Take your mind back 10 years to the financial crisis. US banks gave out a flurry of subprime mortgages, created collateralized debt obligations, house prices fell and interest rates rose, and then the bubble burst. Subprime borrowers could not meet the higher interest rates, the defaults flooded in and banks were faced with serious liquidity problems. Despite the Feds best efforts, Lehman Brothers filed for bankruptcy, Indymac collapsed, Bear Stearns was acquired by JP Morgan Chase and Merrill Lynch was sold to the Bank of America and economic upheaval was felt worldwide.

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Oliver Gilliand

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Oliver Gilliland
TCLA Writer

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10 years later, a monumental loss in consumer confidence for traditional banks can still be felt. A recent YouGov survey found in France 27% of people surveyed believed banks were a force for good, while only 37% in Italy and 55% in the UK trusted banks. This low confidence has only been exacerbated by the recent cyber-attacks. For instance, in April this year, seven of the UK’s largest banks were either forced to shut down their systems or reduce their service as a result of a hacker using software which cost just $11 to rent.

Equally, the Payment Services Directive 2 introduced in January this year has reduced barriers to entry to the banking industry across Europe. In particular, the Directive enabled third-party access to account information, meaning new firms can access customer data previously only available to traditional banks and can use this to contact customers to gain business. While the EU’s common standards have allowed for quick expansion without new banks having to worry about regulatory compliance. This historic low in consumer confidence and open regulatory landscape has created a rare opportunity for new entrants to capitalise on this resentment in a once thought impenetrable market.

So, who are these new entrants seeking to seize this opportunity and disrupt the UK financial landscape? Introducing the Neobank.

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What on earth’s a Neobank?

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Neobanks or ‘challenger’ banks are essentially online-only banks i.e have no physical branches. They can be separated into 2 types:

  1. Companies with no banking licence and only offer a ‘user service’ and rely on a traditional bank for the processing payments or use a partnership model.
  2. A complete full-service online bank with a banking licence, such as Monzo (the focus of this article).
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      Introduction

      The challenge to traditional banking

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      The most pressing question for these new banks is what exactly they can offer consumers that traditional banks cannot?

      1. The Fees – Neobanks require minimal overheads to operate (website maintenance) meaning they can price more competitively than traditional banks.
      2. Functionality – Traditional banks mobile banking apps have been consistently criticised for being anti-user friendly. They frequently crash and are riddled with security concerns. Whereas, Neobanks can offer a sleek, secure and easy to use service. The reason why Neobanks can offer a more secure service according to a report by PwC is a result of culture; they focus on securing data using technology and quickly adapt to the latest threats. Whereas, traditional banks are less tech-orientated and as a result are significantly slower at adapting to change.
      3. Wider Customer Base – as the barriers to entry to set up a Neobank are significantly lower than that of a traditional bank, they can afford to accept customers with poorer credit ratings than that of a traditional bank.
      4. Easy to Set Up – Neobanks offer a streamlined paperless sign-up process, as opposed to having to go into a branch to set up an account. For instance, N26 paperless sign-up process takes up to eight minutes and can be done entirely from your smartphone.
      5. Special Features – Many Neobanks offer built-in budgeting and saving tools within the account. For instance, Monzo’s target feature allows users to set budgets, categorise expenditures and receive live updates on the rate of their spending.

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      Introduction

      Make or break – The problem Neobanks face now

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      The biggest problems Neobanks currently face is customer acquisition. Despite low consumer confidence and an open regulation, changing 150-year-old consumer habits remains difficult, especially in a market which is quickly becoming oversaturated. This is highlighted by the fact the three largest UK Neobanks, Revolut, Monzo and N26 have only 2.5 million customers between them compared to the largest UK traditional bank Llouds which boasts 30 million customers. The fundamental issue is trust, the current perception seems to be that despite the public not trusting traditional banks to give them the best value for money, they do trust them to keep their money safe. But, as the cyber-security attacks on traditional banks continuously increase, it is debatable how long this perception will last unless something drastic is done.

      Another big concern is profitability. Both Monzo and Starling are yet to break even, due to pitching their services below cost to attract new customers and investing heavily in licensing. While Revoult, the first Neobank to break even on a monthly basis, are unable to monetize their service. If these banks are going to have any chance to compete in the long run they need to find a way to monetize their service effectively while remaining an attractive alternative. This leads to the big question, whether in order to be profitable Neobanks simply need to amass more customers or fundamentally change their business model?

      The final issue they face is lack of relative capital. Despite Neobanks attracting significant investment, such as Revoult which raised $250m last year, this pales in comparison to the money available to traditional banks. Unless Neobanks can either attract far more investment or create a truly unique product, it is questionable whether they will be able to effectively compete in the long-run when traditional banks have so much more capital to invest.

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      The response of traditional banks

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      UK banks are well-known for being slow to adapt to technological change and this no exception, likely due to the fact Neobanks have not drastically gained market share as of yet.

      Lloyds is seeking to collaborate with Neobanks rather than directly compete, with CEO Antonio Horta Osorio suggesting “partnerships between banks and fintech companies will become even more important as they work in a symbolic relationship”. Moreover, Lloyds is set to invest £1 billion annually on its digital strategy over the next three years, which is triple the amount invested across the entire fintech industry in the UK last year.

      HSBC is taking more direct action, creating a stand-alone digital banking startup known as ‘Project Iceberg’ and promising to invest $15bn-$17bn in technology-based growth over the coming years. Equally, RBS has collaborated with UK Neobank Starling to create its own digital bank and is planning to switch 1 million customers from subsidiary NatWest to this new bank to boost customer acquisition.

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      Introduction

      Impact on law firms

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      The growth of Neobanks can only mean good news for law firms. Many law firms are looking to expand to attract large fintech clients to provide regulatory advice as the market continues to grow. For instance, Slaughter & May recently launched its Fintech Fast Forward programme, aiming to offer legal support to financial and legal support start ups in the sector. On the other hand, traditional banks are looking for advise on their own fintech strategy and to be constantly updated with any developments in the sector. For instance, Herbert Smith Freehills recently advised Sabadell and TSB Bank on the latter’s migration of services from its existing fintech services platform to one provided by the former’s in-house services company, Sabadell Information Systems

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      Concluding thoughts

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      It is evident the current UK banking market has not been drastically disrupted yet, but if Neobanks are able to create a more attractive model and traditional banks continue to lag technological developments, this picture could change. One only needs to look at the success in the Chinese market to see the potential impact fintech companies can have, where Ant Financial and Tenecent have completely disrupted the Chinese financial system. The difference is they offered a different service to that of Neobank, providing a combined social media, e-commerce and payment system, similar to Paypal, and offer the largest money market fund in the world, which is a mutual fund which invests in short-term debt instruments. Unlike the UK fintech companies, this service is so attractive largely due to the 3.93% return on surplus funds, that customers are moving money from their current accounts into their Alipay digital wallets. Their success is highlighted by the fact Ant Financial handled more payments than Mastercard, completed over $8 trillion in transactions last year and is now worth 50% more than Goldman Sachs.

      In terms of profitability, it is unclear whether a low-fee online bank can be successful in the long-run. But, If UK Neobanks could emulate a similar model to Ant Financial, creating an equally attractive only money market fund, or a service so attractive that customers are prepared to switch accounts, they may be able to cause a similar disruption to the UK banking landscape.

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      Introduction

      Oliver is a member of TCLA’s writing team. He is a recent law graduate from the University of Nottingham.

      You can reach out to Oliver in our forums by clicking here.

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Big Commercial Stories | November 2018

UK Digital Services Tax:

The UK has proposed to introduce a 2% digital services tax in April 2020. This would be levied on UK-generated revenues of “specific digital business models”, like search engines, social media platforms and online marketplaces, with global revenues of at least £500m.

This tax aims to ensure that large technology companies pay their “fair share” of taxes on the profits made from services which are provided to users in the UK. This can level the playing field between them and companies that are geographically bound and hence, have been paying a proportionately higher amount of tax.

The UK is now seeking feedback on the design and implementation of this tax ahead of its inclusion in the 2019-20 Finance Bill.

Impact on businesses and law firms:

There are concerns that, even with the minimum revenue threshold, the digital services tax could still unnecessary burden smaller technology companies. Also, given the extent of digitalisation of many businesses, it can be unclear which companies should be considered as entities which are subject to this tax.

Furthermore, as this tax could be seen as discriminatory against large technology companies like Google and Facebook, it could trigger retaliatory measures from the US, where many of these companies are based.

To ensure compliance with the digital services tax, law firms would have to advise their clients on issues like whether they are subject to the digital services tax and how they can structure their operations to minimise the amount of tax they need to pay.

Contributed by: Kit Kuan

Danske Bank Money Laundering:

The story:

Danske Bank, the largest bank in Denmark, has come under fire for the largest money laundering scandal in European history. It is estimated that $234 billion worth of questionable money was circulated in Danske Bank’s Estonian branch from 2007 to 2015.

Danske Bank is currently under criminal investigation by the US Department of Justice for money laundering activities. In 2013, 99% of the Estonian branch’s profits came from non-resident accounts. Many of these were based in Russia, which is currently the subject of US sanctions.

Impact on businesses and law firms:

Businesses breaching money laundering regulations may be subject to massive financial penalties. Just last year, Deutsche Bank was fined $630 million by UK and US authorities for its failure to prevent Russian money laundering activities. Earlier in September, ING Group paid a $900 million penalty for violating Dutch anti-money laundering regulations.

Such businesses may also face significant non-monetary sanctions, such as freezes on dollar funding. In February, the US Treasury accused Latvia’s ABLV Bank of laundering billions of dollars for North Korea’s ballistic missile program, and froze the bank’s dollar accounts. Cut off from the world’s most important market, ABLV subsequently collapsed and was wound up by the European Central Bank.

In addition to direct penalties, businesses associated with money laundering may suffer significant indirect repercussions. For instance, due to shaken investor confidence, Danske Bank’s share price has dropped by more than 30% this year.

The Danske Bank scandal highlights the importance of having active checks on internal anti-money laundering systems. Danske Bank had adopted a three-pronged anti-money laundering strategy, made up of operating guidelines, risk management and internal audit. However, due to the small size of the Estonian branch, Danske Bank did not actively monitor this defence strategy, which ultimately led to its downfall. In May 2018, Denmark’s Financial Services Authority published a report highlighting “deficiencies in all three lines of defence” at Danske Bank’s Estonian branch.

Finally, the EU is facing significant pressure from the US to strengthen its rules on money laundering. Under present rules, the European Central Bank has no independent power to investigate money laundering – it may only do so once a national authority has brought an issue to its attention. However, national regulators in smaller European countries such as Estonia or Latvia may not have the resources or expertise to detect sophisticated financial crime, allowing criminals a window of opportunity. In light of this, several pressure groups have expressed an interest in forming a centralised authority to police money laundering in the EU.

For law firms, the escalation in the global fight against money laundering may present direct opportunities in assisting businesses with drafting internal anti-money laundering policies, or conducting ‘Know Your Customer’ due diligence. Law firms may also be called upon to assist businesses with regulatory compliance and keeping up with their reporting requirements as the regulatory landscape may evolve in the coming years.

Contributed by: Shu Qin Low

US’s Iran Sanctions:

The Story:

In response to Iran’s continued testing of ballistic missiles, on 5th November, Trump reintroduced sanctions that were once removed under the 2015 nuclear deal in exchange for Iran’s cease of nuclear tests. Sanctions imposed on 5th November are part of the second batch of sanctions, with the first batch of sanctions already imposed on August 7th, 2018. This second batch of sanctions is expected to be fatal to Iran’s economy as it targets the core sectors of the economy, from oil exports to banks. The sanctions were re-imposed despite the objections from the UK, Germany, and France, all part of the 2015 nuclear deal.

Impact of businesses and law firms:

What seems important is EU’s response. In a joint statement, the UK, Germany, France, and EU foreign affairs chief Federica Mogherini said that they will protect European companies engaged in legitimate business with Iran, in accordance with EU law. The EU is currently seeking ways to bypass the US sanctions. Some of the methods being discussed include creation of a new European payment system independent of the US-dominated SWIFT, and the use of special purpose vehicle (SPV), which will involve EU member states setting up a legal entity to handle transactions between EU companies and Iran.

These conflicting attitudes of the US and the EU means that lawyers would have to advise companies doing business with Iran on their obligations under US and EU law and how they can mitigate the impact of the sanctions. Law firms would also have to keep abreast of how provisions of US and EU law are being enforced and implemented. Since different firms are affected differently, depending on the industry they are in and their relationship with the US, law firms must make sure that the client’s specific circumstances are considered to accurately capture the impact of the US sanctions.

Contributed by: Sara Moon

UK High Street Retail:

The Story:

High street retail is facing its toughest climate in years. Reports this week state that 14 shops close each day. The autumn budget acknowledged that Brits have embraced internet shopping like almost no other nation. Perhaps its convenience appeals to Brits most as they work some of the longest hours in Europe.

Impact on businesses:

The increased demand for online retail is good for businesses because the costs of selling online are generally 10-20% below high street retailers. However, for high street retailers this means store closures. It is estimated that 40% of the current retail space will become surplus. This will affect property owners because shops won’t need to lease as much space. This lack of demand could decrease property prices and increase the residential property market in high street locations. John Lewis’ new Croydon store only required a 3rd of the space of their traditional stores.

If high street retailers decide to omni-channel (have a combined online and high street presence) they need to manage costs carefully. Store closures will reduce overhead costs but also lose sales from that store. M&S decided to close 100 stores and focus on the most successful parts of the business namely food. Supermarket retail does not seem to be as advanced in terms of online presence vs high street retailers, probably because the process is quite complex and costly, making food deliveries more of a luxury way to shop. PoundWorld, unable to change with the shifting climate, is one of the companies struggling most.

For startups, consumer growth in online retail is great news. They can cut entry costs by going straight online. They also do not have to worry about legacy costs like high street retailers such as high rent, wages and heating. However, low entry costs mean more competition which is why many new fashion lines go under.

Impact on law firms:

An increased demand for restructuring seems inevitable as the high street crisis shows no sign of slowing. Loss of profit will mean high street businesses will be unable to pay overheads and other debts owed to creditors and investors. This may particularly affect privately-owned businesses like Toys R Us which tend to have a lot of debt on their balance sheet. As the high street adapts legal assistance with takeovers and mergers will increase for example House of Fraser and more recently Sainsbury’s. An increasing need for property lawyers is also likely to deal with tenants unable to pay leases and a shift in the property market from retail to residential.

The demand for competition law could rise if the high street were to deteriorate to such an extent that online retailers lacked competition. Although, reliable surveys show demand for high street retail will continue but to a lesser extent so the loss of the high street as a competitor all together seems very unlikely.

Contributed by: Flora Raine

Smart Contracts:

The Story:

Adding to the list of technological advancements in today’s commercial landscape are smart contracts. These are automated contracts that use blockchain technology to log and execute transactions without the need for any human intervention.

