October 23, 2018

UK Legal Services to Face a Multi-Billion Pound Bill for ‘No Deal’ Brexit

Erosion of London’s position as a financial center considered key threat to sector

LONDON, October 23, 2018 – Brexit has helped propel the growth of the UK legal services sector since the referendum result in June 2016, but a ‘cliff-edge’ Brexit would result in a significant decline in turnover, according to research undertaken in partnership with Oxford Economics, the Law Society of England and Wales, and Thomson Reuters, the world’s leading provider of news and information-based tools to professionals.

Output of legal services, as measured by value added, rose £1.2 billion [5%]* in real terms between June 2016 – December 2017, while real UK GDP increased £56.6 billion [3%] over the same period.

Growth of UK legal services has outpaced real GDP post-referendum

A key factor driving this growth is the increased demand for legal advice resulting from the uncertainty created by the Brexit referendum and the UK’s likely departure from the EU. There is likely to be a further rise in demand generated by potential regulatory changes and the need to re-write contracts.

Outlook on Brexit amongst legal professionals remains pessimistic

Despite legal services turnover usually outpacing real UK GDP growth, and the Brexit effect somewhat supports this gain, the outlook among legal professionals on the impact of Brexit remains pessimistic. The report found 63% of respondents agreed ‘Brexit represented more of a threat than an opportunity’ in the short-term.

Jim Leason, vice president of Market Development and Strategy, UK & Ireland, for the Legal business of Thomson Reuters, said “The UK legal services sector has performed well partly because of the legal challenges Brexit presents but this could change as negotiations reach crunch time.” Over half of the survey respondents suggested they were ‘not well prepared’ to counter threats related to Brexit, such as the erosion of London’s status as a financial center or impediments created to the cross-border supply of legal services.

Pessimism among legal professionals could stem from fears over the possible consequences of a ‘no-deal’ Brexit. The UK legal services sector’s turnover could be 2.1% smaller by 2025 if no agreement is reached in negotiations – this is the equivalent of £840m in real terms. If this occurred, it would also reflect a sector with 2.1% fewer people employed, which equates to 7,400 people.

Output and employment in 2025 in the downside (‘no deal’) scenario

Brexit to undermine commercial competitiveness of UK legal services

The potential erosion of London’s position as an international financial center is considered the most important Brexit-related threat by legal professionals surveyed.

The intense clustering of financial services firms in London has supported the growth and success of law firms that serve them. Law firms who are based in London also benefit from pools of shared expertise.

Erosion of London’s position as a financial center is the most important Brexit threat

Another Brexit-related threat to the legal services sector is that the UK’s decision to leave the EU may undermine its position as a global center of dispute resolution. Brexit has caused uncertainty over whether the UK will continue with a regime for mutual recognition of court judgments between the UK and EU Member States. Separate research by Thomson Reuters found that due to this uncertainty, 20% of businesses surveyed had already changed international contracts—so that England and Wales will no longer be the choice for governing law and where disputes are heard—with EU jurisdictions benefiting the most.

Maintaining existing EU membership rights is regarded as highly significant by professionals to help maintain the UK’s position as a global legal center. These benefits include being able to provide legal services temporarily (Fly-In-Fly-Out) and recognizing the same standards of professional privilege. Of law firms surveyed, 74% viewed maintaining their ability to Fly-In-Fly-Out as either ‘very’ or ‘quite’ significant to the future commercial success of the legal service industry, with 72% stating the same for professional privilege.

According to Leason, “The findings of the report reveal there is a wide gap between what the turnover of legal services could be in the event of a Brexit agreement and in a ‘no-deal’ scenario. Such are the complexities of the potential risks and why legal professionals see Brexit as more of a threat than an opportunity. Crucially, there is a risk that Brexit could result in UK law firms being locked out of pan-European work, potentially knocking London off its perch as the ‘one stop shop’ for legal services.”

Leason further states, “In an event of a ‘no-deal’ Brexit, it seems likely that large law firms could be potentially hit the hardest as they derive a larger proportion of their revenues from international companies. The risk is that this could result in large firms relocating jobs and practices abroad, which could have wider knock-on effects on the economy.”

*Helping to Understand the Impact of Brexit: the economic outlook UK legal services, Oxford Economics and Thomson Reuters. Download a copy of the report here.

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Gretchen DeSutter
Thomson Reuters Communications