House of Lords call for evidence: Internal Market Sub Committee. Submission of evidence by the Law Society 5 October 2016

Transcription

1 House of Lords call for evidence: Internal Market Sub Committee Submission of evidence by the Law Society 5 October

2 The Law Society s submission to the House of Lords EU Internal Market Sub- Committee - Inquiry on UK-EU trade in professional business services Summary 1. The Law Society of England and Wales is the independent professional body that works globally to support and represent its 160,000 solicitors, promoting the highest professional standards and the rule of law. 2. The Law Society has responded to the questions set out by the House of Lords EU Internal Market Sub-Committee in their call for evidence on UK-EU trade in professional business services. 3. The legal services sector is a success story for the UK. It contributes 25.7 billion 1 to the economy each year, including 3.4 billion 2 towards to the trade deficit. Since the UK's decision to withdraw from the EU, the Law Society has spoken extensively to its members on the priorities for the legal sector in the Government's negotiations with the EU. Our priorities have been identified as follows: a. continued access for UK lawyers to practise law and base themselves in EU member states by maintaining or introducing arrangements equivalent to: i. Lawyers' Services and Lawyers' Establishment Directives; ii. Professional Qualifications Directive; and iii. Continuing rights to appear before the European Court of Justice and legal professional privilege for communications in EU cases. b. maintaining the ability of business to enforce judgments and choose jurisdictions across the EU by participating in Brussels I Regulation. c. continuing to work collaboratively on security and justice issues including sharing information and enabling extradition to protect UK citizens. 4. We would also call on the government to work with the legal services sector to continue to promote the England and Wales as the governing law of contracts, the jurisdiction of choice and London as the preferred seat of arbitration. 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. 5. In 2015, the UK legal services contributed 25.7 billion to the economy. It also positively contributed 3.4 billion to the UK s trade deficit which is 1.6 per cent of UK Gross Value Added. This is five times the amount of accountancy, auditing, book- 1 Office of National Statistics (ONS) ONS figures (released 29 July 2016) 2

3 keeping and tax consulting combined. By 2014 net exports of the legal sector had increased by 73.2 per cent in real terms since This is equivalent to 5.6 per cent real growth per year on average The legal services sector employs over 370,000 5 people including over 314,000 6 people in private practice (in 2013). Two thirds of those in private practice are based outside of London. 7. Whilst London employs over 107,100 people, there are a number of other legal centres across England and Wales including Birmingham (7,600), Bristol (6,800), Cardiff (3,400), Leeds (8,200), Liverpool (5,500), Manchester (10,800) and Sheffield (3,500) England and Wales is a global hub for legal services due to the law of England and Wales being the governing law of contracts, England and Wales being a centre for dispute resolution and London being the preferred seat for arbitration. In 2015, over 22,000 8 commercial and civil disputes were resolved through arbitration, mediation and adjudication in the UK. Specifically in the Commercial Court, nearly 1,100 9 claims were issued with two-thirds involving at least one party whose address was outside of England and Wales. 9. Four out of the largest ten law firms in the world, based on gross fee revenue, have their main base of operations in the UK. There are also over 200 foreign law firms with offices in the UK. Two of the four largest law firms in the world, based on headcount have their main base of operations in the UK. 10. The UK is the second largest legal services market in the world with the US being the largest. It is the largest market in Europe. The UK accounts for 10 per cent of global legal services fee revenue and a fifth of all European fee revenue. 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? 3 The Law Society's Economic Value of the Legal Sector 4 The Law Society's Economic Value of the Legal Sector 5 The Law Society's Economic Value of the Legal Sector - This figure is based on figures obtained for the number of solicitors and barristers working in organisations outside of legal business. This is then pro-rated up based on an estimate of the ratio of solicitors/barristers to other staff given by a question asked in a previous Law Society Firms Survey 6 The Law Society's Economic Value of the Legal Sector - original source - ONS, Law Society Group, Bar Standards Board , TheCityUK's UK Legal Services Source: ONS Nomis, TheCityUK calculations 8 TheCityUK's UK Legal Services Source: Dispute resolution organisations, TheCityUK estimates 9 TheCityUK's UK Legal Services 2016 Source: Ministry of Justice Judicial and Court Statistics 3

