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Interim Market Report 2011 - Legal Market Commentary

As we reported earlier this year the reforming zeal that was evident in the aftermath of the financial crisis has dissipated. Transforming the governance and regulation of the banks and wider financial services industry is no longer a coordinated global crusade and does not enjoy the political focus it once did. It has increasingly settled into regional and national initiatives. The crisis in this respect may ultimately have been a terrible waste. However, in both the UK and the EU, regulators are acting against a backdrop of a simmering sovereign debt crisis and a banking system that remains fragile. The financial services industry is a significant part of the UK economy and as in most other countries, in spite of the need to reduce the threat posed by their banks, there is little appetite to undermine their competitiveness.

Whilst a universal regulatory environment is out of reach, the pressure on effective governance remains. In the UK this pressure is manifest both in the volume of regulatory initiatives and the intensity of regulatory oversight. The FSA’s tougher stance has become evident. The FSA has increased the number of supervisors and enforcement staff and its approach is more interventionist. ARROW visits have moved to focus on governance mechanisms and the roles played by both executive and non executive directors, board committees and risk management frameworks. Clearly the FSA has a renewed focus on enforcement, having almost tripled the value of fines handed out in 2010.

The new regulatory structure for the UK is emerging. In April the FSA announced an internal reorganisation to help it evolve into its new structure. The Supervision and Risk business units have been replaced with a Prudential Business Unit that, as the Prudential Regulatory Authority (PRA) will become a subsidiary of the Bank of England. It will be responsible for ensuring that individual banks comply with capital adequacy requirements, have sufficient liquidity and spread their risks. A Conduct of Business Unit will become the FSA’s renamed Financial Conduct Authority which will focus on consumer protection and market regulation. The Financial Policy Committee has also recently had its first meeting. As part of the Bank of England it will sit alongside the Monetary Policy Committee and is tasked with advising on the actions needed to keep the whole banking system safe. It is planned that it will have the power to control the supply of credit and to stop asset bubbles developing.

The banks have already been warned that they will be scrutinised more intensely following the introduction of the PRA. This is a move away from simply regulating structures, activities and compliance with procedures.

Not only the banks but the wider financial services industry in the UK is under intense regulatory scrutiny with much new regulation coming into effect in 2012.

It is interesting how the different strands of corporate governance are responding to the regulatory environment. In our experience, legal and compliance recruitment markets are closely linked and both enjoyed a huge increase in demand during 2010. Whereas the compliance recruitment market is still experiencing strong demand, the legal recruitment market, in a similar fashion to other areas of corporate governance, has entered a period where demand is more restrained.

At the start of 2011, what had in 2010 seemed like a return to the boom conditions that existed prior to the financial crisis, developed into a more subdued recruitment market. There was evidence that some areas were still expanding. These included leveraged finance, private banking, credit derivatives, ISDA, corporate M&A, litigation and insurance. Regulatory initiatives also continued to drive demand with regulatory lawyers being recruited into product and transactional teams such as capital markets and banking. There was also demand for lawyers to sit on public policy and strategy teams to prepare for the replacement of the FSA and to consider the potential implications of the Commission on Banking’s recommendations. There was also the sheer volume of regulatory policy that was being generated.

However, not all areas were busy. There was less demand for transactional lawyers, particularly at more senior levels. Many senior roles in larger institutions were being filled internally. The only sign of a consistent demand for senior lawyers was from smaller organisations seeking their first legal counsel. Equity and debt capital markets remained reasonably quiet and demand for regulatory lawyers had seemingly replaced the demand for commercial lawyers, especially in broad in-house counsel roles. Often, employers were looking for a combination of two skill sets such as coupling a regulatory background with lending or commercial contracts.

Redundancies had not been banished either. Some companies were still looking to take out cost and were making redundancies in cases where work was being duplicated. Mergers, takeovers and restructurings were also taking their toll.

A more lasting consequence of the financial crisis is in the restructuring that resulted. this has been effective in bringing legal departments closer to other governance functions such as compliance and risk. The front office functions are also appreciative of lawyers being available earlier, have a better understanding of their requirements and being able to offer not only advice, but solutions. Legal teams staffed by talented, pro-active and intuitive lawyers working closely with the business are becoming a growth model. As such, many in-house lawyers now feel that they are better placed to add value.