Just this week, Change Healthcare made an announcement to collaborate with software provider company, TIBCO, to create a smart contract system to automate healthcare technology. Change Healthcare is a US-based conglomerate that primarily operates as an information exchange intermediary to connect providers, patients and payers in the US healthcare industry. This would allow personal health records to be encoded and stored on the blockchain with a private key to grant access to specific individuals. Other data such as surgery receipts, testing results, drug prescription… etc, could be stored on the ledger and be sent to the relevant parties as such insurance providers.

Indeed, this isn’t breaking news nor is it surprising to anyone anymore. However, it does show how technology is leveraging itself across many industries. With the advantages of smart contracts (see below), it will likely not be long before other sectors, such as the government or those in the management industry adopt this automation.

Impact on businesses and law firms:

To businesses, smart contracts have the potential to increase commercial efficiency by reducing transactional costs such as legal and administrative fees to draft a contract. It provides autonomy by reducing the need for intermediaries to create the contract, it is quick because it reduces the time needed for paperwork, and it is safe since the encryption of data prevents hacking.

Now, this can either be an opportunity law firms to burgeon in the tech sector, or it could be a risk, towards the unprepared, to lose their competitive advantage in the industry especially when clients are so heavily invested in this area today.

To the former, lawyers will be in market to deal with the enforceability of smart contracts, in cases of a breach of smart contracts, because there will be uncertainty as to whether traditional contractual principles (requirements of offer, acceptance, consideration, intention and privity) applies to smart contracts. If they don’t, what will?

Contributed by: Angel Siah

Snapchat Regulatory Investigations:

The story:

Snap Inc., the parent company of the social media platform Snapchat, is facing investigations from the US Securities and Exchange Commission and Department of Justice about the disclosures which Snap made to investors ahead of its initial public offering (IPO) in March 2017.

Snap believes that these regulatory investigations are concerned with the issues raised in a class action lawsuit which investors have filed against Snap in May 2017. The investors in this case claimed that Snap had misled prospective investors about the state of its business. In particular, Snap had allegedly failed to disclose the extent to which competition from Instagram had affected its growth in the second half of 2016.

Impact on businesses and law firms:

Businesses should be aware of the fast-paced rate of technological change and the associated level of market competition that they need to face, as well as take steps to respond accordingly. Aside from it being a matter of strategic concern to keep up with or outdo one’s competitors, this is also a financial issue about ensuring investors’ confidence and hence, the amount of funding which businesses can receive from them.

To ascertain the type and extent of information deemed adequate for the purposes of IPO disclosure, law firms would have to closely monitor the development of this case. This is especially so as, in its pre-IPO S-1 filing, Snap had already stated that it was facing “significant competition” in its business and cited the example of Instagram introducing a feature which “may be directly competitive” with its own Stories feature.

Law firms can then advise their clients who plan to file IPOs and help them to avoid the kind of lawsuits and regulatory investigations which Snap is facing, as well as the proceedings which might arise from the investigations. Even if a law firm’s clients do not plan to file IPOs in the US, given the US’s importance in the global securities market, the standard of IPO disclosure established in this matter might be adopted in other countries.

Contributed by: Kit Kuan

Oil Prices:

The story:

Oil prices have seen significant change in the last month. In October prices reached a four-year high following US sanctions on oil-rich Iran, affecting their exports. This led investors to believe large amounts of oil would disappear from the market causing shortages. However, Russian, Saudi, and US oil companies supply overcompensated for this and Iran’s biggest customers were spared the US sanctions. The oil cartel OPEC also reduced its forecast for global oil demand for next year. This sudden increase and fear of excess supply led prices to fall by over 20%, putting oil into bear market territory. The decrease in price is thought to stabilise as OPEC and Saudi Arabia have spoken about lowering their production for next month.

Impact on businesses:

The price of oil has a far-reaching impact, it affects oil suppliers like BP and Shell, and companies using plastics made from oil, such as Adidas. When oil prices go up too much (around $100 per barrel) it weighs on the consumer, especially in countries like the US where the price feeds into petrol prices quickly and directly. It impacts the cost at the pumps and consumers tend to spend less especially when we know inflation is relatively high and economies like the US and UK rely on buoyant consumer spending. Therefore, such a large drop in price has global economic significance.

A fast decrease in oil price usually worries investors as it signals turbulent times in the world economy and a decline in economic optimism. However, it seems over supply is the cause here. This is good news for consumers and the economy because industries should face less pressure to raise prices, as one of their costs is much lower, leading more money to be spent on other things.

Such a dramatic fall could lift pressures on central banks to curb inflation. America’s central bank will have to rethink its forecast for inflation and reconsider some of its planned interest rate rises. If fuel costs aren’t rising and the Federal Reserve isn’t pushing for higher rates, the pressure will be off of the Bank of England, the European Central Bank and the Bank of Japan to follow suit. Fewer interest rate rises over the next 2-3 years will bring down projected borrowing costs, triggering collective relief from a growing number of indebted companies and consumers across the globe.

It will be interesting see how our consumption patterns change over the next few decades. Oil use for cars is said to peak within the next 7 years as we move towards electric cars. The International Energy Agency’s forecast future growth in oil, even in a decarbonised economy (where our energy is not through oil and gas) because oil is a feedstock to make plastics. This seems quite optimistic considering consumer backlash against single use plastics and countries around the world are likely to take legal steps to reduce plastic.

Contributed by: Flora Raine

M&A deals in the Software Sector:

The story:

On the 11th of November, the $124 billion German software company SAP announced that it is acquiring a US survey software Qualtrics for $8 billion cash. The acquisition is thought to develop SAP’s cloud customer relations business through more sophisticated data collecting that will provide better analysis of customer behavior and response. Five days later, on the 16th, BlackBerry said that it will acquire a cybersecurity firm Cylance for $1.4 billion in cash. BlackBerry, a firm that many people associates with phones, shifted its business to producing cybersecurity software after deciding to stop manufacturing phones in-house in 2016.

These recent deals follow the current trend in the tech sector, where technology giants are snapping up juicy targets to stay ahead in the race. The most popular sector for M&A deals is, according to PWC’s report in October, software; 250 deals were announced last quarter, valuing at up to $41.9 billion. IBM’s acquisition of Red Hat and Microsoft’s acquisition of GitHub were also part of the trend. Big software companies are keen to proceed acquisitions to outrun the looming shadows of fast-growing startups, especially in the cloud-computing business.

Impact on law firms:

Big M&A deals are one of the cash cows of law firms. Lawyers are involved in the entire process: negotiating the deal, carrying out due diligence, and drafting the terms and conditions of the deal. Therefore, the current explosion of tech M&A transactions mean that there are growing number of deals that lawyers can get involved in.

Contributed by: Sara Moon

Criminal Charges against Goldman Sachs:

The story:

On November 1st, charges of money laundering and bribery were filed against Wall Street bank, Goldman Sachs, for their work for a state-investment fund based in Malaysia, 1Malaysia Development Berhad (1MDB). Goldman’s role in this money-tracing maze since 2015 was to underwrite three bond offerings for 1MDB, amounting to a value of $6.5billion, from which it legitimately earned about $600million. However, the US Justice Department claims that the conspirators misappropriated $4.5 billion from the 1MDB fund. This raises the question of whether those involved in the deal (including Goldman) were aware of the integrity of the deals and if so, when. Tim Leissner, Goldman’s former chairman for South-East Asia, had since pleaded guilty to the charges and is due to be sentenced next month.

Impact on businesses:

These unprecedented legal allegations pull Goldman into a regulatory entanglement. The bank could face large fines or be compelled to forfeit the money it made from the bond deals. Taken to the greatest extent, they could be indicted and have its banking charter revoked, although, specialists in money laundering (including Stefan Casella, a former US prosecutor) says that the government is unlikely to go that far.

Nevertheless, investors’ confidence is definitely affected. Since the news broke out, the bank’s shares dipped to their lowest point this week since 2011. Finally, as a bank that prides itself as a high global-standard setter, these allegations risk tarnishing its reputation in the market.

Impact on law firms:

Instead of focusing what law firms can do as a business to fend off money laundering (@Abstruser wrote a great summary on that in the previous commercial law update for the Danske Bank money laundering case), I thought I’ll focus on what law firms can do to help clients fend off this increasingly popular crime.

One precautionary step that lawyers may consider advising their clients to take is review the adequacy of the business’s internal legal and compliance controls. Lawyers may also help their clients evaluate if there is a need to change or enhance the transparency of their clients’ business culture or management through publications.

Contributed by: Angel Siah

The Brexit Withdrawal Agreement:

The story:

The political timeline

In a significant milestone, the UK and EU agreed the text of a draft Brexit agreement last Tuesday. The next day, Prime Minister Theresa May secured the support of her cabinet ministers after a five-hour emergency meeting. While the cabinet reached a collective decision, it was not unanimous – 11 members objected to the deal, with 18 supporting it. Work and pensions secretary Esther McVey and Brexit secretary Dominic Raab resigned from cabinet the following morning. Following this, Donald Tusk announced that an EU summit will be held on November 25, 2018 to finalise the provisional Brexit deal.

Still, the hurdles are far from over. After the summit, the EU Withdrawal Act 2018 requires the final text to be approved by an ordinary resolution of the House of Commons. Theresa May will need 320 votes to approve the withdrawal agreement, but the Conservatives have only 318 MPs in Parliament. Internal dissent from Conservative hard Brexiters (such as Jacob Rees-Mogg) and Remainers (such as Dominic Grieve) further threatens the Prime Minister’s ability to gather the necessary votes to cement the deal.

Growing unrest surrounding Theresa May’s premiership may further complicate matters, as a number of Conservative MPs have moved to trigger a vote of no confidence against her. A motion of no confidence is triggered when 15% of Conservative MPs (48 members) submit letters of no confidence to the chairman of the 1922 Committee. 25 MPs have publicly stated they have submitted such letters, but the total number may well exceed this. Should Theresa May be toppled as Prime Minister, it could severely delay the finalisation of the withdrawal agreement, increasing the risk of a no-deal Brexit.

The withdrawal text

Under the provisional deal, a 21-month transitional period will run from March 29, 2019 to December 31, 2020 during which all EU legislation “shall be binding on and in the United Kingdom”. This period is designed to allow the EU and UK to conclude a future trade agreement. This transition period may be extended, but any extension would be subject to further contributions to the EU common budget.

On financial contribution, the draft agreement requires the UK to honour all financial commitments to the EU as if it were still a member for the years 2019 and 2020. The UK Treasury estimates this ‘exit bill’ to amount to €40-45 billion, though by some estimates the figure is closer to €60 billion.

Crucially, until a future trade deal is agreed, the UK (including Northern Ireland) shall be the part of a temporary ‘backstop’ customs union with the EU. As long as the backstop remains in place, the UK shall commit to a “level playing field”, following EU competition rules and maintaining close alignment with labour, tax and environmental laws.

As to Northern Ireland, a hard border will be avoided and goods may be freely circulated across the island of Ireland. Checks on trade will instead take place within the UK mainland. However, the price to pay is steep – Northern Ireland will be bound by the EU’s customs and single market rules, thereby remaining in a much closer customs relationship with the EU than the rest of the UK.

Impact on businesses:

Businesses and investors alike will continue to keep a close eye on Brexit, as the pound continues to fluctuate as Brexit unfolds. The volatility of the pound has calmed somewhat, pending presentation of the draft withdrawal text before the House of Commons, but it is still trading 14% lower than on the referendum day. Analysts at Societe Generale and JPMorgan predict that the pound will benefit if a deal is accepted by Parliament, which will offset inflation as well as buoy wages and consumer spending. However, in the event of a no-deal Brexit, Standard & Poor estimates that the pound could fall a further 15% against the US dollar.

For companies planning their business operations, the withdrawal text presents a clear, if not altogether ideal, starting point from which to map future developments and possibilities. Three clear scenarios appear: no-deal, transition, and backstop.

Scenario 1: No-deal

If the withdrawal agreement is not accepted by Parliament, the chances of no-deal Brexit become alarmingly high. The EU has made it clear that the terms of withdrawal are more or less final, with Angela Merkel stating that “[t]he question of further negotiations does not arise at all”. If the UK fails to sign a formal treaty with the EU by early December, UK officials have stated that contingency plans for a no-deal Brexit will have to be triggered.

Without a withdrawal agreement, the UK would default to WTO trade rules on March 29, 2019, which would require the imposition of tariffs and checks at the UK border – including the Northern Ireland border. This would severely impact businesses and their supply chains. Health Secretary Matthew Hancock warned that deaths could result from medicine shortages in the event of a no-deal Brexit.

Scenario 2: Transition period

If the withdrawal agreement does pass through the House of Commons, businesses will be briefly comforted by the short-term certainty provided by the transition period. It should be noted that the draft text covers only withdrawal arrangements. The future UK-EU trade relationship will be subject to further negotiations once the UK has exited the EU. For businesses, this means that plans may safely be made up until the end of 2020, but long-term certainty will depend on the future trade relationship negotiated after Brexit.

Scenario 3: The ‘backstop’

If no trade agreement is reached by the end of 2020, the backstop regime will kick in. Even this possibility is worrying, as the threadbare backstop omits several arrangements crucial to business operations. These omissions are wholly intentional – Sabine Weyand, the EU’s deputy chief negotiator, has stated that the backstop was designed to ensure the UK could not rely on it indefinitely, giving the EU greater bargaining power in negotiations for the future trade agreement.

For example, the backstop does not include an agreement on road transport. British drivers will need to apply for new international licenses and regulatory certificates to travel in Europe, a time-consuming and bureaucratic process. The backstop also does not commit the UK to regulatory alignment with the EU on goods, which will likely lead to extensive product standard checks on goods crossing UK borders.

For UK financial services, the backstop only contemplates a basic level of access to EU financial markets based on the principle of equivalence. Equivalence assessments would commence as soon as possible after Brexit, with the aim of being concluded before the end of 2020. The EU currently grants equivalence to several other countries, such as Singapore and the US. However, the problem with the equivalence regime is that it largely focuses on wholesale activities such as securities trading. There is no such regime for retail activities such as commercial lending and insurance, which will affect British retail banks and insurers if a future trade agreement is not secured. This is likely to prompt more British financial institutions to set up shop in the EU in order to retain existing customers.

Impact on law firms:

Similar to businesses, the draft text allows law firms to begin analysing industry-specific implications of each Brexit scenario in order to advise clients accordingly. Many law firms have already begun this process – Simmons & Simmons, for instance, launched its Disputes Aviator tool to help clients conceptualise the impact of various Brexit scenarios on English jurisdiction and governing law clauses in future and existing contracts.

Law firms themselves may also begin consolidating their strategies for each possible scenario. For example, to prepare for a no-deal Brexit, Freshfields, Slaughter and May, and Eversheds Sutherland have registered several of their lawyers to the Irish Roll of Solicitors in order to retain rights of audience before the CJEU and professional privilege in regulatory probes by the European Commission. Similarly, Simmons & Simmons, Covington & Burling and Pinsent Masons announced their intentions to launch offices in Dublin following the Brexit vote.

Contributed by: Shu Qin Low

Google’s Absorption of DeepMind:

The story:

Alphabet, Google’s parent company, would be absorbing DeepMind Health, the medical unit of DeepMind, which is a UK Artificial Intelligence (AI) company owned by Alphabet, into the newly formed, US-based Google Health.

