. Historically, the EU’s FTAs with third states have focussed more on access to markets in goods than services and they have not generally removed as many barriers to trade as are removed between EU member states. Any FTA negotiated between the EU and the UK would have to be significantly broader and more detailed than the EU’s existing FTAs for it to give the UK legal sector the same level of access to EU markets as currently exists. Further, a FTA would presumably not allow the UK to take the benefit of the EU’s FTAs with third states.
What should the Government’s key objectives be for your sector in its negotiations with the EU?
In our view the Government should seek to ensure that the practising and establishment rights of UK lawyers in the EU post-Brexit are at least equivalent to the rights currently afforded to EEA-qualified lawyers.
Similarly, the Government should seek to ensure that the existing reciprocal rules on allocation of jurisdiction and recognition and enforcement of judgments between the UK and the EU are maintained in essentially the same terms post-Brexit. Government should also ratify the Hague Convention on Choice of Court Agreements, which would impose reciprocal obligations on the UK and the EU (and certain other states) to respect certain types of jurisdiction clause and enforce related judgments. The UK is currently party to the Hague Convention by virtue of being a member state and it could ratify the Convention post-Brexit without the consent of the other member states.
The Government should also ensure that the UK’s rights under the EU/South Korea FTA are, if possible, preserved after Brexit.
Such a strategy will benefit not only the UK legal industry but also business in the UK more generally for the reasons discussed above.
Opportunities
Does leaving the EU raise significant benefits or growth opportunities for your business/sector? What are these and how can they best be exploited? To what extent do they offset/outweigh concerns about reduced access to EU markets?
Brexit may create a short-term increase in demand for legal services as clients seek to understand the impact of Brexit on their business, ensure compliance with the new legislative regime and deal with Brexit-related disputes. However, this will not outweigh concerns about reduced access to EU markets.
Other
Please make any additional points here.
October 2016