Cameron Timmis looks at te growth of financial services work and why lawyers belive tha launch of a new association to encourage development in this area is overdue


In a sign that financial services practice is growing in stature, this week sees the launch of the Financial Services Lawyers Association (FSLA). According to FSLA treasurer Andrew Onslow QC, the new group will be ‘filling a gap’ in what hitherto has been a neglected practice area and will be a forum for discussion and debate as well as education and training.



Much of the impetus in setting up an association has come from junior lawyers looking to expand their skills and expertise in this area, explains Tim Aron, an FSLA executive committee member and currently a pupil at 3 Verulam Buildings. ‘It’s an industry area that people are very aware of… but don’t know much about.’



The launch of the group has also been welcomed enthusiastically by senior practitioners. ‘Financial services law has grown tremendously over the last ten to 15 years… it’s long overdue,’ says Sidney Myers, head of the regulatory practice at Allen & Overy, and a member of the FSLA advisory board.



The development of financial services practice has accelerated in the past few years, following the establishment in 2000 of a single regulatory regime under the aegis of the Financial Services Authority (FSA), the world’s first ‘super-regulator’ (previously financial services regulation was carried out by a large number of disparate bodies).



Today, the FSA regulates more than 29,000 firms and around 165,000 people involved in the financial services industry.



For lawyers, this has generated two distinct forms of work: non-contentious – or compliance – matters, which involves advising firms on the scope and implementation of FSA rules; and contentious matters, which involves advising clients who are subject to investigation for alleged breaches of FSA rules. The latter involves areas such as market abuse, money laundering, financial promotion and complaint handling.



The stakes are big: in the biggest fine to date, in 2004, the FSA fined Royal Dutch Shell £17 million for market abuse by overstating its oil and gas reserves – although in many cases, it is the reputational damage to a firm which is the true penalty.



One reason for the growth in demand for financial services expertise is the volume of European financial services legislation resulting from the EU Financial Services Action Plan.



A current example is the Markets in Financial Services Directive (MiFID), which comes into effect in November, and aims to harmonise the European regulation in member states and increase the scope for firms to offer investment services and products (known as ‘passporting’) in other jurisdictions.



‘Most City firms’ financial services practices are rapidly growing,’ says Carmen Reynolds, head of UK financial services at US law firm White & Case. ‘There is so much regulation coming out of Europe; that affects transactions and how institutions structure themselves.’



At the same time, says Ms Reynolds, ‘it’s becoming a much more specialised area. Ten to 15 years ago, far fewer firms would have had dedicated financial services units… but that is changing because of the explosion of rules and directives, and because enforcement against financial institutions is much higher on the regulator’s agenda’.

While not surprisingly it is City law firms that tend to dominate financial services practice, it is by no means their sole preserve. For example, over the past year, south-west firm Michelmores has rapidly expanded its financial services capability, targeting financial institutions in the region whose businesses include mortgages, pensions, collective investment schemes, hedge funds and private equity investments.



‘It’s a major sector,’ says financial services practice head Philip Ryley. ‘Some 1.1 million people are employed in it… obviously a lot is based out of the City, but there are also a lot of businesses all over the country.’



While headquartered in Exeter, the firm also benefits from having a smaller London office: ‘Our rates are significantly less than City players,’ observes Mr Ryley. ‘A lot of the work we acquire in London can be done in Devon at a cheaper rate.’



As well as advising on compliance issues, Mr Ryley says the firm also has an increasing amount of enforcement-related work: ‘We are seeing enforcement actions taken against not just individuals but senior managers for regulatory breaches.’



Other firms have also targeted financial services as a potential growth area.



In 2004, Philip Rubens, a commercial litigation partner at London firm Finers Stephens Innocent, undertook a six-month secondment in the FSA’s enforcement division, and subsequently established a financial services practice at the firm to advise investment bankers, hedge fund managers and brokers on FSA enforcement matters.



‘While a number of larger law firms send secondees at associate level, it’s highly unusual to send a partner there,’ says Mr Rubens. ‘It gives us a competitive advantage.’ Mr Rubens notes too that there are still ‘very few firms outside the magic circle doing this kind of work’.



As well as welcoming a regular flow of secondees from private practice, the FSA also has a large permanent staff of lawyers. Jamie Symington, head of wholesale in FSA enforcement, says most of these – currently around 100 – work in the FSA enforcement division, where they are ‘embedded’ in investigation teams, working alongside accountants and others with law enforcement background.



‘We have referrals made to us from other parts of the FSA of suspected misconduct or some kind or another,’ explains Mr Symington. ‘We will typically investigate that to establish whether there has been misconduct… lawyers will be involved in the investigation process doing hands-on investigation, some of the interviews and will be responsible for the litigation of matters that go though to the disciplinary process.’



Despite what he describes as ‘some restructuring’ within the FSA enforcement division – it is widely known that this includes a redundancy programme – Mr Symington says the FSA is still looking to recruit lawyers.



‘Even at full complement, there is turnover of lawyers. We welcome and make a virtue of that and we like to bring in fresh blood from time to time. We see the FSA as being a very good opportunity for lawyers, whether as a long-term career or as part of a career strategy to develop a particular specialism and use it in private practice in the regulated community.’



Whether within the FSA, in private practice or in-house, in the next few years all financial services lawyers will be grappling with a dramatic shift in UK regulation, from a rules-based approach to a ‘principles’ based approach – formally announced last month by the FSA with the publication of its paper, Principles-based regulation.



The shift in approach is a recognition that the current regime and an ‘ever-expanding rule book’ have ‘failed to prevent misconduct’. Indeed, according to the FSA, the existence of so many rules has ‘becoming an increasing burden on our own and the industry’s resources’. What it now proposes is regulation that relies more on high-level principles and outcomes, and less on prescriptive rules.



It’s a development that many lawyers find troubling. ‘In theory, I can see that if you have a huge rulebook with an enormous number of rules, it can be very limiting for firms,’ observes Sidney Myers.



‘If you have very high-level principles, that gives people more flexibility. The flipside is that it gives much greater uncertainty.

‘What is worrying for [law] firms is whether they can tell clients whether something is a breach of principle.’



The net result, suggests Mr Myers, could be more litigation. ‘The principles approach gives the FSA more scope to argue that firm has breached the rules because they are so broadly drafted and so general; conversely a lot of firms will say that is unfair to say that is a breach of principle.’



Mr Rubens concurs: ‘From a lawyer’s perspective, we are more used to detailed rules and regulation. The concern everyone has is that if you cut down the rules, will it be possible to advise a client with some degree of certainty where they stand on a particular issue… possibly leading to more disputes between clients and the FSA?’



Mr Onslow says a concern is that, by ‘going down this route’, the FSA will have greater latitude in enforcement, enabling it to, in effect, ‘make it up as they go along’ at the same time as avoiding ‘detailed arguments over fine points of rules by teams of expensive lawyers’.



Some have also interpreted the shift as an attempt to introduce a more lax regulatory regime, to ensure that other jurisdictions in Europe, with less regulation, do not benefit at London’s expense.



Not so, according to Mr Symington: ‘We are very clear that the fact we have principles-based regulation doesn’t mean we will be any less rigorous in the way we use enforcement tools. If people want to challenge us on rules, we are willing to see those contested.’



Cameron Timmis is a freelance journalist