As part of its current work with certain NHS hospitals, DeepMind Health has access to the medical records of 1.6 million NHS patients. DeepMind has stated that, post-business consolidation, the data remains under the control of its NHS partners and that “its processing remains subject to both [DeepMind’s] contracts and data protection legislation”. Still, this planned absorption has raised privacy concerns that Google can incorporate the data in such records into Google’s products or services without the patients’ consent.

Impact on businesses and law firms:

As data is becoming an increasingly valuable asset, there will be greater awareness and hence, scrutiny of commercial entities’ potential non-compliance with data protection rules. This is especially so given the rise of stringent regulations like the General Data Protection Regulation (GDPR), as well as the recent high-profile data breaches such as the one involving British Airways.

Even if businesses are not directly collecting or using data in fairly innocuous and common commercial dealings, they need to be alert to the wider data protection implications that can arise from such dealings. Law firms are more likely to have to handle matters like helping their clients to structure their operations, negotiate their deals and draft their agreements with prospective clients and business partners more tightly, with a view to pre-empting possible data protection-related problems.

Contributed by: Kit Kuan

Impact of a no-deal Brexit on Businesses and Law Firms:

1. An optimistic future

Without a deal with the EU, Brexiteers would hope for the UK to prosper outside the EU and that this would be a way of avoiding paying the divorce settlement to Brussels.

If a no-deal Brexit kicks in, it is likely that the UK would trade with the EU on standard terms used by members of the World Trade Organisation. These terms will not be as favourable to the UK as an outsider than they would be to the EU’s members simply because the UK’s exports to the EU would now be subjected to tariffs. However, the optimism is that the UK will eventually get used to this. While it will be a painful process, the hope is that the opportunity for the UK to trade independently with the rest of the world balances out the losses.

2. The realistically less optimistic future

However, the more realistic result is that a no-deal Brexit risks a very bad deal. With 45 years of arrangements intertwined between the EU and the UK, the UK’s relationship with the EU goes way beyond a trade deal. The UK’s membership of the EU’s single market (a customs union that many businesses benefit from) would cease. Without a deal, there will be grave uncertainty as to the costs that businesses will have to face once the privilege to trade freely is taken away.

no-deal Brexit would leave the UK without rules to govern crucial matters such as immigration control, aviation, medicines regulation and financial transactions. Again, this would be a time when many businesses would seek legal advice for contingency plans.

It is true that the Remainers’ forecast for the UK to go into a recession post-Brexit did not come true. However, the performance of the UK’s economy has not been the best either. It has declined compared to other advanced economies. From being the fastest growing member of the G7, the UK is now one of the slowest. While this may be attributed to external economic factors, such as a slower global economy, one cannot deny that the uncertainty of the UK politics in recent years has hampered investors’ confidence. A no-deal Brexit may have even more profound effects.

Finally, a situation that businesses and law firms may want to prepare for is the possibility for a major political change in the future, including a potential change of government. Since the agreement took place, not only have a number of high-profile ministers resigned from office but an ever-growing number of MPs have submitted letters of no confidence on Mrs May as well. As a matter of background, a vote of no confidence is a vote by the PM’s own MPs against her to be deemed as no longer fit to hold her office. For the vote to succeed, a total of 48 Tory MP’s vote is required. To date, approximately 25 votes has been obtained. If Mrs May wins the confidence vote, she will remain in office and awarded immunity for a year. If she loses the vote, she will have to resign.

Contributed by: Angel Siah

The US Tech Stock Sell-off:

The story:

US stocks have experienced extreme volatility over the past two months. The S&P 500 and tech-heavy NASDAQ ended October 6.9% and 11% down, making it the indices’ worst performing month since 2009. Investors seeking to ‘buy the dip’ were wrongfooted, as the stock sell-off continued well into November. Tech stocks were particularly hard hit. The sell-off has seen more than $1 trillion worth of market value wiped off from the big five ‘FAANG’ technology companies. Last Tuesday, Apple fell 3.9%, Facebook dropped 3.4%, Netflix declined by 5%, Amazon dropped 4.4% and Google parent Alphabet fell 2.3%.

There are many factors driving the broader market sell-off, but a key reason is the US Federal Reserve’s quantitative tightening policy, under which interest rates have risen three times this year. As interest rates rise, the cost of borrowing is expected to put pressure on American companies. The fear of a global economic slowdown helps to explain the recent tech sell-off, as investors move from speculative internet and tech stocks towards safer stocks such as real estate and utilities. The US-China trade dispute may also be affecting recent sentiment towards tech companies, as many of them rely on Chinese manufacturers and chipmakers.

However, some of the tech stock woes aren’t directly tied to the trade war or rising interest rates. Facebook, for instance, has come under recent fire for admitting that it hired research and public affairs companies to investigate and discredit George Soros, a well-known critic of the company’s business model. Users leaving Facebook, and the threat of litigation against the company have led investors to be wary of the future of the company. Apple, as well, has been having difficulty expanding their customer base, and recently slowed production for many of their new iPhone models. Apple will now stop announcing how many units they sold per quarter to the stock holders, which has prompted many investors to flee.

Impact on businesses and law firms:

For many listed companies, the sell-off presents a threat as investor fear begins leaking into other sectors and regions outside of the US tech market. Poor performance from the FAANG companies, which have led the global stock market for over a decade, has sparked investor fear that the longest bull-market in history has come to an end. Morgan Stanley, for instance, has begun warning customers that the stock sell-off indicates the beginning of a bear market. Additionally, with both the US Fed and the ECB moving towards a regime of quantitative tightening, higher interest rates are beginning to make bonds seem more attractive than stocks.

The recent stock sell-off may also impact business funding models. For instance, venture capital, which drives many tech startups, may not be as easily accessible, as investors move towards more defensive instruments like bonds or consumer staple stocks. As such, companies may seek to re-evaluate their business funding options, which creates opportunities for law firms to advise on debt restructuring and broader financing.

Contributed by: Shu Qin Low

Fall of the Pound 2016 – 2018:

The story:

Many factors determine a currency’s rise and fall but for the pound Brexit is way ahead of other causes. The market hates uncertainty and as there was little knowledge of what Brexit really meant for the UK economy traders instincts leaned towards selling the pound. This caused the pound to fall around 11% following the referendum.

The future value of the pound will be determined by the political outcome around Brexit in the next couple of years. US Investment Bank, Goldman Sachs believes the pound will rally vigorously next year against the euro and the US dollar. They forecast an increase of 4.6% and 10% from current levels to 1.176 euros and 1.41 dollars, as long as the UK shifts into a “status-quo” transition on Brexit day.

Impact on business:

A weaker pound benefits many FTSE 100 and FTSE 250 companies as their earnings tend to come from abroad. Therefore, a stronger pound impacts the larger more international company’s earnings, dividends and ultimately their value. The more domestically orientated mid-sized 250 index (a more diverse group of companies that better reflects the UK economy) benefit slightly less. However, compared to US companies and other peers, UK companies are underperforming in the long term.

The value of the pound and share prices are thus linked (when the pound goes up shares go down and vice versa). That relationship is going to continue to hold because three-quarters of revenues from the largest 100 companies are earned from outside of the UK.

Impact on law firms:

London’s biggest law firms have benefited from a weaker pound due to their overseas growth. A study by PwC found that foreign exchange movements contributed around two-thirds of overall fee income growth and almost half of profit growth in the UK’s global top ten firms. Their financial results are being propped up by earnings from their array of international offices which are then boosted when converted into pounds at the current favourable exchange rates. Allen & Overy said almost three-quarters of its 2016 revenue came from issues involving two or more countries. PwC estimates the weak pound is contributing an average of £43.7 million of revenue and £16.2 million of profit to the top ten firms.

Contributed by: Flora Raine

Accounting Firms’ Disruptions in the Legal Service Sector:

The story:

According to Legal Cheek’s article published last Friday, KPMG, one of the ‘Big Four’ accounting firms in the world, announced that it will increase the number of its lawyers to over 3,000 in the next few years. If it reaches this ambitious target, then it will become one of the largest ‘law firms’ in the world. Considering that Denton, the current largest law firm in the world, has over 9,000 lawyers and Linklaters and Allen & Overy, both part of the magic circle, have 2,100 and 2,800 lawyers respectively, KPMG’s target headcount forewarns traditional law firms of the possible—or even already initiated—upheaval in the legal sector.

KPMG’s announcement is just one of the numerous changes accounting firms have been making in their business over the last few years to infiltrate the legal industry. EY, for example, acquired Riverview Law, a legal service firm, this September as part of their project to expand the global legal managed services. PwC currently has over 3,500 lawyers in 90 countries and its UK branch offers legal services in 13 different areas. It also opened a law firm, ILC Legal, in Washington DC last year. Deloitte’s legal network, which includes over 2,400 lawyers in over 80 countries, recently saw another local Singaporean law firm, Sabara Law, added to it. Some of these firms—KPMG and PwC—also offer training contracts (while EY used to offer training contracts, it announced that it has no plan to do so in the current cycle).

These threatening business transformations of Big Four accounting firms could be said to be driven by their client needs and profitability. Many clients prefer to seek legal advices from the firm they obtain non-legal services because this leads to integration of, and thus more effective provision of, legal and non-legal services in certain corporate or commercial transactions. At the same time, ability to provide legal advices, especially in the areas of tax and corporate, can make these firms highly competitive because these are not something that traditional accountants offer.

Impact on businesses and law firms:

To businesses, disruption caused by big accounting firms in the legal market is good news. These firms will drive up competitions in the legal market, which is likely to lead to lower cost to clients. Downward trend in legal service cost is especially likely considering that the Big Four are investing hugely in technology in order to innovate their legal services and provide clients with more cost-effective solutions. Also, clients can enjoy benefits arising from the Big Four’s globally wide community of experts and strong consulting advisory capability when seeking legal advices from these firms.

However, rise of the Big Four in the legal market is a nightmare to traditional law firms. According to a survey conducted by ALM Intelligence last year, 69% of law firms said that they see Big Four as their biggest competitors, more than the in-house law departments. Concerns shown by law firms are understandable because accounting firms already possess strong base to establish new legal service businesses and are effectively using them to compete existing law firms; they are already renowned professionals in the areas of tax, finance and M&A and are focusing on these areas of law to complement and strengthen their existing non-legal services provided to their existing wide client base. Law firms must develop strategies to survive the threat posed to their market shares and revenue by the Big Four.

Some of the law firms are already preparing for the looming transformation of the legal market. For example, Allen&Overy surprised the consulting market by launching its own regulatory consultancy this summer, showing that Big Four’s disruption in the legal market is not a one-way attack. In addition to this, many of the law firms are joining the technology race by innovating their legal services to become more efficient and less costly. In regard to tax, law firms are not just advising on law but also other aspects of tax planning, such as financial and economic aspects to compete with accounting firms. Baker & McKenzie, for example, hired Mark Bevington, a former partner at EY and half of its corporate tax team consist of non-lawyers. As shown by these moves, in order to maintain competency in the market, traditional law firms would have to constantly develop their services to survive the increasing competition caused by the accounting firms.

Contributed by: Sara Moon

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Good old Europe is currently facing another internal crisis. This time it sees Italy and the European Commission playing chicken over Rome’s new spending plans. Italy remains defiant over its proposed budget for 2019, whilst Brussels refuses to accept the budget. Both parties are waiting for their ‘opponent’ to blink first and come to a compromise. This escalating standoff has created anxiety within the financial markets, and has caught the attention of many, spreading fears over a replay of the Greek debit crisis.

Read on for the what, why and what now of the ultimate European dilemma.

What is going on?

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Camilla

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Camilla Gionso
TCLA Writer

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Introduction

Italy’s budget drama began last September, when the country announced its 2019 spending plans to the European Commission.

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Each year EU member states present to the European Commission and to the other member states draft budgetary plans for the following year. The Maastricht Treaty has set a limit of annual deficit GDP ratio of 3% to guarantee the stability of the Eurozone. If the presented budgets are considered unrealistic and/or to pose serious threats to the Union, the EC can ask a member state to submit a new version of the budget.

Introduction

What happened is that Italy’s newly elected government agreed to a sharp increase in deficit spending. Specifically, the country aims at a deficit target of 2,4% of its GDP. The plot twist was that this target is three times bigger than what the previous government had agreed with Brussels (0.8%).

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It is more common to talk about the debt-to-GDP ratio, which is sovereign debt: this measures the ratio between a country’s government debt and its GDP. For example, the United States have a debt-to-GDP ratio of 105%, United Kingdom of 85%. In this case we are referring to annual deficit target, so how much a country intends to spend more than it will earn on an annual basis. By setting a target of 2,4%, Italy is essentially aiming at spending 2,4% more than it will earn in 2019.

Introduction

For the first time since the creation of the Eurozone, Brussels has rejected a member state’s budget, and has given the country three weeks to come up with a new one, setting the deadline for the 13th November 2018. Another unprecedented step was the Italian government’s refusal to do so. On this date Italy has confirmed that it will remain defiant over its budget. The strong position took by Italy is reflected in Deputy Prime Minister Matteo Salvini’s words: “We will not subtract one single euro from the budget”.

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Introduction

This is how the standoff has started, and, at least for now, the matter seems far from being resolved.

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Why does Italy want to increase its deficit spending?

Deficit spending is generally considered good as it fosters economic growth, especially in periods of poor spending or poor demand. In fact, by using deficit spending governments are able to increase their spending without increasing the costs on the population.

The main reason for Italy lies in its new government coalition.

The country managed to renovate its government after elections last March, albeit through many difficulties. Its government is made up of a wobbly coalition between the populist ‘Movimento Cinque Stelle’ (5-Star Movement) led by Luigi di Maio, and Matteo Salvini’s far-right ‘Lega Nord’ (Northern League). You may argue that these two parties couldn’t be more different (and, truth be told, they are), but both of them made a number of appealing promises to the Italian population during their election campaigns, and they are now trying to stick to them. These include giving a minimum income to the unemployed, cutting taxes and eliminating extensions to the pension age (people will be able to retire at the age of 62, which is probably the lowest pension age in Europe). They state they are aiming at “eliminating poverty” within the Italian population. Because they want to alleviate costs on Italians, they need to increase their deficit.

With this audacious ‘manovra’ Rome is aiming at increasing demand amongst Italians (they would theoretically have more money to spend) and is forecasting an economic growth of namely of 1.6% in 2019 and of 1.7% in 2020. In an interview with the Financial Times, Deputy Prime Minister Mr. Di Maio has even argued that the Italian spending plans will become a ‘recipe’ to foster economic growth at a European level, that Europe must end its austerity plans and adopt an approach similar to the Italian one, which he was not afraid to compare to Roosevelt’s New Deal provisions that had aided the US during the Great Depression.

Rome’s reasons are very clear: this expansive budget is here to foster economic growth and reduce Italian public debt without further burdening the Italians, who are still impoverished from the financial crisis, and whose economy still hasn’t recovered. What is also clear is that the country is not willing to back down to Europe, nor to enter in any sort of compromise with the authorities in Brussels.