The Current Recruitment Market

The current recruitment market is in many respects following the pattern that was set at the start of the year. The major expansion in the number of lawyers employed in the financial services industry is over. Recruitment is now primarily driven by the need to replace lawyers as vacancies become available.

During the second quarter of 2011, although employment in the financial services industry as a whole grew at its fastest pace since 2007, it is clear that confidence dipped in the banking sector. Concerns about economic recovery, the sovereign debt crisis and a drop off in business volumes were all potentially to blame. The utility banks are also making contingencies for the final report of the Commission on Banking later this year. Whilst these are all reasons to potentially stall recruitment decisions, the banks and the wider financial services industry are still spending heavily in response to the immense regulatory pressure they are being subjected to. However, this is not having the same effect on demand for lawyers that it is having for compliance specialists. There was a big push to recruit regulatory lawyers during 2010 and many lawyers employed within the industry are now as a matter of course doing more regulatory work.

Currently it is group legal functions that are providing the biggest demand. Merger activity is resulting in a need for corporate, commercial and regulatory lawyers to deal with pre and post merger issues. There is now also significant demand for lawyers with debt and equity capital markets experience and strong demand for good derivatives lawyers. Demand for finance lawyers remains steady. As in other areas of corporate governance, experience of working for a regulator, particularly the FSA, can be highly desirable.

There is currently an unusual bias in demand for more junior lawyers within financial services with more vacancies at the 1to3 year PQE level and even some at the newly qualified level. The reason is seemingly the result of the recession when private practice reduced the number of trainees. There is now a shortage of junior lawyers with fewer available for secondments from practice as well as less available to move in-house through other routes. Many institutions are disappointed at the quality of recruits that are available and in many instances are having to recruit their second choice candidate. However, it is becoming common for employers to have a preference for capable juniors with demonstrable potential to be trained and developed rather than more experienced lawyers with a narrower skill set. Big firm training has become so specialist that it is difficult to find good well rounded lawyers with the commercial mindset required and as such, financial services groups are now exploring the possibility of recruiting talented lawyers from the smaller firms with broader practice areas.

Many of the current more senior vacancies are for lawyers with very specific skill sets. Rather than looking for transactional experts, they most frequently require lawyers with well developed stakeholder management skills who they can put on management groups and in front of credit committees.

A clear trend is that many financial institutions are looking for lawyers with more than simply technical skills. They are looking for those with potential, who can grow into leadership roles within legal departments or the wider business. They are often looking for the next generation of General Counsel.

Analysis by Sector

Financial Services

Demand from the investment banks has slowed during the course of 2011. At the start of the year demand from previously quiet areas such as credit derivatives, banking litigation and trade finance began to emerge. The US banks who seemingly took longer with their restructuring also began to actively recruit as did a number of the London branches of the smaller European and foreign owned banks.

There is now clearly an element of uncertainty in investment banking as a result of lower trading volumes and depressed revenues. Areas such as equity, fixed income, commodities and currencies are exposed together with the lawyers who now work directly in these front office functions. Some investment banks have reacted to slower trading by making redundancies. It is rather ironic that redundancies have become more likely as a result of their higher cost base caused by increased regulation and higher fixed compensation costs. Whilst we have no reports of legal redundancies, these developments are making the banks concerned cautious about their current recruitment plans and legal departments nervous about recruiting additional staff.

The investment banks who are recruiting are demanding lawyers with experience of structured products, general banking, debt capital markets and derivatives. These are invariably replacement vacancies rather than as a result of an increase in the number of lawyers employed.

The retail banking sector is going through a period of considerable change. There are a number of applications to the FSA for start-up banks. Lloyds Banking Group and RBS are selling off branches and new entrants are setting up both high street and web-based operations. The retail sector recruited strongly in 2010 and has continued to recruit in 2011. Legal departments have grown in response to the level of regulatory change and scrutiny. As a result of a shortage of lawyers with non contentious regulatory experience, commercial litigators with consumer credit and payment protection insurance experience are now also being considered. The retail sector is now offering lawyers secure and interesting work and is attracting lawyers from other sectors who may not have previously considered working within retail banking.

As might be expected, the insurance sector has proven to be counter cyclical to the rest of the financial services industry. The sector did not make significant redundancies during the recession and was not part of the increased demand during 2010. It is now providing a steady flow of vacancies with a significant number of senior positions. Much of the demand is also coming from the diverse number of smaller insurance groups in the City. Corporate, commercial and regulatory lawyers are in most demand, probably in response to the amount of M&A activity the industry has seen.

