Malaysia is liberalising its legal market, but foreign firms are still not sure what to expect.
Malaysia is a land of opportunity for UK-based international law firms. There’s a burgeoning Islamic finance sector, growing outbound investment into the UK, and Malaysian corporations are listing in ever greater numbers on the Kuala Lumpur bourse.
Links between Malaysia and Britain go back a long way. In the commercial world, the UK has been a big investor in the south-Asian country for decades – household names such as HSBC, Standard Chartered, Prudential, Tesco and Dyson have all established large operations there. And now, fuelled by the strong growth (5.6% in 2012) of Malaysia’s $303.5bn economy, Malaysians are buying British.
World-renowned brands such as Laura Ashley and Lotus racing cars are owned by Malaysians, but it has taken the £8bn regeneration project of Battersea Power Station to really bring Malaysia’s UK investments into focus. Property developer SP Setia, oil plantations giant Sime Darby, and Employees Provident Fund, the largest Malaysian government pension fund, are behind the consortium that is developing the iconic site. Other institutional investors, including Islamic pension fund Tabung Haji and fund management giant Permoladan Nasional Berhad (PNB) are also snapping up prime London real estate.
UK-based law firms are following this new investment flow. Heng Loong Cheong, a Hong Kong-based partner at DLA Piper, says that while the main emphasis had previously been to assist UK and US multinational clients investing into Malaysia, ‘the focus these days is more on capturing those outbound opportunities’.
Malaysia is moving to open its domestic legal market to foreign firms. Liberalisation has been in the making since 2002. But long-awaited changes to regulations – chief among them new rules for allowing foreign law firms to open an office in the country, and form joint ventures with Malaysian law firms – are expected to come into force in 2014. Foreign lawyers broadly welcome this, but there are concerns about how the new rules will work.
Nick White, head of Trowers & Hamlins’ representative regional office in Kuala Lumpur, notes: ‘Until the liberalisation regime is put fully into effect, the challenge for foreign firms is finding the best way to serve their Malaysian clients within the current restrictions.’
A clause running counter to liberalisation was introduced in the Legal Profession (Amendment) Act 2012. This sought to prohibit foreign law firms without an office in Malaysia from advising clients on the ground. But the Malaysian parliament later dropped the ban on fly-in/fly-out services, and international law firms – many of which service the market from Singapore – have welcomed the decision.
Stephen Revell, senior partner in the Singapore office of Freshfields Bruckhaus Deringer, says: ‘We are very pleased about the enlightened approach that Malaysia is taking to the whole concept of fly-in/fly-out.’ Freshfields was one of the law firms that joined the Law Society in lobbying against the ban. ‘We are only talking about lawyers flying in and dealing with foreign laws, we are not trying to practise Malaysian law. Once we managed to emphasise what fly-in/fly-out is really all about, then we managed to get some traction,’ Revell says.
Cheong says that lobbying by the largest Malaysian banks, including CIMB, was instrumental in the removal of the ban. In 2012 Malaysia was the world’s fourth-largest IPO destination by value after the US, China and Japan. An example is the $3.1bn listing on Bursa Malaysia of palm oil company Felda Global Ventures in June 2012. CIMB has been handling many of Malaysia’s largest IPOs and Cheong says the prohibition would have significantly restricted the ability of CIMB – and other Malaysian banking and corporate entities – to instruct international counsel based in Singapore, Hong Kong or elsewhere.
The new rules will also allow foreign law firms to apply for a Qualified Foreign Law Firm (QFLF) licence to set up an office in Malaysia, or for a licence to operate an international partnership with a Malaysian firm. In addition, Malaysian firms will be allowed to employ foreign lawyers.
At a roundtable hosted by the Law Society in October, Christopher Leong, president of the Bar Council of Malaysia (BCM), said he was open to receiving applications for licences in advance of the implementation date and was hopeful that the first licences will be granted by next summer.
International lawyers reckon that the final quarter of 2014 is a more realistic timeframe for the first licenses to be issued, given how much detail needs to be clarified.