4 11. It is commonly accepted that the EU single market in services is a work in progress. However in legal services a single market is already a reality. The EU single market for legal services (which also applies to EEA countries and Switzerland), allows UK lawyers and their law firms to benefit from a simple, predictable and uniform system of commercial and physical presence in other EU member states, with little scope left for EU member states to introduce national variations (such as whether the name of a law firm needs to include the name of one of its local partners or not). 12. The main two provisions that create this single market are: a. Lawyers' Services Directive 1977 (temporary provision of legal services); b. Lawyers Establishment Directive 1998 (on permanent establishment). 13. Within the EU individual solicitors and their law firms can provide services on a temporary basis and/or establish permanently in another Member State under their home title. They can provide advice on the law of England and Wales, EU law and international law but also on the host state law, under conditions of competency and with some very limited restrictions (e.g. in probate and conveyancing work in a number of jurisdictions). They can also appear in court in conjunction with a local lawyer. 14. Access to the EU single market for legal services is not only important for UK firms. The potential impact of withdrawal from the single market on US law firms in the UK must also be considered. Even though US law firms have operated in Western Europe since the Marshall Plan and in Central and Eastern Europe since the fall of communism, they would often do so today through an entity regulated in England and Wales as well as through lawyers who are able to benefit from the EU Lawyers Directives. Solicitors operating within the EU single market of the top 50 UK law firms have at least one office in one of the EU Member States. UK law firms have a presence in 25 of the 27 member states. There is no presence in Malta and Cyprus (likely to be due to the size of the market) ,731 solicitors are based in 24 other EU Member States (only Estonia, Lithuania and Slovenia do not show the physical presence of a solicitor). 17. It is also a daily business practice for solicitors to provide legal services within the EU on a temporary basis. There are no exact figures available for the number of solicitors of England and Wales practising temporarily (e.g. fly-in fly-out) in EU Member States as it requires no prior authorisation. 4

5 Benefits of access to the single market for legal services 18. The Lawyers Services Directive, Lawyers Establishment Directive and the Professional Qualifications Directive (further details below) are beneficial for the UK because: a. They make England and Wales attractive to third country businesses and law firms - firms from third countries will often look to set up an office in the UK as a means of gaining access to the EU market. The Qualified Lawyers Transfer System (QLTS) allows those qualified in non-eu countries to requalify as an England and Wales solicitor and practise English law. There are over 200 foreign firms in London, including 100 US firms who may consider a new "European hub" without access to practise and establishment across the EU. b. England and Wales firms could lose existing clients and business partnerships - England and Wales solicitors would not automatically be able to practise local or EU law or to establish. In many cases they would be unlikely to be appear before member states courts. All these factors could mean they become less attractive to both existing and prospective clients as well as losing opportunities to grow their business effectively and quickly at an international level. 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)? Free movement of people 19. Free movement of people within the EU is beneficial to the law firms and solicitors as it allows them the ability to employ qualified staff from the EU in their UK offices without impediment. 20. Law firms want to attract the most talented people to work in their law firms and retain, to the extent possible, the right to employ qualified staff from the EU in their UK offices. In 2015, 2.4% of solicitors were non-uk EU nationals Large firms draw heavily on the expertise and mobility of international staff, including from the EU, to provide their services (most of which are international by their nature). The limits on employing international staff in the UK may lead to firms transferring these operations outside of the UK. 22. Placing limits on the free movement of persons may also have an effect on the employability of individual English and Welsh solicitors if immigration laws are made reciprocal. If there are immigration controls placed on solicitors with UK nationality within EU member states, it would likely increase the administrative burden and the costs of employing UK solicitors in an EU country. Administrative burdens could 10 Office of National Statistics 5

6 include asking for permission to employ a solicitor and justifying that need. Other lawyers within the EU would not face such barriers making them more attractive to EU based firms. Mutual recognition of qualifications 23. The qualification of solicitor is recognised across EU member states through the Professional Qualifications Directive (PQD). Solicitors can re-qualify into any EU/EEA legal profession through an equivalence examination in the PQD or through the Lawyers Establishment Directive after three years of establishment as well as effective and regular practice of host state law (including EU law). 24. There are two ways in which the legal sector benefits from the PQD: a. Non UK EU lawyers requalifying as English and Welsh solicitors there are a high volume of foreign lawyers using the PQD to re-qualify as solicitors. The solicitor qualification is attractive for those lawyers operating at an international level. Due to the prominent use of the law of England and Wales and the international standing of the solicitor qualification, some global law firms ask their staff to requalify in either English and Welsh common law or alternatively New York state law. b. English and Welsh requalifying in another member state - this is in much lower numbers and is usually done due to personal reasons such as originally being from another member state or permanently established in another jurisdiction. 25. Since the outcome of the EU referendum, a greater number of UK lawyers have been using the mechanisms of the PQD and Establishment Directive to re-qualify in one of the other EU legal professions (notably Ireland, Belgium, Luxembourg, etc) so that they have a guaranteed right of establishment as well as standing in front of the EU courts which is particularly important for lawyers practising EU law in areas such as competition, trade or internal market, who need to maintain access to the Court of Justice of the EU. Regulations and standards 26. The UK legal services sector provides services to domestic and international clients. Many of these clients are UK businesses, and increasingly non-uk businesses, carrying out operations in the EU. The legal profession works day-to-day with clients across a diverse range of fields, covering all aspects of the single market. Solicitors play a key role in facilitating the smooth operation of the economy and seek to ensure that the rights of consumers, employees and businesses are properly protected. 27. The simplicity of complying with one system rather than a different system for every Member State where they wish to offer goods or services, means it is easier for lawyers to advise them. This in turn reduces legal costs along with other ancillary expenses caused by complying with multiple systems. This ties in with the idea of the 6