The investment management sector actively recruited during 2010 and this has continued into 2011. The number of lawyers employed in the sector is increasing the need for lawyers has been for both replacement and new positions. Demand has focused on funds and particularly derivatives lawyers.

Having produced a steady stream of vacancies in the second half of 2010 demand from the private banking/wealth sector has slowed during 2011. Many of the companies in this sector are relatively small and do not employ more than one or two lawyers. To date, head count requirements have focused on more junior positions and for lawyers with broad backgrounds and regulatory experience.

Candidate Availability

Candidate availability has declined and there are fewer lawyers with marketable skills who are immediately available. Employers continue to be conscious of the need to retain their best lawyers and recognise the need to provide them with career and salary incentives to stay. This has reduced the flow of candidates into the recruitment market and it is not unusual for a lawyer with an offer to be counter offered by their existing employer.

Although many are resisting it, employers are having to relax some of the very tight recruitment parameters that they were using during the recession. Generally if a candidate fulfils all the requirements they will potentially have more than one offer. This is resulting in longer recruitment processes. It often takes time for an employer to recognise that they need to reassess their demands when they are not able to secure their first choice candidate.

Within private practice there are still large numbers of lawyers wanting to move in-house, particularly into financial services.
Overseas candidates without UK experience are also being recruited again. Lawyers from Australia and New Zealand are particularly marketable.


Legal teams in the commercial sector remained substantially intact during the course of the recession. Therefore, when the recovery got underway they did not have the same regulatory pressure or the same need to recruit as financial services legal teams. It was not until the final quarter of 2010 that commercial companies started to recruit in numbers, almost 18 months after the recession formally ended. Demand is now being sustained across a wide range of sectors including technology, media and telecoms, energy, retail, FMCG and engineering.

Whilst the removal of headcount freezes is now facilitating the recruitment for vacancies that have often been open for months, if not years, there are also a substantial number of new positions. This is a positive development and constitutes growth in the market. This is being driven by recruitment initiatives at the front end of companies, for example sales and marketing efforts particularly in the UK and EMEA region. There is also significant need for lawyers with a compliance or risk management background to fill a more defensive function. This is the result of developments such as the Bribery Act and existing competition, data protection and data privacy legislation.

Companies are now investing more in retaining their staff, particularly those with larger legal departments. They are facilitating the promotion of lawyers through their departments, something that is easier to do when departments are expanding. They are also offering financial inducements. It is clearly cheaper to retain valued existing staff than increasing costs by recruiting externally.

The skills that are currently in demand include a compliance focus and knowledge of the Bribery Act. This is being driven by senior executives who are concerned about their increased personal liability. As a result of the shortage of expertise in this area commercial litigators with some regulatory experience are also being considered. This is a welcome opportunity for lawyers with contentious backgrounds who often find a closed door to the in-house market. Previous US experience such as FCPA exposure is also welcomed.

In addition to specialist skills, lawyers with industry specific experience who have worked for either leading companies in the sector or the relevant departments within top 20 law firms are the most sought after candidates.

The outlook for in-house lawyers is positive. Increased governance and regulatory requirements for companies and the increasing costs of external legal counsel is currently leaving legal departments with a strong business case.

Headcount requirements in terms of seniority has shifted. During the recession the lower cost of recruiting lawyers from newly qualified to up to 1 year PQE proved attractive. Whilst demand for juniors has fallen, what demand there is has shifted to around the 2 year PQE level.

Qualified lawyers at the 3 to 5 year PQE level are the most sought after. It will become progressively more difficult to fill these positions as the reduced number of lawyers qualifying in 2009 filter through the PQE system.

There are currently more opportunities for senior legal counsel. The challenge is that employers almost invariably want a very close fit in terms of both industry experience and legal experience. This is making it problematic to recruit for these positions and frustrating for lawyers looking to move.

Head of Legal vacancies are now up on the last two years but by historic standards, the number of vacancies still remains low.

Candidate Availability

Candidate availability remains high and no longer reliant on a redundant pool of lawyers. Currently there is little response to generic recruitment advertising but a strong response to specifically advertised roles. There is a significant proportion of non-active job seekers demonstrated by very little response to generic recruitment advertising but a strong response to branded advertised roles.