Devil in the detail
Under the revised regime, although foreign lawyers can continue to provide legal services on a fly-in/fly-out basis, they must not exceed a maximum stay of 60 days per lawyer per year, and they will be required to obtain ‘immigration authorisation for each period of stay’. Foreign lawyers have been entering Malaysia simply by using their national passports until now and many are concerned these restrictions will result in additional red tape.
As Revell points out: ‘It is not clear at this stage whether [a work permit] is going to be required or not. If it is, to get a work permit every time we go in could be an extremely restrictive provision.’ Rupert Lescher, a partner at Laytons Solicitors, concurs: ‘If a client rings you up and says, “look, I have got a transaction, and I want to deal with it now, and it does involve flying over to Malaysia tomorrow morning,” well, if you haven’t got a work permit, there is no way you are going to get one in time.’
Cheong wonders whether the same restrictions will apply to the many Malaysian nationals who, like him, work for foreign law firms: ‘It seems ridiculous that, being a Malaysian citizen, I would suddenly be prohibited from flying in and out of Malaysia, which is my right.’ He adds: ‘This will be very hard to police, if you think about it, how can they prove that I am not there for a social visit?’
Nankunda Katangaza, head of international policy at the Law Society, adds: ‘If you are a lawyer and you visit while on holiday, at what point does your coffee with someone who is a client, just catching up, turn into providing legal advice?’
Leong says meanwhile: ‘We will rely primarily on the immigration department to enforce rules pertaining to work permits in respect of “fly-in, fly-out” lawyers.’
But Katangaza wonders how feasible it will be for the country’s immigration authorities to start monitoring the comings and goings of just one profession. ‘I believe the 60-day [restriction] will require a huge government involvement to police. I am curious how this will be enforced,’ she concludes. The Law Society favours a self-policing system by foreign firms.
But it is not just the headache of getting clearance from immigration authorities that is worrying international firms. Michael Walter, south-east Asia managing partner at Herbert Smith Freehills, worries about other aspects of the new rules. QFLF and IP licences will be granted for an initial period of three years and are renewable. But, given the start-up investment and commitment involved in setting up an overseas office, he questions whether three years is long enough.
In addition, QFLF licences will only be granted to foreign law firms which have a proven expertise in international Islamic finance, and which would be able to support and contribute to the Malaysian government’s Malaysian International Islamic Finance Centre. For now, only up to five of these licences will be granted. Walter says: ‘Part of the rationale for Malaysia is to create an Islamic finance centre in Asia in competition with the Middle East. International Islamic finance is a service we offer, so it would not be a huge ask for us to comply, but the uncertainty is in how it all fits together.’ For example, it remains unclear how firms will meet the Islamic expertise requirement in terms of staffing the Malaysian office.
Furthermore, the licences issued to foreign firms to operate an international partnership (IP) will require the equity and voting rights to be split 60/40 in favour of the Malaysian law firm. One international lawyer, who prefers not to be identified, says: ‘You are capping the maximum profit that can be drawn from that partnership at 40% even though you may generate 100% of the work. When that is coupled with other restrictions, such as having to establish a separate office – so you can’t even go in and use the space offered by your Malaysian law firm partner – together with a three-year licence period, it all becomes, frankly, uneconomic.’
Restrictions also apply to the permitted practice areas for QFLFs and IPs. These will be transactions regulated by Malaysian law, and at least one other national law, or a transaction regulated solely by any law other than Malaysian law (the Malaysian law element will need to be carried out by a Malaysian lawyer holding a valid practising certificate). There are many exclusions, and it is unclear which areas of Malaysian law will be permitted.
Katangaza warns of the dangers of an ‘overly prescriptive’ approach. ‘It’s like having a party at such an inconvenient location that it makes it difficult for people to attend and yet you really want them to. When the time comes you’ll be standing there anxiously thinking, no one is coming, and actually it’s because you made it impossible for them.’
At the time of writing, implementing regulations were still under discussion between Malaysia’s attorney general and the BCM. The BCM has been seeking feedback from the Law Society and international law firms on the regulations, which are available on request.
As Steven Dewhurst, DAC Beachcroft partner in Singapore, notes: ‘The way in which the Malaysian Bar is encouraging the process to develop is very much a one-to-one dialogue. It has chosen to go down a very ad hoc route.’