7 UK, and London in particular, as a "gateway to Europe" as the standardisation facilitates a "one-stop shop" for legal advice in relation to EU regulatory issues. Without access to the single market, UK law firms may become less appealing for pan-european advice. Exiting the European Union What specific issues does the UK exiting the EU raise for your business/sector? Please be as specific as possible. Remaining a global legal centre 28. England and Wales is seen as a global legal centre due to the prominence of the law of England and Wales being used to govern contracts. It is also seen as the centre for dispute resolution and London is the preferred seat for arbitration. English and Welsh law has always been a popular choice for contracts because it is comparatively certain, stable and predictable. English and Welsh law is also based on the principle of freedom of contract which makes it flexible to support the needs of modern commerce and business. 29. Whilst the UK s withdrawal from the EU will have little effect on English and Welsh law, some of our competitor jurisdictions may see it as an opportunity to suggest otherwise. It is important that the profession works with the Government to continue to promote the excellence of England and Wales as a legal system, its prominence as a jurisdiction of choice and to promote the excellence of its legal services providers. Enhanced judicial co-operation in civil and commercial matters 30. England and Wales is seen as a jurisdiction of choice. Part of the reason for this is the ability to have its judgments easily recognised and enforced. 31. Brussels I regulation sets out a uniform system under which the judgments are recognised and enforced throughout the EU area. Brussels I sets out which national court can hear the case. If the national courts have heard the case by following the jurisdiction rules set out in the regulation, it provides for an almost automatic possibility to enforce the judgment in all EU member states. It covers all judgments reached in civil and commercial matters, including contractual and non-contractual disputes, employment, insurance and consumer disputes, cases where the parties have a choice of court agreement, where there is immovable property situated in the territory of one of the Member States, dissolution of companies, etc. 32. The UK s membership of Brussels I regulation provides the following benefits: a. Encourages cross-border trade - Given the increase in cross-border trade globally, commercial parties will increasingly have to look to enforce their judgments against counter parties with assets in other countries. Brussels I allows them to do this easily and cheaply due to the near automatic nature of the 7

8 mechanisms. This can encourage investment in Member States and promotes the growth of UK businesses overseas. The ability to enforce judgments (or awards in the case of arbitration) in a country is often a threshold question for businesses contemplating an investment in that country. b. Makes England and Wales attractive to litigants - Maintaining Brussels I would provide a continued incentive for parties to negotiate jurisdiction clauses in favour of the English courts (and select English law to govern their contracts). It will mean English judgments made pursuant to English jurisdiction clauses will be enforceable in member states. c. Gives predictability and certainty leading to reduced costs for businesses - These mechanisms give businesses a level of predictability that when they pick England and Wales as the governing contract law, this choice will be respected by other countries. It also gives them a better ability to predict where they might sue and be sued across Member States which is also attractive. Such conditions allow businesses to reduce time and costs as local law advice may not be necessary at the transaction stage, again encouraging the use of English and Welsh law. 33. If the UK is not able to be a member of the Brussels I regulation, the Government should look to alternatives including joining the Lugano Convention (a similar framework to Brussels I for EU and EFTA states) or signing the Hague Convention on Choice of Courts (which we are currently a signatory to as part of the EU). Rome I and II regulations 34. The EU has also set up a system for choice of law within contracts. The Rome I regulations set out the rules by which law is to be applied to a case having crossborder dimensions. Under the rules of the regulation, for example, the parties can choose to apply English law to the dispute, even though the case would be heard in France. In this situation the French court must apply English law to the dispute. 35. The Rome II applies to non-contractual relations. This regulation sets out the rules that the national court must apply in identifying applicable law in non-contractual matters. For example, in relation to tort, the general rule is that the national court must apply the law of the country in which the damage occurred. 36. In both cases, the regulations set out the principle of universal application. Rome I means the courts will respect the choice of law in a contract to be the law of a non EU member state and it is not allowed to prioritise the use of its own laws. This means that if the parties have chosen to use English and Welsh law to govern their contracts, courts in EU member states will continue to apply English law, even if and when the UK is not an EU member state anymore. The EU courts will still need to respect the choice made by the parties. 8