Lawyers in private practice frequently react to an approach to move in-house. A ‘sweat shop’ culture is returning to some law firms which is further enhancing the draw of the usually better in-house work-life balance.

There is currently a significant number of lawyers looking to move at the 8 year PQE plus level. There are however, few appropriate opportunities, particularly given the precise experience requirements demanded by clients at this level.

Private Practice

In 2011, demand from private practice grew more slowly than we had perhaps anticipated. However since the end of the first quarter demand has picked up. Whereas in 2010 a typical firm may have been recruiting across one or two practice areas, the larger City firms are currently recruiting across multiple disciplines. There has been a particular increase in this for banking, financial services regulatory and corporate lawyers, mirroring the demand in the banking sector. This has included acquisition and leveraged finance, asset finance, white collar crime and litigation and public M&A.

Employers expectations remain but as we reported at the start of the year, firms are now recruiting lawyers who want to specialise, retrain or require further training. Magic and Silver Circle firms are now recruiting high calibre common law candidates from Australia, New Zealand and Canada to satisfy their immediate recruitment needs.

Junior Level

Whilst law firms have continued to recruit at trainee level some of the larger firms are reducing their trainee intakes for 2011 and 2012. This will no doubt impact their ability to grow from the bottom upwards but may well be a pertinent comment on their perception of the future prospects for the wider economy.

Unlike last year, newly qualified lawyers are being retained and there is little demand to recruit them externally. NQ’s remain interested in qualifying into areas such as real estate, employment and IP but often do not realise how difficult it is to secure positions in these departments. Many continue to make the mistake of not taking up positions with their existing firms in the expectation that they will secure a position externally. This remains a rare event. There are few opportunities and intense competition.

Mid Level

There is now a real shortage of highly experienced 3 to 5 year PQE lawyers. This is particularly pronounced in areas such as corporate M&A and leveraged and acquisition finance which, as a consequence of the financial crisis, suffered from redundancies. Given the restrictions on entry level lawyers this shortage is highly likely to continue. Firms trying to recruit at this level remain selective and as a consequence are now recruiting lawyers from overseas.

Senior Level

In practice, the market still remains difficult for lawyers with upwards of 6 years’ PQE who do not have a following or are not seeking partnership or a PSL opportunity.

Partner moves are a regular feature of the recruitment market with high profile moves between the Magic Circle, Silver Circle and US firms.

Partners also continue to move opportunistically, for example to a firm with a higher PEP, less bureaucracy or where they can have more influence. Law firms pay very close attention to how closely aligned a partner’s practice is with their own firm’s strategy.

Candidate Availability

There is currently a steady flow of candidates into the practice recruitment market and lawyers are more readily moving between firms. Reasons include moving to a firm with a better profile in a chosen specialism, moving for career prospects, a better work-life balance or, in the case of a move to a US firm, an increase in salary. There is little incentive to make a lateral move and there is currently a strong incentive for firms to retain their better lawyers. However, many lawyers who move into the recruitment market with the intention of securing a role in-house, by default move to another practice.

Summary / Predictions

Demand in the legal recruitment market is more balanced across financial services, commerce and private practice than it has been for almost three years.

Unemployment amongst lawyers is no longer significantly higher than prior to the recession and, given the perilous state of the economy, that is more than might be reasonably expected. Frustrations remain, most particularly on how rigid employers have become in terms of the experience that they expect of the lawyers they recruit. This fractures the recruitment market into a myriad of smaller markets with consequent shortages of candidates that might otherwise not exist. Early signs that it might be becoming easier for lawyers to move between various sectors of the financial services industry, commerce and different practice areas in law firms is refreshing.

If the legal recruitment market currently has an air of normality about it, the economic environment in which lawyers are working is about as far removed from normal as it has ever been. Even for those with the most optimistic outlook, the simmering sovereign debt crisis in Europe will sooner or later need to be resolved. Unfortunately we have no better idea than anyone else as to how the economic chips will ultimately fall. Muddling through over an extended period of time is probably the most likely scenario. In the UK it is seemingly consistent with the current sub trend growth and declining standards of living. Nobody however, should be under any illusions that their prospects in the recruitment market are not ultimately dependent on the economy.

We should therefore be grateful that even though not as many legal vacancies as we would like are either being generated or filled, for the moment, confidence remains sufficiently high for the wheels of the recruitment market to keep turning. Whilst hardly inspiring, lawyers remain in a better bargaining position than many other groups within the UK employment market.

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