What does a “No-Deal Brexit” mean for the Legal Services Sector?

By Zulon Begum and Harriet Riddick

On 16 October, after many months of negotiations and a deadlock over key issues, Boris Johnson urged the UK to be prepared for a no deal break with the EU from January. Negotiations have since resumed, but, despite the stated deadline for an agreement to be reached to allow sufficient time for parliamentary ratification (31 October) now having passed, a deal is yet to materialise. At the time of writing, it is unclear whether an eleventh-hour agreement between the UK and the EU will be reached (and if so, what exactly it will look like) or whether the so-called “worst case scenario” – the transition period ending without a deal in place – will become a reality.

Amid such uncertainty, planning for the worst (whilst hoping for the best) is the prudent course of action for the many businesses which will be impacted by the eventual outcome of the post-Brexit transition trade deal negotiations.

For the UK legal services sector, which relies heavily on the EU as a significant destination for the export of its services, understanding and planning for the implications of a “no-deal” is crucial.

The current single market framework

At present, the legal services sector is able to operate relatively seamlessly across EU jurisdictions under the following two EU Directives:

• the Lawyers’ Services Directive (Directive 98/5/EC), which allows specified lawyers to provide legal services on a temporary basis in a member state other than the one in which they are qualified (a practice known as fly-in, fly-out or “FIFO”); and
• the Lawyers’ Establishment Directive (Directive 77/249/EEC), a reciprocal arrangement which allows specified lawyers in one member state to establish and practise permanently in another member state under their existing title and conditions.

In addition, the Mutual Recognition of Professional Qualifications Directive enables EEA nationals to have their professional qualifications recognised in an EEA State other than the one in which the qualification was obtained.

The current EU legislative framework enables England and Wales qualified lawyers and/or law firms (as applicable) to:

• provide advice on the laws of England and Wales, EU law and international law as well as on host state law (subject to certain restrictions and meeting the host state’s competency requirements);
• requalify in another member state without undertaking the usual qualification route after three years of practising in that member state;
• appear in court in conjunction with a local lawyer in EU states;
• represent their clients before the EU courts, and allow their clients to benefit from legal professional privilege; and
• establish a branch office of a UK incorporated/established entity to provide legal services in another EU member.

The above arrangements are augmented by the EU laws on free movement, which enable EU citizens to live and work in any EU country, as well as the Court of Justice of the EU (“CJEU”), which can enforce EU single market rules.

No-deal Brexit

If the transition period ends without a deal in place, the current EU regulatory framework which allows the UK law firms and lawyers to provide services and/or establish and practise in other EU member states will fall away with effect from 1 January 2021.

Instead of being subject to a single EU-wide legal framework, UK lawyers and law firms will be subject to a myriad of rules and regulations in each of the EU/EFTA states – and ultimately will only be entitled to those rights granted by the national regulators of EU member states to third-country (non-EU) lawyers.

This will create an array of challenges for UK lawyers and law firms, including:

• Restrictions on providing services in EU member states on a temporary basis using home state qualification (FIFO). Under German law, for example, the provision of temporary services in Germany by a lawyer from a non-EU member state under his/her home title is not permitted. UK solicitors who want to practise in Germany under their home title after the end of the transition period must apply for “foreign legal consultant” status.
• Restrictions on use of UK LLP structure. UK firms will lose the automatic right to use their preferred business structures in EU member states and, in certain jurisdictions, the UK LLP corporate form may no longer be accepted. In Germany, for example, LLPs will only be able to operate after the end of the transition period if they do so as a branch of a firm with its centre of administration in the UK. LLPs with their centre of administration in Germany should therefore either be absorbed into the UK LLP or converted to a German partnership (with a different liability profile).
• Loss of rights of audience before the EU courts from 1 January 2021, unless UK lawyers hold alternative EU/EEA (but not a Swiss) qualification.
• Restrictions on practising with, or sharing profits or equity with, non-EU lawyers. For example, in France, non-EU lawyers are not permitted to form a partnership with French avocats. A continuing uncertainty therefore presented by a no-deal Brexit is how to maintain the governance, control and integrated global profit pools of international law firms that had established in France via a branch of UK LLP following the end of the transition period, when, unless any agreement is reached to the contrary, direct ownership by UK lawyers will be prohibited.
• Loss of the protection of legal professional privilege (“LPP”) in front of EU courts and EU institutions with respect to communications between UK qualified lawyers and their clients. UK lawyers should consider involving their EU/EEA-qualified colleagues in ongoing cases to ensure that LPP continues to apply where applicable.

Steps to prepare

A detailed country-by-country analysis of local professional and corporate regulations would be well-advised for UK firms with offices in other EU jurisdictions, in order to ensure that their existing structures conform with national laws in each EU member state in which they are established, regarding corporate structure, ownership, control, profit sharing and professional rules for non-EU professionals in that country.

With a Brexit deal still hanging in the balance, and the end of the transition period fast-approaching, law firms should also ensure they are able to put their contingency plans into action in the coming weeks.

About the Authors

Zulon Begum has extensive experience of advising professional and financial services firms and senior equity partners on a whole range of partnership and corporate matters. Zulon has particular expertise in mergers, acquisitions and internal restructurings involving partnerships and LLPs. Zulon regularly advises partnership businesses on their constitutional and governance arrangements, partner remuneration and succession issues, restrictive covenants and partner teams moves and exits.

Harriet Riddick advises clients across many sectors on all aspects of UK contentious and non-contentious employment and partnership law issues. She has experience advising professional services firms (including law firms) on a wide range of issues including reviewing and updating their LLP Agreements, partner investigations and disciplinary matters and partner disputes and exits.