9 Relationship with financial services 37. The financial sector is a key purchaser of legal services in the UK, determining the shape of the supporting legal sector, especially in the area around the City. Between 2009 and 2014, financial services accounted for per cent of the total value of transactional work deals amongst the Top 50 City law firms. 38. The maintenance of London as a global financial centre will be important for the legal services sector to continue its large contribution to the UK economy. 39. Engagement with individual international firms who serve financial services clients suggest that they would adapt to new circumstances. If financial services clients move elsewhere in the EU then a number of firms have indicated that they would follow their clients, including moving offices or headquarters to other parts of the EU if a new financial centre or centres emerged in other locations. In part this depends upon the model of individual firms. They might also adapt by focusing on different markets, or by restructuring their organisations. Because they would effectively follow their clients, the firms anticipate that they would continue operate as successful businesses. However, if they are not undertaking this work in England and Wales, it could have implications for the legal sector s contribution to the UK economy, and at a personal level, on England and Wales qualified lawyers who are working in those firms. 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? 40. The Law Society is currently analysing the effect of operating within the EU on the basis of its current schedule of commitments under the GATS. 41. If the UK does not participate in the internal market for legal services and there is no agreement which maintains a regime which is equivalent to that which currently operates, this is likely to cause barriers or problems for some firms and individual lawyers. England and Wales is one of the most open jurisdictions in the EU but within the EU, its firms and individual solicitors are treated on a par with domestically established firms. This would not be the case under the WTO framework as the exceptions listed in the GATS schedule would also apply to UK lawyers and law firms. 42. Currently individual EU Member States have the following limitations to for non-eu lawyers: 11 ONS Pink Book % for finance and banking, 11% for fund and investment management 9

10 a. nationality requirement, meaning one can only be a EU/EEA/Swiss national to requalify in/practise host state law, e.g. Austria; b. local content requirements, where one also has to be qualified in local law e.g. France; c. strict rules prohibiting local lawyers from partnering with non-eu lawyers, e.g. Spain and Sweden; d. compulsory membership in professional bodies in relation to commercial presence, e.g. France, Germany and Luxembourg; or e. restrictions relating to company structure or commercial presence, such as restrictions on foreign investment in law firms, e.g. France, Spain or Portugal. 43. In addition, there are other factors that could affect whether UK lawyers can practise or establish firms within the EU including: a. liability for taxation on one s worldwide earnings e.g. France or Belgium; b. restrictions on buying and owning a property e.g. Italy or Poland; c. immigration law; or d. employment law (including rules on social security and pensions). 44. A number of jurisdictions also have nationality requirements including Luxembourg and Belgium. However these requirements are subject to reciprocity so the UK could work with these countries to accept mutual practice rights. 45. In particular, without access to the EU regime, English and Welsh solicitors may lose rights of audience before EU courts. This will mean they are unable to represent their clients. This could have a significant impact on a number of practice areas including competition law. There may also be problems with the extent to which clients can benefit from legal professional privilege - of concern to both lawyers and their client or prospective clients. This could pose a serious competitive disadvantage to firms wishing to compete with their EU/EEA/Swiss counterparts throughout the internal market. 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? 46. Leaving the EU but remaining a member of the EEA would retain present market access for law firms and lawyers. 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? 47. If access to the internal market for legal services were not to be safeguarded through the withdrawal agreement or by some other method (eg continuing participation in the EEA) and an FTA were to be decided upon, the Law Society would be in favour of an FTA which included provisions safeguarding a higher level of legal services 10

11 access, and accompanying measures, than would be provided on the basis of WTO membership alone. What should the Government s key objectives be for your sector in its negotiations with the EU? 48. The government's key objectives for the legal sector should be: Opportunities a. continued access for UK lawyers to practise law and base themselves in EU member states by maintaining, or introducing, arrangements equivalent to: i. Lawyers' Services and Lawyers' Establishment Directives; ii. Professional Qualifications Directive; and iii. Continuing rights to appear before the European Court of Justice and legal professional privilege for communications in EU cases. b. maintaining the ability of businesses to enforce judgments and choose jurisdictions across the EU by participating in Brussels I Regulation. c. continuing to work collaboratively on security and justice issues including sharing information and enabling extradition to protect UK citizens. 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? 49. Leaving the EU does not seem to offer significant benefits or growth opportunities for the legal sector in itself - although in the short terms it has been acknowledged that current levels of uncertainty and potential changes as a result of withdrawal have prompted a spike in the demand for legal advice. Similarly clients will be looking to their legal advisers to help them understand and adapt to changes resulting from future negotiations. 50. The legal sector could benefit from future trade deals (with markets other than the EU) if these successfully enable or facilitate access to markets which are currently closed or present barriers to legal services trade. 51. In line with this the Law Society is already working actively to liberalise a number of legal markets. If future trade deals are successfully negotiated with countries of particular interest to the legal sector, this will help to maximise the opportunities for growth in the trade of legal services more generally. 11