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Introduction

Fair enough. So where is the problem?

Not everyone sees it that way.

Even though Italy’s target deficit is within the 3% limit admitted by EU laws, Brussels does not believe this a smart move for the country.

The first worrying aspect is Italy’s sovereign debt, often considered the elephant in the room in the euro area. Worth more than 130% of its GDP, in Europe this is second only to bailed out Greece and is more than double EU’s limit of 60%. Unsurprisingly, then, the European Commission believes that an increase in this debt might be unsustainable for the country’s already fragile economy. This huge sovereign debt is also paired with the slowest rate of economic growth in the European Union. Italian economy showed no growth in the third quarter of 2018, following a 0.2% growth in the previous period. Unemployment is also a pressing issue in the peninsula. Whilst it was 7%, it has now reached the value of 10%.

Hence, the Italian budget relies on growth projections which, to Brussels, seem more than unrealistic. If these optimistic growth forecasts are not met, the annual deficit of 2,4% could become a lot higher and Italian public debt unsustainable.

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Introduction

Market reactions

Together with Brussels’ angry faces, Italy has also been hit by some negative market reactions.

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Introduction

After this rattle has started, Moody’s rating agency has lowered its rating of Italian debt at one notch above junk because of concerns about Italy’s fiscal strength and the stalling of reform plans. This essentially means that there is little certainty on whether Italy will be able to repay its sovereign debt, and that, at least to Moody’s, it is not safe to hold Italian bonds.

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Introduction

The main problem with junk bonds is that many investors are not allowed to hold securities that are considered non-investment grade (for instance, funds may have a clause in their statute obliging them to hold securities with a minimum rating). Moreover, the ECB itself would not be able to buy Italian government bonds if their rating reaches junk level, as the bank is allowed by its statute to buy bonds with a rating of at least BBB.

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A ‘junk bond’ is an instrument that refers to a very high-yield or non-investment grade bond. These bonds usually have a rating of BB or under and are considered having a high default risk.

Introduction

To name just one example of what this can provoke: the ECB would not be able to continue its quantitative easing program in Italy, as its bonds would be prohibited.

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Quantitative Easing (QE) is an unconventional expansionary monetary policy. The central bank buys securities from member states’ banks to add liquidity (cash) in the capital markets. This makes it easier to borrow money as it lowers interest rates and is therefore aimed at inducing more spending and boosting the economy.

Introduction

This downgrade had an impact on Italy’s bonds yields: they reached a five year high of 3.4 points. This impacted the gap between Italy’s 10-year government bond yields and Germany’s– lo spread, as it is called in Rome. This gap has widened to around 310 points, its highest level since 2013 (to offer a comparison, the spread was at 130 points last May).

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Bond yields: The money that investors realise on a bond is called yield. But this is not limited to the interest rate they get annually. An investor may decide to sell the bond before its maturity to another investor for a higher or lower price. If the investor is able to make money selling the bond, that is also part of the yield. A higher yield means that the bond pays more. Hence, it is riskier.

Introduction

What does this mean? The state will have to pay higher interest rates on its bonds (aka more spending), and every time one government bond gets to maturity Italy will have to replace it with a higher priced bond (again, more spending), as investors will expect higher revenues from a riskier investment.

Moreover, now that Rome has confirmed it will not change its budget plans, the European Commission can sanction the country financially as per EU regulation and cause further spending.

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Introduction

Italian economy is already pretty unstable, and if the battle between Rome and Brussels intensifies, this situation can only get worse. It is clear how the ingredients for a new crisis are all there, and many fear it too. But because Italy is the EU’s third largest economy it would be way too large to be bailed out as Europe did with Greece, and the effects that an Italian collapse can have on the Euro area can hardly be overestimated.

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Introduction

What now?

At the moment, the main questions are two.

Firstly, how far is Italy willing to go? The government could be forced to resign by the gravity of the economic reality and lack of international acceptance (as it has happened in 2011 with the Berlusconi government). Or, they could convince their electorate that the Italian economy is strong enough to undertake this budget, and that the European bureaucrats are just trying to kill Italian sovereignty with imposed austerity.

And secondly, how strict will the EU response be? Will they let Italy go for its own path, paving a way to more rule breaking, or will they force Italy into EU regulations?

The time horizons for this dispute are, however, quite long. After the Italian’s response last Wednesday, the EC has another two weeks to reply to the Italian reply. And the new budget, whatever its form will be, will not be implemented until next May.

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Introduction

Other EU capitals and distrust: does Europe need fixing?

This Italian budget crisis is only another blatant example of how distrust amongst EU member states lies at the core of the general malfunctioning of the Union, beginning from its fiscal policy.

Facing European widespread criticism on the Italian budget, deputy prime minister Mr. Di Maio has twitted that European bureaucrats don’t approve it because “this is the first budget that has been drafted by Rome and not by Brussels”. Mr. Matteo Salvini has spoken to Italian newspapers arguing how “the prescriptions imposed by Europe – and by the previous Italian Governments – have increased the public debt and made Italy poor and precarious”.
On the opposing front we have northern Europeans, with Angela Merkel and France’s prime minister Emmanuel Macron greatly criticising Italy’s new government and its economic manoeuvre. Even Sebastian Kurz, Austria’s chancellor, has claimed that “Austria is not prepared to stand behind the debts of other states while those states are actively contributing to market uncertainty”.

Since the creation of the eurozone, Germany and other northerners have never felt enough solidarity towards the southern countries to share their debts. And, on the other hand, southern European states (with Italy and Greece at the forefront) perceive Brussels as an outside imposition they are increasingly not willing to listen. This situation is today even worsened by the Eurosceptic Italian 5-Star Movement’s election to government.

In order to enable smoother conversations and an easier coordination and implementation of its policies, Europe should focus more on renewing solidarity and trust amongst its member states. In this way Italians will stop seeing Brussels as an outside imposition on its sovereignty, and Northern Europeans will not consider the south of Europe just a financial burden to the Union. This is of pivotal importance for a continent with an economy is big enough to impact the whole world.

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Introduction

Camilla is a member of TCLA’s writing team. She is a third year social and political studies student at UCL. She is currently on her year abroad in Germany.

You can reach out to Camilla in our forums by clicking here.

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The recent trade war between the US and China has captured the world’s attention, depriving the upcoming Stock Connect scheme between London and Shanghai of the consideration it deserves. The Shanghai-London link has been on the cards ever since President Xi visited the UK in October 2015 and expressed his willingness to create a system which would allow investors to trade shares on each other’s markets. If this program were to launch successfully, it would place Shanghai up there next to London, New York and Hong Kong as a principle fountainhead of global capital.

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Ginevra Bizzarri, TCLA Writer

Ginevra BizzarriTCLA Writer

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Introduction

Jason Lui, head of Asia Pacific equity derivative strategy at BNP Paribas, heralded the symbolic as well as economic significance of this initiative, explaining how it would encourage homegrown Chinese companies to list abroad whilst also allowing Chinese domestic investors to trade a foreign company in their own markets for the first time. This deal would also be welcomed by international investors, both institutional and retail, who would be granted direct access to A-shares* of Chinese companies listed on the domestic Shanghai Stock Exchange (SSE).

China’s decision to welcome greater foreign participation in its mainland capital markets and to allow its own investors to invest abroad should be understood in light of the dragon’s desire to show the world (especially the US) that, after decades of stringent state capitalism, it can make its market more competitive and inclusive, and finally take centerstage in the global financial system.

The launch of this program is imminent as there is speculation that it is supposed to go live by the end of the year. HSBC recently announced its intention to be the first to float in Mainland China whereas China-based Huatei Securities, one of the Mainland’s largest brokerages, intends to be the first to make itself available to foreigners via the London Stock Exchange (LSE).

This arrangement would function through the complex depositary receipt (DR) system which, if handled well (big emphasis on the if) would revolutionize the equity capital markets as we know them. Nevertheless, many have questioned whether this initiative is capable of living up to its potential, whether China is really going to play fair and refrain from imposing on this new link all the regulations and restrictions which have disturbed the West in the past.

However, before launching in a full analysis regarding the pros and cons of this program, some financial jargon needs to be explained. Indeed, unless most of you are familiar with complex financial securities, you will be wondering what on earth the terms depositary receipt means. Considering that this stock connect scheme is going to function exclusively through the DR system, it is necessary to explain it. Essentially…

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Introduction

II. WTF ARE DR’S?

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Introduction

When wanting to list on a stock exchange, foreign public-listed companies usually choose the “ordinary issue” route. This means they choose to list their shares directly on a stock exchange which is not their own. So if I am an investor in the target market, I can purchase a share and directly hold it. On the other hand, when companies issue depositary receipts, they are choosing to list indirectly. A DR is a type of transferable financial security* (usually in equity) which represents a claim on a bundle of a company’s shares. Essentially, the DR is a physical certificate which gives investors the opportunity to hold shares in the equity of foreign countries without actually trading in the foreign international market.

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American Depositary receipts

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Introduction

The first kind of DRs were American Depositary Receipts (ADRs) and were (unsurprisingly) invented in 1927 by J.P. Morgan to facilitate investment by Americans in Selfridge, the British retailer. Indeed, prior to 1927 it was a nightmare if for example, as an American, you wanted to buy stocks of foreign companies. Rules at the time dictated that shares could be purchased on international exchanges only, meaning that you had to directly engage with another stock exchange. This wasn’t really ideal. Imagine being a US investor and wanting to buy shares in Selfridge. You would have to navigate the different currency exchange rates, languages and foreign stock exchange rules.

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Introduction

On top of this, you would also need a solid understanding of different rules and risks related to investing in companies without a US presence. This was a lot of stress. The genius of ADRs was that investors could diversity their portfolio as they pleased by investing in foreign companies without using a foreign brokerage account* and without having to directly deal with rules and regulations of other stock exchanges.

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A-sharesA-shares are companies incorporated in mainland China, listed on the Shanghai Stock Exchange or the Shenzhen Stock Exchange, quoted in renminbi, and only available to mainland investors and qualified foreign institutional investors.Dual-class sharesWhen multiple share classes are typically issued: one share class is offered to the general public, while the other is offered to company founders, executives and family. The class offered to the general public has limited voting rights, while the class available to founders and executives has more voting power and often provides for majority control of the company.H-sharesPublic Chinese companies offering H-shares are listed on the Hong Kong Stock Exchange. In addition, H-shares are quoted in Hong Kong dollars and freely traded by all types of investors.

Term Definition
Equity Security An equity security represents ownership interest held by shareholders in a company, realized in the form of shares.
Brokerage account A brokerage account is an arrangement between an investor and a licensed brokerage firm permitting the investor to deposit funds with the firm and place investment orders through the brokerage.
Clearing In banking and finance, clearing denotes all activities from the time a commitment is made for a transaction until it is settled. This process turns the promise of payment into the actual movement of money from one account to another. Clearing houses were formed to facilitate such transactions among banks.
Settling Settlement of securities is a business process whereby securities are delivered, usually against (in simultaneous exchange for) payment of money, to fulfill contractual obligations, such as those arising under securities trades.

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Because economics is all about herd mentality, and because the ones to follow are usually the Americans, when other countries realised the opportunities offered by these financial instruments, they were quick to replicate them in their own markets. Now we also have Global Depositary Receipts (GDRs) which are different to ADRs in that they are not unique to the US market; rather, they are issued by international firms who wish to access multiple markets. They have the exact same perks as ADRs, the only difference is the G in front of them!

In the London-Shanghai link, Chinese companies would be the ones issuing GDRs on the LSE stock exchange. On the other hand, international companies would be issuing “CDR”s (you guessed it, Chinese depositary receipts!) on the Shanghai Stock Exchange.

This all sounds very cool, but how does it actually happen? How are these depositary receipts actually issued? Who creates them? Where do they come from?

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First off, a company wanting to issue DRs on a foreign stock exchange, must transfer its shares to a “custodian bank” in its home country. The company issuing shares then then has the responsibility of identifying a depositary bank in the target market to which the custodian bank will then transfer the shares. Depositary banks are present in all markets and essentially have the responsibility of facilitating investments in securities. The depositary bank will then have the actual responsibility of using those shares to created DRs which it will then sell to investors in the foreign market.

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If this confuses you, just think of the inherent difference within the names! A depositary bank is a bank where you deposit and a custodian bank is a bank which will have your shares in custody. Although the custodian bank will be the one to who the company entrusted the shares in the first place, legally those will still be kept in a safe-keeping account by the depositary in the target market, once it has the shares, the depositary bank can create new securities, which we know are called “depositary receipts”. These DRs will be linked to the actual shares in the bank by a ratio and will represent a specific number of them. This means that, for example, each DR is worth 10 shares. If you buy one DR you are entitled to 10 shares of x company.

Overall this mechanism has created two securities: the receipt (which we as shareholders would hold) and the actual foreign share (held by the depositary bank).To make this simpler, imagine a UK company, Barclays for example, wanted to list on the Shanghai Stock Exchange through depositary receipts; this is how the process would work:

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  1. Barclays entrusts its shares to custodian bank in the UK.<l/i>
  2. Issuer nominates depositary bank in target market which custodian will transfer the shares to.
  3. Depositary bank will be a bank in Mainland China.
  4. Depositary bank then receives shares of foreign issuer and holds them.
  5. Depositary bank in China then creates CDRs whose value is given by the underlying shares of the foreign company which it holds.
  6. Each CDR will be worth x number of shares.
  7. Price of each CDR would be issued in Chinese renminbi converted from the equivalent UK price of shares being held by the depositary bank. (This makes it simple for Chinese investors to buy stock of a UK-based company.)
    CDRs can now represent local UK shares held by the depositary.
  8. CDRs can now be offered to investors in the local market and can be freely issued and traded on the Shanghai Stock Exchange.

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Chinese investors are are then able to trade, clear* and settle* these CDRs in their own market, in their own currency, according to their own procedures. Indeed, this is the catch. Security regulations will apply only to the securities held by the local buyers (so the CDRs held by Chinese investors in our example) but NOT to the shares of the original company (those held by the bank). Indeed, DRs are generally subject to the trading and settlement procedures of the market in which they trade. Overall, intermediating this transaction through the depositary receipt mechanism is a win-win for all: local buyers can access foreign investments whilst still complying with domestic regulations (something China is deeply committed to), and foreign companies can reach a larger investor base and gain more international notoriety and momentum than what it otherwise would by listing through an ordinary share form. On top of this, as mentioned above, the foreign company can avoid the regulatory and procedural burdens which come when listing on a new market by transferring these responsibilities straight to the depositary bank. Most of you are probably thinking this process sounds like a massive hassle. Why not just go for ordinary listing? Essentially…

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III. WHY DR’S? HOW WOULD CHINA BENEFIT

1. EXPANDED SHAREHOLDER BASE ABROAD AND INCREASED INTERNATIONAL RECOGNITION

No matter how hard China tries to isolate itself, if it wants its growth to continue, opening up its markets looks like a good idea. Indeed, just 10 days ago stats were released which revealed that the growth of China’s economy “only” reached 6.5% this year, marking the slowest year-on-year quarterly growth since the first quarter of 2009. As a result, Fang Xinghai, vice-chairman of the China Securities Regulatory Commission (CSRC) urged China to “open up further” the market as “foreign investment accounts for just 2 percent of the total value of the A-share market”. Through cross-listing in GDRs, Chinese companies will expand their shareholder-base, raise more capital and gaining more publicity and recognition internationally; all this whilst also circumventing the disadvantages of foreign investment restrictions.

