Legal Business Blogs

LB’s Brexit take: City law’s globalisation playbook has just been shredded

 Well, there you have it – a textbook example of why referendums, compared to parliamentary sovereignty, are a really bad idea.

You can make an entirely coherent case for Brexit. Largely one based around deregulation, lower taxes, rawer capitalism and, yes, probably more immigration. Singapore on steroids. But, of course, that wasn’t what the demographic was voting for. Tory Brexiteers promised ‘control’, not even to reduce immigration. Those voting against globalisation and capitalism are now much more likely to get a bigger dose of it – well, those not already retired.

The UK now faces the prospect of Scotland breaking away, bitterly ironic given that most Brexiteers are unionists. The EU had become a bizarre lightening rod for all the things that aggravated the grumpy British public, despite contradictory claims of the Leave camp and that many of the issues were due to domestic politicians anyway.

Referendums, long prone to emotion, protest votes and self-delusion, can turn out like this. And this time it did – even though it appears possible that a not insignificant number of people that voted Leave did so thinking (and secretly hoping) it would be a Remain vote, viewing it as a tactical electoral signal, not a constitutional revolution.

As we noted yesterday, the Remain camp ran a poor campaign – signally failing to convey the realities of how we pay for this nation and where the money is being spent. Given that we currently pay a £108bn a year for pensions, a figure that has risen dramatically over the last five years, even as the young and much of the country have had austerity imposed upon them, the discussion of the £8.5bn contribution to the EU was risible. If the cliché is that he who pays the piper calls the tune, this vote turned that logic on its head. It was the part of Britain largely drawing on the state that carried the day against wishes of the section that was primarily footing the bill.

Remain were also undermined by exaggeration. Their strongest card was sober moderation – they had the case, they didn’t need to stretch it. They needed to look credible at all times. The moment they got into the mud of claim and counterclaim, they were in dangerous territory. But perhaps it didn’t matter, if we have entered the post-fact age of public debate.

A final point on the politics. I’ve been a business journalist most of my career, so when I deal with politics it tends to be policy rather than Westminster intrigue. But as a political anorak in my personal life, for perhaps a decade now I’ve been increasingly uneasy that the aging demographic of our population, and propensity of older people to vote in comparison to the young, means policy-making in the UK has become dangerously tilted in favour of the old. Good policy-making, long-term thinking and planning comes when governments plan for all sections of society and, yes, with a clear view to the nation’s future. That is the young. One way or another, policy in this country will continue to be unbalanced if we do not engage young voters. Online votes? Facebook ballots? It should all be on the table. The current dynamic is bad for the country.

Right, to the profession. City law’s steadfast support for Remain came despite the profession being in line for a substantial Brexit dividend in sorting out the torturous logistics (although there will be an inevitable impact on the lifeblood of City corporate practices – deals). The main event for City firms and their advisers will be access to the single market, in particular what happens to the passporting regime for financial services.

A guess at this point: even a minor economic downturn will see that Brexit majority crumble, suggesting we’ll end up with Norway-style access to the EU market, even if it requires substantial watering down of the Leave agenda.

Will there be a downturn? They’ll certainly be weeks of market turmoil but that’s different to the wider economy. Best guess is there will be a least a moderate downturn and rising inflation as sterling tanks. The problem is Brexit does increase the risks to the UK economy of Lehman-style major shocks which, of course, could come as a kind of feedback loop from reverberations in Europe.

The impact on the City profession? In reality, London’s advance as Europe’s top financial hub has built for 25 years. In the absence of a single obvious rival in Europe, it would take considerable time for that to erode, though it certainly could happen substantially in the event of anything other than very good access to the single market.

But in the meantime, banks and law firms will hold off on investment in the City to see the direction of travel.

Major UK law firms have the advantage of being heavily hedged having built huge European networks. Ironically, those practices have been seen as unwelcome baggage in recent years, holding back profitability and making it harder to get the US mergers they long for. It also left them more vulnerable to assaults from predatory American rivals that were increasingly concentrating their fire on London over Europe.

That equation may not dramatically change in the short term. One possibility is that City firms – which were clearly gearing up to do something drastic to secure a US breakthrough – will have to put those plans on ice. Weakening sterling (and probably a soft euro) would further weigh against their chances. Or they bite the bullet and accept being taken over by US law firms. The latter is more likely now. UK law firms will be looking at wheezes to secure the access they need in the EU. Dublin, already home to some to some of the EU’s most profitable law firms, may emerge a winner from this.

We are already hearing reports of US law firms shifting investment plans to Europe. It’s far from certain that will happen immediately. US firms generally don’t much like having major exposure in mainland Europe – they don’t like the culture, the pace and, most of all, they don’t like the profit dilution. But needs must, I suppose.

What US firms will do in the City is debatable. Their buying power is about to go up considerably, making it easier to expand. Hedging gets more complicated but is doable.

But it’s hard to call because the foundations that have supported the global legal profession for 25 years have just been pulled up. We’ll keep you posted.

For more commentary, see: ‘The profession reels as shock Brexit vote sends UK crashing out of EU… and into years of uncertainty’and ‘The Brexit debate: The big uneasy’