A lob and a smash

NO SECTOR is more valuable to Britain’s GDP than “professional and business services”—those 4m or so lawyers, accountants and consultants who make up 12% of Britain’s workforce and grease the wheels of the country’s (and much of the world’s) economy. Their strength has been compared to the “Wimbledonisation” of British tennis. Although Britain has few world-class tennis players, it wrote the rules and hosts the world’s biggest tournament; although there are few big British banks, the rules by which finance is governed were largely devised by British lawyers, many of whom enforce them. The sector is one of the country’s few undisputed world leaders, and biggest overseas earners; its share of exports to developed economies, at 12%, is second only to America’s, and Britain’s law firms have 20% of Europe’s market in legal services.

Much of this is a result of Britain’s openness to the world, so the vote to leave the EU on June 23rd came as a nasty jolt. There had been warnings about the dire consequences. Analysis by the Law Society, a lobby group, showed a soft Brexit, in which most of Britain’s trading relations with the EU were kept intact, might lead to a loss of £225m off revenues for the legal sector by 2030. A hard Brexit could lop off £1.7 billion—equal to the combined current revenues of four of the biggest law firms.

In the short term, however, the outlook is rather different as many law firms and consultancies are asked for help navigating Brexit. Most have set up specialist units. As Dominic Cook, an associate fellow at Oxford University’s Said Business School argues, over the 43 years of British membership, regulations and laws made in Brussels have permeated almost every aspect of domestic activity. “Everything will have to be looked at,” he says. The government, too, has been looking to law firms and consultants to make up its own shortfall in expertise. The Department for Exiting the European Union, only created in mid-July, has already spent at least £260,000 ($340,000) on fixed-fee legal advice. Richard Cranfield, a senior partner at Allen & Overy, a law firm with a 100-strong Brexit team, says there will be much more work when details of the deal are finalised.

However, what some call a Brexit bonanza is already being tempered by a downturn in mergers and acquisitions (M&A) activity, one of the most important sources of income for many big law firms. Mr Cranfield says that transactions were down a bit in the first few months of the year, and since the referendum have dropped further. According to the ninth annual research survey by Thomson Reuters Legal, nearly a quarter of the finance directors of Britain’s top 100 law firms fear that weakness in M&A work is now a major risk to profitability, up from 8% last year.

Worries about this sort of slowdown are compounded by fears that many banks, deprived of the “passporting” rights that allow them to work across the EU, might migrate to Paris or Dublin in the event of a hard Brexit. (Figures published by the financial regulator show 5,500 companies registered in Britain rely on such rights to do business in other European countries.) This would mean less work for those legal firms that have focused particularly on finance. Companies are nervous, suggests Mr Cook, although those that cover all sectors of the economy, including the public sector, should not be too affected. Mark Paulson of the Law Society sums it up: “It’s a bit like being a doctor in a plague year; you’ll be busy for a while, but it doesn’t bode well for the long term”.