So, to give you a practical example of why issuing GDRs on the LSE would be convenient for Chinese companies: if I asked you readers whether you would be more willing to invest in McDonalds or Kweichow Montain Co, where would you be more likely to place your bets? Aside from the fact that you want McDonalds to keep raising capital so that it can continue to produce and offer those delicious chicken nuggets, you would probably go for the big M because you are familiar with it and you know it will probably keep being profitable. But…what if I told you that China-based Kweichow Moutai Co, distiller of baijiu, is now more valuable that McDonald’s Corp? Would you then change your mind? Probably. The problem is that the Chinese market has always been subject to heavy rules and regulations which prevented it from being fully transparent, depriving investors of the necessary information to evaluate stocks such as this one. By issuing GDRs Kweichow would simultaneously access more capital and boost its prestige in the global market.

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2. WANTING TO LURE FOREIGN CAPITAL INTO ITS OWN DOMESTIC MARKET

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Another big reason why the Chinese government is pushing for these GDRs is because it wants to lure capital from China-born tech giants back into its home market to boost the domestic economy. So, for example, I’m referring to the big tech trinity composed by Alibaba, Tencent or Baidu who, despite being Chinese companies, are not listed in the domestic stock market. Instead, you can find their shares sitting on the New York or Hong Kong stock exchange, or both! How frustrating must it be for Chinese citizens to know that three of the most valuable companies in the world are their own and yet they cannot access them?

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Indeed, these companies cannot be listed or purchased on a Chinese stock exchange, This is because Mainland China has imposed numerous legal and technical barriers to IPOs in domestic markets. For example, Chinese regulations (Hong Kong excluded), currently forbid dual-class shares* which are instead heavily favored by tech companies because it means they can raise capital whilst retaining control. Chinese regulators in the past have claimed that the primary job of a bourse is to keep shareholders happy and to look after their interests. Endorsing dual-class shares would, in their opinion, completely disregard this principle as it would rob investors of the right to veto transactions, censure directors or more generally voice their concerns. However, the CSRC recently disclosed that it is considering revising current company law to allow shares with different voting rights. Another issue is that in China companies must have three years of profits before they are allowed to go public. This is a big no-no for companies, especially tech ones, which before actually making some returns burn through cash as they scale up.

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So you can see why companies refuse to list there. But why does the Chinese government so desperately want them to? The answer is because China’s capital markets could not be more prepared to welcome the CDRs: with a capital market worth US$8.5 trillion, the Mainland would have enough liquidity to absorb all these CDRs. Goldman Sachs recently released predictions which see the largest tech companies (Alibaba, Tencent, Xiaomi, Netease, Baidu, and JD.com) in a position to raise 60 billion between them through the issuance of CDRs. Ok this sounds cool, but how would China make sure people will actually invest in these CDRs? Well, in a pre-emptive attempt to stabilize the market, regulators have already thought about this and have approved the establishment of six mutual funds, also known as “unicorn funds” which have been created with the purpose of investing in CDRs for a period of at least three years. In a “dream scenario” idealized by BNP Paribas, the Mainland’s attempt to connect its isolated capital markets to the global financial system could create 1.3 trillion-1.45 trillion of foreign demand for yuan assets. Not bad stats.

Ok, this all sounds well and good for China, but..

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IV. WHAT’S IN IT FOR INTERNATIONAL INVESTORS?

Well, as mentioned before, because of all the barriers to entry plaguing the Mainland’s capital markets, international investors would be able to use CDRs to access the Mainland’s market without having to worry about any rules or regulations. Because the Chinese market is huge, they would be able to raise substantial amounts of capital from numerous different investors.

Despite the excitement surrounding the initiative, people are wary as they foresee numerous hurdles to the smooth implementation of this project. Some have gone so far as to dub this stock connect scheme a “symbolic move” as opposed to a genuine reform actually aimed at increasing foreign investment. So what are the issues?

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1. LIMITED PARTICIPATION AND EXTRA REGULATION

First off, it seems that the only overseas-listed Chinese companies who will be allowed to issue CDRs in the Mainland market are ones which can flaunt a market value of more than 20 billion yuan. Under the current guidelines released by the CSRC only seven companies would be eligible to issue CDRs; these include Baidu, Tencent and Alibaba, along with others such as JD.com and NetEase. This means that unless you’re part of the lucky seven you are out of the game (for now at least). This measure is unlikely to please Chinese investors who might be eager to give their money to potential startups like Xiaomi, the smartphone maker who has been renamed “the Chinese Phoenix” by virtue of its recent stellar growth.

Furthermore, the restrictions are not only on who can list CDRs but also on who can buy them. It is currently believed that only individual Mainland investors with a capital base of around 5million yuan (US$720,9000) will have the green light to purchase. The arrangements are similar for Chinese companies wanting to issue GDRs on the LSE who will need to be “blue chip companies” and have large capitalization and profits.

Constraints have also been imposed on how much companies can issue and invest in CDRs. Indeed, with China wanting to curb capital outflows and prevent capital inflows of fresh equity from flooding the domestic markets, the CSRC and SSE recently stated it is very likely that there will be limits on how many securities can be issued. They fear that the moment China opens its capital markets to companies such as Alibaba or Tencent, liquidity will quickly drain out of China’s A-share market as investors will all want to invest in these new companies. This will likely exacerbate the bearish sentiment which has characterized the mainland equity markets recently.

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2. MINIMAL IMPACT DUE TO A MORE APPEALING STOCK CONNECT CHANNEL ALREADY EXISTS

Some, on the other hand, take the line of argument that it is just plain useless to set up a stock connect between London and Shanghai, which will likely be subject to numerous restrictions and regulations, if there are already other channels through which international investors can access Mainland stocks. These channels are known as the Shanghai-Hong Kong and Shenzen-Hong Kong stock connect schemes.

In fact, before November 2014, the only way to invest in China was by buying companies listed in Hong Kong (H-shares*). Then, in 2014 and 2016 the Shanghai-Hong Kong and Shenzen-Hong Kong stock market connects were inaugurated in a bid from China to further open up its markets. The schemes allow international investors to directly buy and trade A-shares from companies based in Shanghai or Shenzen which are listed on the Hong Kong exchange, whilst also giving Chinese investors access to Hong Kong stocks. So, whereas the London-Shanghai link would only allow investors to access depositary receipts, the already existing stock connect schemes with between the mainland and Hong-Kong let investors trade shares through local brokerages and offer a much wider menu of stock selection. To illustrate, H-shares represent more than 230 Chinese companies and give investors the chance to invest in all the prominent economic sectors like financials, industrials and utilities.

By virtue of its respected legal system and adherence to international standards and practices, over the years Hong Kong has made a name for itself as a respected centre for international finance. Furthermore, its unique ability to connect Mainland China with global capital markets make it an irresistible destination for international and Chinese investors wanting to trade securities. Now, the obvious question: why would international investors choose to access A-shares through the London connect, which has been criticized for being “just a watered down version of Hong-Kong’s programs” when they can already access them easily through Hong Kong, a free market open to traders worldwide?

What is also arguable is that companies, when faced with a choice, would still choose to list in Hong Kong rather than Shanghai. Indeed, since April 30 the HKEX (the Hong Kong bourse) announced that it would allow companies having dual-shares to publicly list on its exchange. If you recall from earlier, dual shares are shares with allocate different voting rights, and which are currently banned from Mainland Chinese markets. Because this share structure has not been allowed yet by the SSE, and it is doubtful whether it will ever be, this means that if giants like Alibaba were to list in China, they would probably choose to do so through Hong Kong.

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3. HOME BIAS

Another compelling argument has been made by those who claim that this program is unlikely to be as successful as it could be because investors are not informed enough. Remember when I mentioned Kweichow Moutai Co earlier? Although we concluded that it is in Kweichouw’s interest to list in London as this will increase its international presence, what is the likelihood that British investors will actually then buy the company’s GDRs? Current stats don’t look very promising: the four Hong-Kong traded Chinese stocks with dual-listings in London barely have any trading volume in the City. But if we flip the coin, we will find that companies listed on the FTSE 100 Index such as HSBC are a big name in China and it is likely that it’s CDRs would be immediately gobbled up by retail and institutional investors in the Mainland. Economics is a game of incentives, and if Chinese investors perceive an advantage in purchasing British CDRs but British investors don’t hold the same attraction to Chinese-issued GDRs, this scheme may easily become a zero-sum game.

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4. FUNGIBILITY OF DRs

When something is “fungible” it means it can be exchanged with something else of the same value, and technically allows investors to cash out their investment, which they like. So for example, if I am a GDR holder in the UK I want to be able to redeem the A shares attached to that GDR and trade them on the SSE to then deliver me the cash proceeds. Similarly, if I am a CDR holder in China I want to be able to redeem the UK shares and trade them on the LSE to get cash. However this is where it gets a bit complicated because in order to do this I need to use a “designated broker” who is licensed to trade in both markets and convert GDRs and A shares or CDRs and UK shares. Supposedly being able to do this is a good thing for investors. However because the process is quite complex some actually question how far this “fungibility” principle goes. Some have speculated that “the conversion rate of CDRs is likely to be almost zero” and have renamed CDRs “depositaries with Chinese characteristics”. Ba Shusong, chief economist of the Hong Kong Exchanges and Clearing, claimed that inability to convert the CDRs would make these receipts “pointless”.

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5. INABILITY FOR LONDON-LISTED COMPANIES TO ISSUE NEW SHARES

London-listed companies will initially only be able to offer existing shares and not new shares. This means they will give the Chinese market access only to shares that are already traded in London. On the other hand, SSE firms listing in London through GDRs are not constrained by this requirement and can raise capital. This will inevitably be a massive disincentive for UK-listed companies who would not be able to raise fresh capital .

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6. TRADE WAR

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The last, but definitely not least, potential backstop to the London Connect is the on-going trade war being fought by China and the US. The recent escalation of events have forced Chinese regulators like the CSRC to reconsider the risks facing the mainland stock market and might delay the project.

Now that I have given a full breakdown of the initiative, its pros and its cons, comes the part that all of you have been waiting for:

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V. WHY SHOULD WE CARE? WHAT IS THE IMPACT ON LAW FIRMS?

This project will no doubt be welcomed by law firms with a strong capital markets practice and a strong China presence.

Linklaters

One firm which perfectly fits this description is Linklaters. Backed by its No 1 ranking in the Bloomberg league tables for IPOs both globally and across EMEA regions, the firm can safely call itself market-leading for what regards global IPO experience and expertise. Being finance heavy, the firm’s London office has also worked on some of the most high-profile deals involving GDR offerings and has developed considerable expertise in the area. Links will also be familiar with this project as it was directly involved in designing and advising on regulatory and legal issues around the launch of the other two existing Stock Connects and is currently involved in similar discussions regarding the new London connect. By virtue of its collection of market-leading lawyers which span Shanghai Beijing, Hong-Kong and London and who can advise clients in both English and Mandarin, the firm will no doubt be first pick for both Chinese and international companies seeking to cross-list through this program.

Allen & Overy

With over 25 years of on-the-ground experience in the China region and extensive knowledge of practical and legal issues that foreign investors and local clients face, Allen & Overy has been and will continue to be one of the top choices when it comes to Chinese firms wanting to “go global” who are seeking advice on outbound investments and related financings. The firm has been praised time and time over for its “in-depth knowledge of both PRC laws, regulations and Chinese culture”. Furthermore, the firm’s China group offers lawyers based in Mainland China, HK, London, New York, Sydney, South Africa and Continental Europe, enabling clients to use A&O as a “one-stop-shop” across different practice areas and jurisdictions.

Clifford Chance

Clifford Chance is another member of the magic 5 who would no doubt see a lot of work coming its way as a result of the London-Shanghai Stock Connect. With China being key to the firm’s global expansion strategy, CC offers offices in Beijing and Shanghai with international and local, dually-trained lawyers. Like A&O the firm has been operating in the country since the mid 1980s and has developed notable expertise in the area of equity capital markets. Evidence of its standing in the region is reflected by the leading role the firm held in Xiaomi’s lPO on the Hong Kong Stock Exchange this July, following the introduction of the new dual-class share regime being allowed. This operation represented the fourth largest global tech IPO after Alibaba, Facebook and Infineon.

There are heaps of firms I could mention which are also very well-poised to take advantage of the situation, but you get the gist. In terms of what specifically lawyers in such firms will help with, their jobs would include:

Drafting of prospectus.

In finance, a prospectus is a disclosure document that describes a financial security for potential buyer. This means that through the prospectus investors need to get all the necessary information they need in order to make an informed judgement on the security and whether it’s worth purchasing. This includes assets and liabilities, profits and losses, prospects of the issuer as well as the specific rights attached to the securities (in this case the rights attached to GDRs and CDRs). Usually, lawyers will be the ones drafting prospectus’ for clients (ie companies wishing to issue securities). For securitization, a prospectus can range from 15 to more than 500 pages! So I’ll leave it to you to figure out the hours that lawyers will have to put into this.

Negotiating contracts

If we consider this particular project, there are a lot of contracts which will need to be signed off by a lot of parties, and each one is of utmost importance for the completion of a deal. So for example, when listing on a stock exchange, a company will want best terms. On the other hand, banks holding the securities will push for terms which will make the security an optimal product to sell to investors.

Regulatory and other approvals

Lawyers will also need to liaise with entities such as rating agencies (Moody’s, S&P, and Fitch) who need legal counsel when determining what the adequate rating of a certain product should be. We have seen that in this particular project, only the most profitable and valuable companies will be able to issue GDRs and CDrs to investors, so this shouldn’t be too much of a problem. Lawyers will also need to instruct London-based clients wishing to issue securities about their duty to comply with the EU Market Abuse Regulation.

Litigation

Arguably, from the moment a foreign company chooses to sell securities to retail and institutional investors it makes itself vulnerable to lawsuits. This is because there are so many rules and regulations to satisfy that this increases the chances of something going wrong and investors complaining about it. There is evidence that in recent years, the amount of class action lawsuits regarding securities has increased.

Conclusion

Although the outcome of this project is arguably a big question mark, the initiative no-doubt signals China’s willingness to further open up its equity markets and is a stepping stone for Shanghai who aims to become one of the top global financial centres by 2020. More importantly, we are faced with a disturbing reality: as Xi gradually opens up his country’s markets and propels the renminbi to have a greater international role, those who have been criticizing China for its protectionist policies and isolationist character will find that, currently, these accusations more accurately describe Trump’s USA. Indeed, a country which was once understood to be the pillar of freedom, fairness and capitalism is seeing the gradual erosion of these principles as the president shows no sign of abandoning his “America First” policy. This situation threatens to shake up the geopolitical paradigms that govern world order as we know them, making us wonder: is the next Sino-US war is really going to be over trade, or will it be one which pits the US dollar against the Chinese renminbi in a fight for global dominance?