Leong for his part, refers to a ‘selection committee’, which could consider variations to the ratio of equity and voting rights in international partnerships if a good enough case is made, and then make recommendations to the BCM.
Party goers and poopers
Despite the lack of clarity, some firms are already making plans. Trowers & Hamlins, which aims to get a QFLF licence as soon as the liberalised regime comes into effect, became the first and only international legal outfit to establish a representative regional office in Kuala Lumpur in July 2012. The one-lawyer office – run by Nick White – has a purely representative function and does not give legal opinion, which is provided by other Trowers solicitors based outside Malaysia.
The firm has been involved in Islamic finance since the early 1990s, when it structured its first sharia-compliant property fund in the UK, and most of its overseas offices are in the Middle East, including Dubai and Abu Dhabi. ‘We have been finding that the profile of our Middle East offices’ client base has become noticeably more far eastern in content,’ says White. Around 90% of Trowers’ Asean clients are Malaysian, and they include state-owned utility Tenaga Nasional Berhad, which the firm has advised on energy ventures in the Middle East, and, in the real estate sector, Tabung Haji, PNB and IJM Land, which is developing London’s Royal Mint Garden residential complex near Tower Bridge.
So while many international firms have opted for a base in Singapore, White says, ‘in terms of planting our flag in the far east for servicing clients and getting more business, Malaysia is head and shoulders above any other option. ‘We have worked with Malaysian lawyers on a number of Malaysian projects and we would hope to be able to continue to do that from a position where we were actually trading and licensed in the country, as opposed to the fly-in/fly-out situation.’
Herbert Smith Freehills is less sure, but is considering a QFLF licence. Walter says: ‘We have a significant Malaysian business that we would like to preserve and build on, which is why the issue of liberalisation has been so firmly at the top of our agenda.’ Herbert Smith Freehills has acted for the Malaysian government and state-owned enterprises in various sectors. It is currently advising Petroliam Nasional Berhad (Petronas) in relation to a $25bn integrated refinery and petrochemicals complex in the Johor province of Malaysia, and recently acted for Malaysia’s Axiata, one of Asia’s largest telecommunications companies, on a $180m M&A deal in Cambodia.
Walter says: ‘At this stage, I am not sure which way we are going to go on this, but my own preference would be that – if we do it – we should do it through a QFLF licence. Joint ventures and alliances are not necessarily the right way of doing business in a new jurisdiction.’
Sitting on the fence is Norton Rose Fulbright, for which Malaysia represents a ‘significant portion’ of the revenues generated in south-east Asia, according to Jeff Smith, head of south-east Asia. ‘We’re looking very carefully at the opportunities presented by the liberalisation of legal services in Malaysia. We have a number of important Malaysian clients, some of whom we have worked with for a decade or more – having a presence on the ground would enable us to stay closer to them.’ The firm has acted for the Malaysian consortium on the £400m purchase and financing of Battersea Power Station.
But Smith adds: ‘We have an open mind. We are keen to be involved in the discussions, but internally we have not committed to any particular path.’ Determining factors include the need to preserve existing relations with local firms, and the resources firms will be required to commit to an office in Malaysia.
An opportunity to expand
Smaller firms appear to be more clearly in favour of a joint venture licence.
DAC Beachcroft entered into a formal alliance with Malaysia’s Gan Partnership in 2012. Dewhurst says: ‘The rationale for establishing an association with Gan Partnership is that we can quickly convert that association into an international partnership. We are working around some of the detail involved in applying for the licence.’ DAC Beachcroft, which specialises in insurance and reinsurance, aims to expand in Malaysia, particularly in the takaful or Islamic insurance sector. In 2012 the takaful industry grew 21% in Malaysia, accounting for a 71% share of Asean gross takaful contributions of $2.7bn, according to an Ernst & Young study published in October. DAC Beachcroft counts local and international insurers among clients active in the Malaysian market, including Etiqa Insurance, a subsidiary of Malaysia’s largest bank, Maybank, and QBE Insurance, Allianz and RSA.
