Can Herbies succeed in Singapore without the QFLP?

Why has Herbert Smith Freehills (HSF) decided to walk away from the Singapore qualifying foreign law practice (QFLP) scheme? 

Singapore’s Ministry of Law (MinLaw) last week announced the highly anticipated results of the renewal process to extend the six qualifying foreign law practice (QFLP) licences it first granted in 2008 (28 February 2014). The most surprising part of the announcement was that HSF would not be renewing its QFLP licence when it expires at the end of October this year. It is the only firm out of the six licencees to opt out.

So what was the thinking process leading the firm to go down this road?

There are several popular theories among the legal community in Singapore. In the first possible scenario, some international lawyers suspect that HSF’s management anticipated it would be difficult for the firm to get its renewal as it failed to meet the headcount and revenue requirements by the MinLaw. Consequently it decided not to re-apply.

“I’d be very surprised if any firm didn’t want to try to renew the licence,” says a sceptical lawyer in Singapore.

Take White & Case as an example. The firm has applied for the renewal but has been given only a one-year conditional licence. This suggests the thresholds, criteria, requirements and anticipations by the MinLaw for the extension are high.

According to the MinLaw, over the five-year period from 2009 to 2014 the first group of six QFLPs collectively generated S$1.2bn (£566.5m) in total revenue. The six QFLPs also currently employ more than 100 Singapore-qualified lawyers.

This means the average annual revenue for a QFLP was around £19m and the average number of Singapore-qualified lawyers employed by a QFLP is 16.

HSF currently has 11 partners in Singapore, so each partner needs to bring in £1.7m each year in order to reach the peer average. This amount is 41 per cent higher than DLA Piper’s revenue per partner of £1.2m for 2012/13 and 14 per cent higher than HSF’s revenue per partner of £1.49m in the same financial year. In addition, HSF only has five Singapore-qualified lawyers, less than one third of the average number of 16.

Inevitably, trying to reach the average money figure and number of local lawyer hires has been challenging for HSF.

Another possible scenario is that HSF did apply for renewal but MinLaw rejected its application. But in order to “save face”, an important business culture in Asia, the MinLaw and the firm have agreed to choose a nicer way to word the outcome.

Either way, it doesn’t really paint a bright picture of the firm’s Singapore practice. This adds to a series of partner and lawyer departures the firm has seen over the past year.

The Lawyer has previously reported that the integration of the merged firm’s Singapore office, the only jurisdiction where both legacy firms had an office, didn’t go smoothly (29 November 2013). The bulk of legacy Freehills’ Singapore team walked out, including legacy Freehills’ Singapore managing partner John Dick (21 November 2013).

A number of legacy Herbert Smith partners and lawyers have also recently left the office. Among them, the most senior exit was that of South-East Asia litigation chief Maurice Burke, who is joining Hogan Lovells’ Singapore office as a partner (4 February 2014).

Frankly, whatever the true reasons may be behind HSF’s decision to turn its back to the QFLP scheme, this isn’t great news for the Singapore government either. Singapore has been promoting itself as a pro-business government and pushing for a further opening up of its legal market (16 April 2012). But there have been wide-spread complaints from the international community that the steps taken are baby steps and each new liberalisation measure come with strings attached.

Many international firms regard the QFLP title as a prestigious trophy, a nice to have for marketing but not so useful or critical in practice.

“Most of international firms’ work in Singapore has a regional focus and most deals are cross-border governed by UK or US law, with some involving certain Singapore law elements. Client won’t instruct us because of the QFLP but it’s a bonus when pitching for work,” says one lawyer working in a QFLP firm.

“The process and requirements to obtain a QFLP licence is a lot of work. The effort and input required outstrip the benefits,” says another lawyer, whose firm has no intention to apply for a QFLP.

Currently, only 10 out of 130 foreign firms in Singapore have a QFLP licence. Some thrive without a QFLP.

Baker & McKenzie is a case in point. The firm operates a long-established joint venture with local firm Wong & Leow and is seem as a fully localised practice in Singapore. It has 22 partners and 64 other lawyers in the jurisdictions, larger than some of the QFLP firms such as HSF, Latham & Watkins and White & Case.

But for firms with a focus on funds formation or capital markets, having the capability to provide Singaporean corporate law advice is favourable; hence Linklaters took the plunge and applied for a licence last year (19 February 2013).

Nevertheless, having a QFLP is far from enough to boost a firm’s practices and businesses in Singapore. Its lack of effect can be reflected by Allen & Overy’s attempt to merge with local firm Allen & Gledhill in 2012, which was eventually unsuccessful, as well as Clifford Chance’s move to established a formal law alliance (FLA) with local litigation boutique Cavenagh Law in 2012 (11 December 2012).

It is particularly interesting to read carefully the government’s rationale behind Singapore’s QFLP scheme. Last week’s MinLaw announcement noted that the scheme seeks to support the growth of key economic sectors in Singapore, grow the legal sector and offer additional opportunities for Singapore lawyers. In other words, ’sorry, it is not really designed to make it easier for international firms to grow and make more money out of the country’. 

That said, being able to offer clients Singaporean law services remains to be important for international firms. Herbert Smith Freehills’ Singapore managing partner Michael Walter vows to ensure the firm to provide clients access to Singaporean legal services in a different way. 

“Predominately, the sorts of work we handle are cross-border deals. However, there are often Singaporean law components involved and clients need to have access to Singapore advice from time to time,” says Walter. “But there are alternatives to a QFLP.”

The firm is currently exploring all other options to offer clients access to Singaporean legal services where required on deals, such as forming an FLA or a joint law venture with a local Singaporean firm.

Perhaps, setting up a FLA would be HSF’s best bet for the future. It can have certain control over the quality and management of the local legal services, share up to 33 per cent of the profits with the local outfit and carve out the low-margin local law services from diluting its global profitability.

As in ancient Chinese philosophy, a setback may turn out to be a blessing in disguise.