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Leaves are falling off trees, the evenings are getting longer – that’s right kids, it’s officially law fair season.

Come every Autumn, you’ll hear the sound of trainees setting up wieldy exhibitions and painstakingly laying out piles and piles of free pens and notebooks. For any aspiring lawyer, there is no better place to hone your networking skills and discover personal insights about a vast number of firms.

And when I say a vast number – I mean a vast number. Law firms from all around the country will fill up the fair – all with the intention of speaking to you. Although tempting, don’t attend with hopes of just pilfering the freebies because your student loan doesn’t cover a Ryman’s splurge, but instead use the fair to your advantage. Find out things you couldn’t necessarily see on the firm’s website or grad brochure and gain the real inside scoop.

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Sienna Hewavidana

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Sienna Hewavidana
TCLA Writer

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Tips on how to make the most of the fair:

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  • Target firms
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    Introduction

    Depending on what you’re interested in, make a list of the firms you want to speak too. Stick to the list – don’t get distracted – and make sure you allow yourself enough time to interact with them all. Law fairs are extremely busy places so you will inevitably have to queue to speak to trainees so you have to limit how many firms you can speak to. Be clever – if you definitely want to do an international secondment, don’t waste your time talking to firms which don’t offer any. You’ll waste both yours and the trainee’s time.

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  • Dress Code
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    No one is asking for black tie but be sure to dress relatively smartly. You want to make a good impression on potential employers – your lecturers may not care if you rock up wearing your pyjamas but law firms certainly will.

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  • Make a Good Impression
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    Be friendly, curious and amiable. Make firms remember you for the right reasons. Don’t be that sleazy guy who waltzes up to the firm and asks ‘Why should I apply to your firm?’. Please. I’m begging you. Don’t be that guy.

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  • Prepare
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    Perhaps the most important tip of them all – prepare, prepare, prepare! Research the firms you’re interested in depth and prepare a few questions. See if there are any recent deals in the news involving the firm and ask about them. If you’re interested in the career of a specific partner, you could ask the trainees if they’ve come across or even worked for them. Firm-specific questions demonstrate commitment, but more general questions can be equally as helpful – such as:

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  • Why did you choose to apply to this firm?
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    Some trainees will justify their answer with the secondments offered, the training, high profile clients (or, almost certainly, the ever elusive ‘culture’ of the firm) but it’s always interesting to get an individual’s real perspective. Some will immediately become the firm’s top PR person and tell you that they dreamt of working for the firm from birth – and others will be refreshingly honest and tell you that they applied to every firm they could and only landed this one.

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  • What is the training contract like?
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    Although you should have ideally researched the basic outline of the training contract offered by the firms you are speaking to, there’s no beating hearing the inside scoop on the how long the hours really are, how much partner interaction there really is and how elitist the firm actually is. Although be aware that trainees are still trying to recruit you so will naturally paint the firm in the best light they can.

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    Introduction

    Tell me about….

  • The pro bono work you do

  • What sort of pro bono work is there? Is it localised or global? How much do trainees get to participate? Do vac schemers? Are there compulsory hours? Do partners take a leading role?

  • The diversity and inclusion policies in the firm

  • What does the firm actually do? How do their policies translate to the real world? What networks do they have? How long have they been in place? What is the participation level across the firm? Are there grassroots initiatives?

  • The secondment opportunities

  • International secondments? Client secondments? What percentage of trainees do them? Do associates and partners? Which are the most popular offices?

    You may not have enough time to ask all the questions you have jotted down but they will show that you are dedicated and already committed to the firm at such an early stage. Prepared questions may also stop you looking a bit silly in front of the trainees as well – you don’t want to be asking a Jones’ Day trainee about which their favourite seat was. And if you don’t know why, it’s back to Google for you.

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    Introduction

    Sienna is a member of TCLA’s writing team. She is a graduate of Politics and Sociology from the University of Cambridge.
    Sienna is interested in race issues, such as the issue of diversity and underrepresentation within corporate circles. She hopes to educate both herself and others on the topics.

    You can reach out to Sienna in our forums by clicking here.

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    With tech companies preaching the advantages of artificial intelligence, cloud technology and machine learning, the term ‘blockchain’ has also been bandied around in a bid to enhance productivity.

    Blockchain has been considered “one of the most disruptive innovations since the advent of the Internet” with global business benefits estimated at US$21 billion by 2021.

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    Kaveesha

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    Kaveesha Thayalan
    TCLA Writer

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    Yet – what exactly is it?

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    Blockchain explained

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    To put it simply, blockchain is a chain of digital blocks which contain data. When data is recorded, a ‘hash’ is created; this identifies the unique contents of the block akin to a fingerprint. When a new block is added to the chain, it contains its own hash and the hash of the previous block to ensure a connected chain. The record of data is shared across all nodes (participants) and is not centrally stored in any single location. Across various industries, the use of blockchain technology to record data is gaining prominence primarily due to its security, efficiency, and potential cost savings.

    Trust and security

    Information on a blockchain is immutable and secure due to its hash function. A change of one block’s contents would change its hash and disrupt the subsequent blocks which still contain the previous hash. For the change to be accepted, the hash of all subsequent blocks would need to be recalculated.

    The distribution of the record of information amongst all its nodes (participants) furthers immutability. Compared to a traditional ledger system, no node enjoys special rights to make a unilateral change to the record. Any changes to the chain will require a consensus from other participants that the change is valid so that that it is recognised in the ledger. This characteristic hinders a centralised hacking attack as corruption of data requires a simultaneous change to all the blocks in the chain.

    This self-auditing process increases trust in the system due to the transparency, verifiability, and immutability of data which overcomes issues of hackability and manipulation that persist in traditional digital systems.

    Efficiency

    The use of blockchain is also considered more efficient due to the accuracy and speed at which information can be input and transmitted which arises from a decentralised authority. A decentralised authority results from the consensus-based system of storing information. Without a central authority to verify information or complete transactions, risks and error-rates can be minimised. This increases the speed which decisions can be made, and information authenticated. By eliminating third-party intermediaries, verification and transfer of data can be completed more efficiently. To capitalise on this, Maersk and IBM created TradeLens Blockchain Shipping solution which moved its global supply chain on to a blockchain network and increased the efficiency of moving goods across the 234 participating marine gateways.

    Cost savings

    The increase in efficiency creates cost-savings for implementers as it reduces the cost of connections and transactions. Compared to a traditional recording system, it requires minimal overhead costs with fewer intermediaries to manage as the transfer and verification of data is completely automated. As a result, companies can avoid paying staff to input and verify data. In the investment market, it is estimated that the switch to using blockchain from a laborious paper system could save asset managers US$2.7bn.

    Application

    The use of blockchain is currently trialled across various sectors, from energy to agricultural industries. Looking to the legal market, firms are experimenting with blockchain to maximise its benefits. In an industry which is centred around identifying and mitigating significant risks, trust is paramount between firm and client. Blockchain has the power to strengthen firms’ relationships with clients due to the transparency and accuracy of data collection and use. The application of blockchain could also minimise the need for simple administrative tasks such as data gathering and verification, thereby reducing overhead costs and financial outgoings while improving cash conversion.

    Firms are independently implementing blockchain technology within their operations. For instance, K&L Gates has invested in Chainvine to decentralise the company’s data system in order to create a secure and permanent blockchain ledger system. Chainvine also aims to create ‘intelligent commodities’ to enable more efficient recording of asset data. Several other firms including Herbert Smith Freehills, Freshfields, Kennedys, Fieldfisher and Hogan Lovells are also dedicating resources to exploring the potential applications of blockchain within their firms.

    Firms are also working together to establish a common blockchain system within the legal services market. In February, ten law firms joined R3’s legal blockchain research community, ‘Legal Centre of Excellence’ (LCoE); Ashurst, Baker McKenzie, Clifford Chance, Crowell & Moring, Fasken, Holland & Knight, Perkins Coie, Shearman & Sterling, Stroock, and White & Case. The collective participation of law firms is paramount to ensuring the widespread adoption of the technology.

    Smart contracts

    A key application of blockchain in this market is through smart contracts. Smart contracts are essentially contracts that are drafted through code. These automatically trigger an action once an event has been marked as completed. This can be illustrated simply with a property sale agreement; once conditional events are fulfilled (e.g. the payment is made), the smart contract will automatically trigger the transfer of property to the buyer on the property register. In this ‘living contract’, once a conditional event is identified, trusted data sources called Oracles track the progress of the real-life event and enable the performance of the contract. Oracles are supplied by third parties and can constitute a multitude of official and trusted sources.

    Smart contracts benefit from certainty that is entirely self-contained in the code. Contracts are made more efficient with the speed at which an exchange of value is enabled due to trustless execution. There is no need for an external authority to authorise a subsequent action after the fulfilment of the event as it is completed automatically. The security embedded in a blockchain transactions also reduces fraud and improves data accuracy.

    One of the most prominent developers of smart contracts is Ethereum. Assets can be traded on the Ethereum platform with the use of Ether or other cryptocurrencies built on Ethereum. Using the Solidity code, individuals can self-serve by coding their own contracts on the platform. Specifically, in the legal market, R3’s Corda is another platform on which smart contracts could be built. Chainvine’s development of ‘intelligent commodities’ would also advance the development of a smart contract platform to enable efficient transactions of assets.

    Considerations

    However, amongst all the praise, it is important to consider potential risks of present smart contract applications.

    First, smart contracts are difficult to code correctly. Due to its immutable nature; once written, the contract is irreversible. If the data input is inaccurate, this would create a cascading effect across the performance of the contract. Smart contracts might not be suitable for complex transactions due to the various uncertainties of contractual terms in a complex agreement which make coding difficult. Contracts would need to be drafted unambiguously and without any room for interpretation to ensure the parties’ intentions are accurately fulfilled. Traditional ambiguous terms such as “reasonable efforts” would need to be expressly defined as codes cannot interpret language. The LCoE recognises this problem and is currently working towards linking data to associated legal prose to ensure code is rooted in law. However, until this is established, smart contracts are limited to simple transactions.

    Second, the legal nature of smart contracts is disputable. In common law systems, establishing a contract requires offer and acceptance, intention to create legal relations, considerations, and certainty. Without human intervention in smart contracts, parties’ intentions to create legal relations are uncertain as coded performance is automatic. This would be a significant issue with “follow on” contracts if performance of a previous contract automatically creates a subsequent contract without the awareness of parties. Ideas of consent and agreement through signing would need to be redefined to give legal status to smart contracts. Additionally, special attention needs to be given to contracts established in markets with strict regulations. For instance, financial regulations would need to be coded into the required contracts in order to achieve legal compliance and operational continuity. Presently, the legal nature of smart contracts is uncertain and greater legislative guidance is required to ensure blockchain commands translate into legal obligations.

    Third, smart contracts might create data privacy issues. A strong selling point of smart contracts is its immutable security. However, this is at odds with current General Data Protection Regulations which implemented a right to be forgotten and data migration. The permanent record of sensitive personal data would be problematic, especially since transactions are largely transparent. To minimise privacy disruptions, the blockchain would need to be altered to limit visibility of transactions only to “trusted” nodes. Total removal of data would be difficult on a blockchain and technology-based solutions need to be developed to bring smart contracts in line with data regulations.

    Fourth, a smart contract’s inherent security is undermined if there is a bug in the code. In 2016, the Decentralised Autonomous Organisation (DAO) hacking attack resulted in the loss of 15% of all Ether in circulation at that time (3.6 million Ether). To prevent more funds from being lost, a “soft-fork” proposal was put forward which essentially froze assets and prevented Ether from moving out of the DAO. In this case, the fork approach was a one-time fix to this particular vulnerability. To improve security in smart contracts, several tech companies are developing security infrastructure to prevent similar DAO incidences. For instance, Quantstamp is developing a security-auditing protocol which enables peer-submitted verification software and “Bug Finders”. However, this labour intensive idea undermines the speed and efficiencies of blockchain. With any code, it can be argued that bugs are inevitable due to human error. Until scalable security can be guaranteed, smart contracts could create unnecessary risk and liability issues for firms.

    Future

    Regardless of the aforementioned considerations, the blockchain craze within the legal industry does not seem to be slowing down. In fact, firms are increasingly exploring the application of blockchain so as not to lose innovation points in a highly competitive environment. While smart contracts have the power to cut lawyers out of the picture, firms could remain relevant by evolving their services.

    Smart contracts cannot be drafted without the legal knowledge which underpin legal compliance. Regulations would need to be considered to ensure coded contracts can be performed. Legal drafting would still be required before contracts can be made into code. Lawyers would also need to identify and carve out clauses of a contract which require greater flexibility and human interpretation, such as force majeure events. As a result, the legal profession might move towards a more advisory role, focussing on value-added services which require creativity and innovative thinking. Moreover, establishing strong client relationships cannot be automated and lawyers will remain paramount in managing clients and their individual requests.

    Conclusion

    Blockchain could very well be the long-awaited disruption to the largely stagnant legal industry. It is argued that the use of blockchain could consolidate legal services and erode firms’ margins as services could be delivered at a fifth of current costs. In line with Richard Susskind’s predictions, the commodification of legal services could be executed through disruptive blockchain applications such as Dapps which facilitate commercial smart contracts without the need for law firms. In a “more-for-less” future, ignoring blockchain is likely to be corporate suicide and law firms should innovate or risk irrelevance.

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    Introduction

    Kaveesha is a member of TCLA’s writing team. She recently completed her LLM in Intellectual Property Law at Queen Mary, University of London.

    You can reach out to Kaveesha in our forums by clicking here.

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    Introduction

    The principle of “swadeshi” (self-reliance, self-sovereignty) was pioneered by Ghandi and fueled the Indian independence movement against British colonisers. Fast forward seven decades and India’s need to assert its own power, autonomy and identity seems to have found a permanent home in the authorities regulating the country’s legal market. Indeed, the recent Indian Supreme court ruling confirmed the current “fly-in” “fly- out” rule, which is a restriction imposed on foreign lawyers who can only visit India (on a casual basis) when advising domestic lawyers or clients on foreign law and international cases.

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    Ginevra Bizzarri, TCLA Writer

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    Many are left scratching their heads as they observe how this protectionist decision stands in stark contrast with the economic liberalisation that the rest of the country’s sectors have been undergoing since 1991, when India opened up to the capitalist world, welcoming competition, international trade, foreign money and foreign businesses.

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    Title Author

    Before I get all analytical on the importance of this topic, I thought I’d give a brief recap of the story. However, because this debate has been troubling all interested parties for over two decades, you readers will have to bear with many complicated twists and turns, so brace yourself.