But not all firms are keen on the shifting Malaysian scene. ‘We are not super-excited about it. The problem with the Malaysians is that they have waited too long and then just opened the door a little bit,’ says one international lawyer who prefers not be identified.
Many international law firms prefer, for now at least, to continue to serve Malaysian clients from their base in Singapore or even London.
For Allen & Overy, Malaysia is one of the key markets alongside Indonesia, Singapore and India that the firm covers from its Singapore base. The firm has an impressive roster of clients, most notably low-cost airline Air Asia, telecommunications companies Axiata and Maxis, CIMB, and the government of Malaysia, which the magic circle firm has advised in relation to a $1.25bn sukuk, or Islamic bonds.
But Singapore managing partner Kenneth Aboud says the magic circle firm is not interested in either a QFLF or IP licence right now. Setting up an office in Malaysia would add to costs while potentially cannibalising some of the firm’s Singapore practice, he says. The firm does not anticipate a big rush into the market by large competitors.
Driving Laytons’ business in Malaysia is ‘a very substantial demand for UK property in Kuala Lumpur’, says Lescher. Laytons is one of a number of law firms which has been put forward by the Battersea Power Station Development Company, the Malaysian consortium, to act for buyers of the flats. Lescher says that Laytons has so far acted in the case of over 300 contracts, which amounted to approximately 35% of all the apartments in phase 1 of the development. But he says: ‘We are not thinking of having a representative regional office or our own office there. We have considered, and I suppose it is always for consideration, the possibility of joining up with a [local] firm, but it is not something that so far we thought is necessary.’
He cites some of Malaysia’s top law firms such as Azmi & Associates, Skrine, Shearn Delamore & Co, and Christopher & Lee Ong. ‘I don’t see the point of really putting them off by forming an alliance with, say, Skrine. There would be no further work from any of the others.’
Cheong concurs: ‘In the short term, we will probably continue to fly-in/fly-out because it’s worked very well for us. DLA Piper sees business opportunities from high-net-worth individuals and large multinationals expanding into overseas markets including Australia and the UK, and is increasingly advising Malaysian clients on compliance with both the UK Bribery Act and its US equivalent – the Foreign Corrupt Practices Act. Malaysian property developer SP Setia, and Aston Villa sponsor Genting, which is behind the development of a £150m casino complex at the NEC, Birmingham, are among DLA Piper’s Malaysian clients.
Freshfields has a strong track record in international Islamic finance. Earlier this year the firm advised the International Islamic Liquidity Management Corporation on establishing its $2bn short-term sukuk programme. But Revell says Freshfields will continue to support clients globally and in Malaysia through its Singapore office. He adds: ‘We have good relations with several of the top local law firms, and plan to develop those rather than trying to set up our own office.’
Like many emerging legal markets, Malaysia is more protective of its lawyers than western countries, and that is likely to remain the case. However, Malaysia stands out from the crowd for its open business culture. The country is ranked among the top 10 economies with the most business-friendly regulations, according to The World Bank’s Doing Business 2014, published in October.
As Lescher points out: ‘One of the great things about doing business in Malaysia is that their business class all speak excellent English. In terms of culture, they are the easiest possible people to get through to, and that’s terribly important.’ Lescher notes that many Malaysian professionals and business people – indeed some of the top people in Islamic financial institutions – are either educated in England or have English professional qualifications, or both. Malaysians like investing in London because it is a familiar place, adds Lescher. ‘There is an inbuilt prejudice in favour of Britain – its history and culture,’ he concludes.
All of which plays well for UK law firms. Whatever the outcome of the current liberalisation process, Malaysia seems set to remain an important focus for the most ambitious among them.
Marialuisa Taddia is a freelance journalist
The Law Society is holding a joint seminar with the Bar Council of Malaysia in Kuala Lumpur on 10 January. UK law firms will be joining BCM members to discuss the opportunities that liberalisation will bring.
One of the aims will be to demonstrate the advantages of a workable liberalised system to both countries, says Nankunda Katangaza. ‘We obviously understand that there is a lot of fear around liberalisation because of the potential impact of competition on local firms. But it is not a one-way street. Malaysians are investing so much into the UK at the moment and there is scope for their Malaysian legal advisers to have relationships with UK firms here.’