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    A Brief Recap

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    1995-2009

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    Once upon a time (actually in 1995), law firms such as White & Case and Ashurst were undisturbedly working in India under the blessing of the RBI (Reserve Bank of India) who had allowed them to set up liaison offices in the country. Unfortunately, (most) good things come to an end and in 1995 a professional organisation called Lawyers Collective decided to play the bad guys. The organisation claimed that international law firms were infringing the law imposed by the Advocates Act 1961, which prohibits non-Indian citizens without the relevant qualifications from “practicing law” in the country. They were also outraged by the fact that foreign firms set themselves up as “liaison offices” only in name whilst they were actually conducting business in the country. This was a problem because a liaison office is technically only allowed to act as a channel of communication and as such cannot undertake any direct or indirect commercial, trading or industrial activity. So, you can see why Lawyers Collective might have felt cheated.

    The case was brought before and heard by the Bombay High Court (BHC) who decided that Indian advocates were, in fact, the only ones entitled to “practice law”. They defined the practice of law as “giving legal advice as attorney, drafting, drawing legal documents or advising clients on the international standards and customary practice relating to their transactions” …exactly what the foreign lawyers were (without permission!) also doing.

    Therefore, on 9 October 1995 the court gave an interim order* in favour of Lawyers Collective.
    So that was the end of fun for international law firms who, understandably unhappy with the outcome, appealed to the Supreme Court in the following year (1996). However, the Supreme Court decided it had more important issues to deal with and sent the case right back to the BHC for a “quick decision”. The BHC probably didn’t get the memo and only chose to hear the case after it had been festering there for 13 years. Funnily enough, the court took all this thinking time only to reaffirm in 2009 that foreign law firm offices and lawyers were unlawful because the only class of persons allowed to “practice law” were the Indian advocates enrolled on the Indian Bar Council. The BHC ruled that this decision applied to both contentious and transactional work.

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    2012-2018

    So the BHC had apparently banned all foreign law firms and foreign lawyers from practicing law the country. The reason I say apparently is because the court forgot to mention whether “practice of law” also included non-Indian law transactional work and also forgot deal with any indirect methods through which foreign law firms could work on India-based transactions. And because the law is made to be tip-toed around (all within reason, of course), this meant that referral arrangements and “best friend” agreements were still technically on the table. International firms wasted no time and within a few months of the decision, Ashurst decided to enter in a best friends agreement with a Delhi based Indian law firm.

    Just as foreign law firms had started to think that they had smugly circumvented the new regulations, a lawyer from Tamil Nadu, who goes by the name of A.K Balaji, filed a petition before the Madras High Court (MHC) against 31 foreign law firms and their right to practice any sort of law in India. Thankfully (for foreign law firms), the MHC turned out to be more lenient than the BHC and in February 2012, it ruled foreign lawyers could visit India on a temporary “fly in- fly out” basis to advise clients on foreign law and international legal issues . The Court also decided to allow international lawyers to act in commercial arbitrations*, which if you ask me was a pretty commonsensical decision considering the government’s intentions to make India an international arbitration hub.

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    Term Definition
    Interim order an order given by the court which is temporary and not final but which is nevertheless fully enforceable unless changed by a final order
    Commercial arbitrations A means of settling disputes by referring them to a neutral person, an arbitrator, selected by the parties for a decision based on the evidence and arguments presented to the arbitration tribunal. The parties agree in advance that the decision will be accepted as final and binding.
    Demonetisation of banknotes The act of stripping a currency unit of its status as legal coin or banknote. The current form or forms of money are pulled out from circulation and retired, often to be relted
    Indirect Tax A tax levied on goods and services rather than on income or profits. (in India this tax is known as the Goods and Services Tax or GSTI.
    Referral arrangements Any situation where a lawyer receives business from, or refers business to a third party.

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    Unfortunately and unsurprisingly, this concession did not go down well with everyone and as soon as the decision was out, India’s top regulator, the Bar Council of India (BCI) re- appealed the case to the Supreme Court where it was left pending until this year.

    Although some say that the ruling dispensed by the Supreme Court this March merely reconfirmed the status quo, it could be argued that it actually made entry for foreign law firms even tougher because it specified that “fly in “and “fly out” visits could not be regular (as this would amount to “practice of law”, which as discussed before is prohibited by the Advocates Act 1961). It also ruled that the BCI should establish the code of conduct and make specific rules for what international lawyers are permitted to do in the country. Overall, it seems like Indian authorities can’t take a step forwards without taking two steps back, and firms such as Clifford Chance, Norton Rose and Bird and Bird who attended the hearing, all went home feeling disgruntled.

    So, this is the story for now. Most of you are probably wondering why bother entering India if it is such a hassle right? Can’t firms just go elsewhere? Also, why are authorities such as the BCI, or the Courts so against the entry of international lawyers? Essentially…

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    Why is the Indian market so attractive?

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    In 2015, India was named the 7th largest economy in the world and US government projections believe it will step up on the podium by 2029, surpassing Japan and becoming the 3rd largest economy at market exchange rates. Most importantly for businesses, India has a growing population of 1.3 billion and a very young median age (of around 28). A young median age is good for the economy because it creates a large working age population so the government must support fewer retired people.

    So, to make this simple: more people working = more money into the economy = a more attractive environment for businesses to invest in = a lot of work for lawyers who have to facilitate this new economic activity.

    However, India does not just have demographics on its side: the prime minister Narendra Modi and central banker Raghuran Rajan have played a big part in making the country’s macro-environment appealing to investors. The dynamic duo is not afraid to take a stance and in 2016 Mr. Modi demonetised* two large-denomination banknotes in an attempt to move towards a clean and taxpaying digital economy. Furthermore, with the aim of simplifying the tax system and boosting revenues, last summer the prime minister also implemented a national goods and services tax, an indirect tax* for the whole economy.

    On the other hand, foreign investors admire the discipline of Raghuran Rajan’s monetary policy. The central banker is focused on keeping interest rates down, inflation under control and the rupee stable.
    Overall, it seems that their tenacity has paid off as this year the value of M&A in the country hit an all-time-high, with $99bn of deals being completed from January until now. To put it in perspective for you , M&A deal value increased by 37% from last year where for the whole of 2017, deal value only reached $62bn. This euphoria has infected all economic activities: indeed, the record breaking inbound and domestic acquisitions were matched by an equally impressive level of outbound transactions, which has not been this high since 2010.

    As India moves towards full urbanization, sectors such as healthcare and technology are developing at a monstrous pace. For instance, in a bid to transform India into a country of “job creators and not job seekers”, Mr. Modi initiated “Startup India”, a government-backed platform aimed at stimulating the tech sector which offers tax exemptions and state funding (up to 1.5bn) to startups. Again, these reforms seem to be working: India is now 3rd on the global list for tech-driven startups, just behind the UK and US. It is estimated that by 2020 there will be over 2,100 tech startups in the country.

    These changes have not gone unnoticed by the world’s biggest corporates, who have started to pour in billions of dollars into this fast-growing sector, leading to some mouthwatering deals for lawyers.
    For example, in May, US retail giant Walmart invested $16 billion to buy a majority stake in Flipkart, a huge Indian e-commerce company which rivals the likes of Amazon. The FT described this as “easily the world’s biggest e-commerce buyout”. Flipkart’s expansion probably alarmed Amazon who already committed $5 billion to the market. Indeed, Amazon is keen to take up a dominant position in India, especially after it saw its dreams turn to dust in China where Alibaba took 1st place. Jeff Bezos recently claimed to be “impressed and energized by optimism and invention in India”, a country in which he looks to “keep investing and growing”.

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    Of course, if we are talking tech we are also talking Softbank (the world’s biggest tech-oriented, private equity fund), who, over the last year and a half, invested around $10billion in Indian tech companies such as PayTM and Ola (Uber’s rival).

    Now, you can see why foreign firms are so desperate to find a way in: this deal frenzy creates heaps of work for lawyers who can assist both foreign and domestic companies in corporate matters involving mergers and acquisitions, project finance, competition etc.

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    Just take a moment to picture how frustrating this situation must be for foreign lawyers. It’s like having a luscious chocolate cake in front of you which keeps getting bigger, yet you are only able to look at it.

    I imagine most of you readers are children of capitalism and as such have grown up in economically liberal, market-driven societies. If this is the case, surely you have been told time and time again, that competition is good because it promotes productivity and economic growth. This all seems to make sense. So, when in March the Indian authorities (once again) slammed the doors in the face of foreign firms, the inevitable question arises:

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    Why don’t Indian authorities want to allow the liberalisation of the legal market?

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    Well, numerous justifications have been given; some, arguably more compelling than others. Not very credible is the statement given by Lalit Bhasin , president of SILF (Society of Indian Law Firms), an interest group who represents India’s elite law firms and who is the most vociferous opponent to liberalisation.

    Bhasin claimed that due to its “noble nature”, the legal profession “is not a business” and “should not be vulgarized” by being “put up for sale”. The truth is India’s biggest firms are scared they will lose the monopoly they currently exercise as their share of the market gets taken up by bigger, more efficient and more experienced international law firms. This scenario happened in Germany where British firms entered the market and within two years, Germany’s top firms had been forced to merge with UK rivals. At the time, only Hengeler Mueller retained its independent status and brand name.

    Slightly more understandable is the fear that international firms may use their size to lower prices of legal services, thereby pushing Indian law firms outside of the market.

    Another valid reason often invoked by Indian regulators when justifying their decision is that the severe restriction framework under which Indian aw firms currently operate, places them at a disadvantage with their foreign counterparts. For example, until recently Indian partnership law dictated that each law firm could not have more than twenty partners. Even if now the law has changed, local firms still have a lot of ground to make up for. For instance, in a survey published last year, the average revenue made by the biggest Indian law firms was around 15 million, whilst the Indian firm with the highest amount of partners was Khaitan & Co, with 104 partners. If we think that Latham & Watkins in 2018 reported revenues of $3 BILLION and that giants like DLA Piper count over 1300 partners across the globe we can begin to understand why Indian lawyers feel so threatened.

    This leaves us wondering: can the general quality of legal services really improve if entry to foreigners were to be granted, or is this just a suicide mission? Is there a possible win-win scenario in which Indian businesses can also benefit or is this a zero-sum game? Let’s see.

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    Assessing the views

    First of all, it is important to clarify that Indian law firms are not the small and inexperienced family run businesses that used to dominate the legal sector in the early and mid 1900s. It would have been understandable to consider domestic lawyers unskilled in the 1980s, when India had little to no exposure to cross-border transactions due to the restrictions imposed on its economy. Indeed, there is no doubt that in that scenario skilled international firms and lawyers would have leveraged their superior expertise to put them out of business. However, time changes things and, as the global economy continues to evolve, the Indian legal sector has realised it must evolve with it. In 2018, India flaunts more than 150 law firms who work for the world’s biggest corporates. For example, in 2015 Trilegal did 60% of its business with companies like Heineken, Microsoft, Mistubishi, Vodafone and BP and coordinated the work from various offices across the country.

    Furthermore, the myth that there will be no more work for domestic lawyers must be dispelled. Actually, it is quite the opposite. The author of “The Indian Legal Profession in the Age of Globalization” rightly points out that the complex PESTL (political, economic, social, technological and legislative) environment which characterizes India will ensure that “there will always be a place for local knowledge and expertise”. This makes sense if we think about it: why would foreign firms want to pay more and send expatriate lawyers to India? Indian lawyers represent an expense-free option and also come with the cultural package which allows them to better understand and operate in the domestic market. In even greater demand right now are dual-qualified lawyers, who can work both in India and abroad.

    What about the clients? At the end of the day, law firms are service providers who have to provide clients the best possible service, and liberalising the legal market would do just that. Logistically speaking, it would be more convenient if law firms and lawyers could offer a single city and time zone to clients. As it stands, Indian clients who wish to receive advice from international lawyers have to hire them from firms based in New York, London, or, more commonly, Singapore.

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    Liberalising the market would not just avoid messing up the sleeping patterns of those working on cross-border transactions, but it would also ultimately ensure that clients get the best possible service. Why? Because by admitting foreign lawyers, Indian regulators would also be admitting their expertise and international best practices, giving locals the chance to observe, learn, and eventually imitate them. With time, the system would become more robust and encourage even more domestic and foreign investment in the country.

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    If some of you are still skeptical, just think of the UK! In this country, anyone in possession of the required qualifications is entitled to practice law, regardless of their nationality. It is also no secret that the UK keeps attracting and retaining the best and brightest. You readers out of all people should know this! How many times, when applying, have you encountered statistics as depressing as this one: “we receive over 2000 applications a year, and offer 45 training contracts vacancies”? I thought so. So, if anything, liberalising India’s legal market would make the competition slightly less fierce and the prospect of applying slightly less terrifying.

    Lastly, we also have to entertain the possibility that this fear could just be overhyped. If and when the market liberalizes, the invasion of foreign firms is not a given. It is actually arguable that most might be initially weary of establishing a direct presence in a market which has often second-guessed its decisions in the past. Foreign practitioners fear that in India could wake up lawyers one day and unemployed the next.

    So…

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    How are foreign lawyers currently operating in India?

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    a) India Practice Groups in foreign offices

    Most global players today coordinate their India-related transactions from their offices in Singapore, Hong Kong, London or New York. For example, the “Singapore solution” seems to be the preferred one by firms; the country’s proximity to India, its common law background and sophisticated dispute resolution system make it a golden location for foreign firms who coordinate all their India-related work from there.

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    These groups tend to be headed by Indian law experts, whose firms often recruit straight from Indian law schools. Having India Groups or India Desks enables firms to establish and familiarize themselves with this difficult market, and also gives them a head start which would come in very handy if the market were to liberalise. However, setting up these sort of arrangements might not be very cost-friendly as it is more expensive to hire and train Indian graduates as opposed to hiring an Indian law firm to directly work on the part of the transaction involving Indian Law.

    b) “Best Friends” Agreements

    Under such agreements, both firms agree to exclusively refer* work to each other when such work involves Indian related matters or vice versa. It is thought that in the event of liberalisation, these agreements would quickly turn into mergers between foreign and domestic law firms. However, these arrangements do not have a great track record. Back in 2009, Clifford Chance tied itself up with AZB & Partners (one of India’s “big”) and in 2011 they had already parted ways. The problem with these agreements is their exclusivity; by promising themselves to one another, both international and Indian law firms do not stand to gain much in terms of business opportunities and client exposure. Also, they don’t always work efficiently. To illustrate, when in 2010 year Bharti Airtel put out a takeover bid of 10.7billion for African business Zain, AZB failed to refer CC. This resulted in AZB acting on behalf of Bharti Airtel, but the international side of the deal was steered by Linklaters and HSF. Similarly, Clyde-Co had to drop their Best Friend agreement with ALMT Legal as it was disappointed with the lack of referrals it received.

    Failures of such arrangements should have taught foreign law firms that partnering up with an Indian law firm just to gain access to more legal work makes no sense. What would make sense are non-exclusive “inter-practice” as opposed to exclusive “inter-firm” arrangements. For example, if firm X in Washington has Indian clients looking to complete M&A transactions in India, it would identify Y firm in India with a strong M&A practice and partner up with it. On the other hand, when dealing with litigation, X firm would look for better expertise elsewhere.

    c) Fly In, Fly Out

    Essentially, the arrangement which was discussed before and allows foreign lawyers to fly into India only on a “casual” basis when advising domestic lawyers and businesses on foreign law. However, although it is always better to build trusted relationships in person, law firms also keep an eye out for their expenses. If they were to fly off their lawyers to expensive hotels in India every time it was needed, their finances would take a hit. Thus, they tend to stick with India practice groups.

    Alternative initiatives which have been discussed include joint ventures or. The Indian Government could allow international firms to enter the market by setting up JVs with Indian firms. However, even if joint ventures or independent offices were allowed, it would still be unclear what kind of law the JV would practice (ie Indian law or foreign law), whether it would be able to engage in litigation and whether the local firm in the JLV would be able to retain its separate legal entity.

    Lastly, a reciprocal arrangement where India and common law countries, such as the UK, agree a cross-country partnership could also be logical. This would ensure equal opportunities and allow for synergies to develop between two systems.

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    Conclusion

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    A recurring sentiment which has, for some time now, found a home in the words of Indian economists and politicians is one that voices the need for the country to “take its rightful place in the world”. However, capitalism is driven by the notion of “exchanging” and it therefore makes logical sense that if the Indian legal sector puts 0 in, it cannot get 1 back. At the end of the day, international law firms are missing out on a lot of interesting work, but the real losers are the Indian lawyers and law firms. Unless the regime is appropriately liberalised, the legal market will not be able to develop to the extent that it could and should for the sake of both businesses and individuals.

    Most importantly, this debate also carries a lot of weight on the ideological level and as such it merits attention.
    In a time which is becoming increasingly characterized by the concept of walls and fear of outsiders, India should not try and protect itself by keeping people out, rather it should revive the ideals of liberalism that the rest of the world seems to have forgotten. In one of its most recent publications, The Economist rightly accused the world of having lost its “hunger for reform” and of “slowly allowing the competitive spirit of meritocracy, and the principles of efficiency and economic freedom to erode”. It is important to be aware of this situation because, like Jenna Rink quite rightly said in 13 going on 30 (apologies to the majority of the male readership who won’t get this reference ): “we need to remember what used to be good. If we don’t we won’t recognize it, even if it hits us right between the eyes”.

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    Ginny is a member of TCLA’s writing team. She is Italian, having lived in Milan until the age of 16. Ginny recently completed a Combined Honours in Social Sciences at Durham University and she begins the GDL in September 2018.

    You can reach out to Ginny in our forums by clicking here.

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    Unless you live under a rock, you have probably become aware of the dockless scooter revolution. Powered, dockless, and almighty, the kick scooters most of us have filed under “kids’ toys” are making a comeback as an adult-appropriate solution.

    Their rising popularity in the United States has led a multiple cities to launch pilot programmes with a number of dockless scooter providers in a bid to control how scooter-sharing operates within their boundaries.

    Recently, the scooter-craze landed in Europe – the scooter giants, Bird and Lime, dropped their electric scooters in the City of Light. Yet, there’s a glaring omission in the list of European cities embracing scooting: London.

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    WHY IS LONDON SCOOTER-LESS?

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    There are very specific reasons why electric kick scooters have not been deployed in London. According to an information sheet released by the British government, “powered mini scooters”, such as Go-Peds, fall under the category of “Powered Transporters”. Any type of powered transporter can be ridden on private property. Yet, in order for the swift two-wheeled vehicles to be driven on public roads, a registration with the Driver and Vehicle Licensing Agency (DVLA) is required. For this to be accomplished, the scooter’s owner needs to show a proof of type approval. For the requisite approval to be secured, one needs to pass the Motorcycle Single Vehicle Approval – on top of it being a relatively burdensome process, the classic Bird-like scooters stand virtually no chance of qualifying. As relevant case law shows, a Go-Ped-like scooter would not adhere to the road traffic legislation relating to minor vehicles – “inadequate steering and no basic services normally associated to a motor vehicle such as lights, suspension, clutch or controls to enable a rider to control the machine properly”.

    Take-away: It is virtually impossible to acquire a permit to use a motorised scooter on public roads.

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    WHO’S AFRAID OF DOCKLESS SCOOTERS?

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    The British capital has taken bold steps towards modernising urban mobility: Theresa May has pledged vast sums for building electric charging infrastructure across the United Kingdom; furthermore, the “Future of Mobility” has decisively taken one of the four spots on the “Grand Challenges” set, a list that defines the industrial challenges that the UK needs to address in order to remain at the forefront of the future developments. Locally, London’s Mayor has been very vocal about decongesting the city centre and saving Londoners from the extremely high levels of pollution in the capital, going as far as promising a ban on internal combustion engines in some areas.

    Admittedly, for a City that boasts the largest cycle hire scheme in Europe, London has been very slow to embrace new developments in dockless urban mobility. Bird and Lime have already deployed their scooters in Paris, a city with a much denser underground railway system than London, but have not announced any plans of deploying in London anytime soon.

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    ACCESSIBILITY AND CONGESTION

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    Fundamentally, the addition of dockless scooters to the mix of options available to Londoners will help decongest the centre. According to Moovit, the average distance commuters travel using public transit is 8.9km. Although e-scooter data from London is obviously not available, Bloomberg says the average distance travelled on e-scooters in San Francisco is 2.4km (1.5 miles). As data from the Department of Transport reveals, approximately a quarter of taxi rides (this includes black cabs and other private-hire-vehicles) are under 3.2km (2 miles), and another 50 percent includes trips ranging from 3.2 – 8km (2-5 miles).

    Evidently, a very large part of all black cab / Private-Hire-Vehicles (PHV) trips can be completed using e-scooters. The choice of a cab/PHV instead of public transit could suggest that some travellers value the on-demand nature of a PHV (time-saving aspect), are unable to access public transit easily (due to location or time – the Tube is not open 24/7), or prefer the convenience of a chauffeured vehicle. Out of these groups of travellers, some would arguably switch to a lower cost, yet similarly fast means of moving around, thus removing another car from the busy streets of the British capital.

    Moreover, despite its effectiveness, the London Underground system (the Tube) is not perfect. People living south of the Thames, for example, only have access to approximately 30 Tube stations – a stark contrast with the over 250 stations north of Thames. This creates a big gap (and a great opportunity for dockless mobility providers) in areas like Bermondsey, where the nearest Tube station or bus stop may be a long walk away from one’s home. At the moment, people living in under-serviced areas may choose to forego using public transit for some/all of their trips altogether, and instead, choose to cab/Uber to their final destination. E-scooters could bridge the distance to the nearest Tube station/Bus stop, thus decongesting the streets and creating a new revenue stream for the local transportation authority, Transport for London.

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    MISSING OUT ON DATA FROM SCOOTER PROVIDERS

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    The other side of the dockless mobility coin is data collection. The operators of dockless bike-sharing and dockless scooter-sharing scheme gain access to a tremendous amount of data. Such data includes, among other things, the pick-up location, the average speed of the journey, and the drop-off location; In combination with the demographics of the population using the dockless vehicles in each case, access to this real-time, valuable information can help cities make informed, public policy decisions.

    As the urban centres are destined to be reshaped, the availability of relevant data is fundamental in guiding such reshaping. As autonomous driving companies, including Waymo, Drive.ai, and the British FiveAI, gear up to offer autonomous shuttle service, data from scooter providers can help reveal weak spots in the current transit system, for example – this could help take a more targeted approach in covering “gaps” in London.

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    LACK OF RELEVANT REGULATION

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    As Liam Lawless, Director of Sales at Inokim UK told the Wired, he has been using an electric scooter in London regularly but has never been pulled over by the police. Although a sample size of one is not to be trusted (statistically, at least), there are other signs that there is a market for e-scooters that is starting to boom in the dark – Lawless says he sold 34 scooters within a period of two weeks.

    This lack of relevant legislation paired with a “blind eyeattitude by the Metropolitan Police poses another threat. Primarily, it allows reckless behaviours to go unnoticed, unpunished, and eventually, become habits. If a scooter rider knows they will not be punished for driving their e-scooter on public roads, it seems unlikely they would fear being fined for riding that scooter without a helmet, for example. The legislation is obviously unclear on the issue: as e-scooters are banned from being used on public streets, there is no clear guidance on whether a helmet needs to be used. Additionally, the lack of relevant legislation makes it impossible to regulate the design of these e-scooters. Should they carry turn signals, headlamps, helmet holders? Amid the absence of a comprehensive regulatory framework, importers of e-scooters can sell any products freely.

    Secondarily, as e-scooting starts growing in secrecy, the City of London loses a potential strategic advantage. At the moment, the City of London could stipulate any conditions in a pilot programme agreement and any interested parties would likely agree – London is a hot market and largely seen as impenetrable at the moment. If the “black market” of scooting grows, a scooter provider could drop its scooters without informing the City (in Uber-like fashion), thus creating momentum behind scooter use and weakening the City’s position. Alternatively, if this situation, which prevents scooter providers from launching in London, continues, Londoners interested in scooting may choose to invest in their own e-scooters, thus decreasing the potential demand for a scooter-sharing scheme. Admittedly, London is a populous city, so it is unlikely that demand would ever be low enough – but it is still a possibility, if the current situation drags on for too long. Scooters, after all, are not as bulky as bicycles, so the relative advantages of shared bikes as opposed to personal bikes (e.g. not having to park/store the bike after every trip) are not necessarily applicable, in the case of the much smaller scooters.

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    IS IT TIME TO REEVALUATE?

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    London wants to be at the forefront of modern urban mobility. If this modernisation will have any meaningful effect for Londoners, the City needs to stop exclusively focusing on the transition from fossil fuels to electricity. Instead, Transport for London needs to consider new solutions that are not just fuel-efficient, but also space-efficient: e-scooters may just be the solution Londoners need.

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    Andrew Kyprianides is a Cyprus-born individual who completed his Law degree at King’s College London in 2015. After graduating from a Master’s in Public Policy at Harvard University in 2018, he decided to focus on a rapidly changing part of the commercial world: mobility. Through his website, themobility.club, Andrew explores the developments in all things directly or indirectly related to mobility – autonomous vehicles, first/last-mile transportation solutions, AI, Waymo, Cruise, Tesla, curb space data, patents, regulation, and city planning, among other things. 

    themobility.club
    themobility.club is a platform which allows readers to stay in touch with the latest mobility-related developments in various ways: the integrated Twitter feed provides instant updates on what is happening at the moment, the Daily articles provide an overview of what happened throughout the day, and the in-depth Spotlight articles allow a deeper understanding of the latest headlines. The weekly newsletter of themobility.club offers a quick way to stay in touch with the most important news of the week.

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    Understanding UK Ringfencing

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    What is ring-fencing and why is it happening?

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    Following the 2008 Financial Crisis, the UK Government established the Independent Commission on Banking (ICB) chaired by Sir John Vickers which proposed several measures to tackle the idea that banks were “too big to fail” and prevent the costs of banks failing falling on taxpayers.

    The ICB proposals were implemented through the Financial Services (Banking) Reform Act 2013 and are known as ring-fencing. Ring-fencing separates and protects core retail services from other activities such as investment and international banking.

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    Estelle Kadjo

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    Estelle Kadjo
    TCLA Writer

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    Many banking groups offer a wide range of services including payments processing, corporate lending, mortgage lending, trading in financial markets, and retail banking for individuals and businesses. The risks associated with these activities vary significantly and ring-fencing is designed to separate vital banking functions from potentially more volatile business activities such as investment and international banking.

    By 1 January 2019, banking groups must reclassify services; those inside the ring-fence will be administered through Ring-fenced Bodies (RFBs), and those outside through Non-Ring-fenced Bodies (NRFBs). NRFBs will house the more volatile business activities so that if they run into trouble, those entities can be wound down by regulators without affecting other retail banking services.

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    Who will be affected?

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    Ring-fencing will affect a range of market players including the banks, consumers, and businesses and corporates.

    Banks
    Implementing the ring-fencing requirements is a complex and costly task “spanning legal, operational, governance, technological and management issues” as pointed out by Marcus Hughes, Director of Business Development at Bottomline Technologies. HSBC estimated the cost of ring-fencing at £2.5bn and Barclays reportedly spent more than £1bn to satisfy the requirements. As ring-fencing requires the separation of core banking retail services from other volatile activities, many banking groups established new separate legal entities to provide those services. For instance, HSBC announced that HSBC UK is its RFB, RBS rebranded NatWest Markets for its NRFB, and Barclays UK will offer day-to-day products and services to individuals and businesses (with a turnover of less than £6.5m).

    Consumers

    Many consumers must have their sort codes changed to satisfy ring-fencing and the Bank of England estimates that over one million customers could be required to change their sort codes. New sort codes also mean that customers’ International Bank Account Number (IBAN) will change. Ring-fencing has led to customers experiencing restricted access to online, phone and mobile banking services over the course of several months as banks implemented the changes. The disruption is likely to continue and affect day-to-day retail activities as new group structures and ways of operating are introduced. More significantly, Stuart Gulliver, former CEO at HSBC argued that the ring-fencing rules will trigger a surge in fraud widely affecting customers. Currently, millions of customers across the UK are being contacted about changes to their bank account details and this creates opportunities for fraudsters to persuade consumers to reveal their credentials by posing as a bank and making fraudulent payments.

    Businesses and corporates

    Businesses and corporates are likely to deal with both RFBs and NRFBs as they offer simple derivatives, deposit-taking, lending, payments processing and trade finance. These activities can sit on either side of the ring-fence. This will further complicate the relationships between banking groups and their clients as businesses and corporates must deal with both RFBs and NRFBs after the 2019 deadline.

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    Is ring-fencing necessary?

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    The collapse of Lehman Brothers and Fortis Bank in 2008, the run on Northern Rock in 2007 and the support packages offered to Lloyds Banking Group after its acquisition of HBOS and the Royal Bank of Scotland exposed the fragility of the global banking system. The Crisis demonstrated that banks could fail, therefore much stronger foundations were required to support them.

    However, ten years post-Crisis a multitude of financial reforms have been introduced including MiFID II, Basel III and IV, and the FCA changes to LIBOR. Pauline Lambert, Analyst at Scope argues that the recovery frameworks adopted on a global scale have “enhanced the safety and sustainability of the UK banking sector compared to the pre-crisis period”. Therefore, ring-fencing may be less necessary in 2018 as there are several mechanisms in place to ensure that banks are better able to absorb shocks. Her argument is supported by Wilson Ervin who believes that ring-fencing will increase by 5 times or even 15 the likelihood of banks failing as there will be less capital and liquidity flowing through the new banking group structures.

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    Conclusion

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    The UK banking system is undergoing a significant restructuring due to the ring-fencing requirements. The change will affect the banking groups, consumers, businesses and corporates. Ring-fencing is a crucial response to the Financial Crisis as it aims to dispel the myth that banks are ‘too big to fail’. However, considering the multitude of financial reforms adopted post-Crisis, ring-fencing may be less necessary.

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    Introduction

    Estelle is a member of TCLA’s writing team. She graduated from the University of Bristol in 2016 with a Law degree. She now works as a Banking and Finance paralegal at Addleshaw Goddard LLP, while studying the Legal Practice Course (LPC) LLM part-time study programme at BPP Law School.

    You can reach out to Estelle in our forums by clicking here.

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