Merrill Lynch this week became the latest in a string of banks to overhaul its relationships with external legal advisers following, in the past 12 months alone, the likes of Royal Bank of Scotland (RBS), ING, Barclays and Standard Chartered.
These reviews are motivated in no small part by a desire to cut costs, but for many it is also about the changing role of in-house counsel and its relationship with a bank’s external advisers.
Allen & Overy banking partner Stephen Gillespie says: “The management of external counsel is a key part of the management of legal risk within a bank. The panel review process is as much geared towards robust risk management as it is towards managing and reducing legal spend. Managing legal spend is an important factor behind panel reviews, but just as important is the enhanced role of general counsels and legal departments within banks and financial institutions, which is in turn driven by concerns driven by corporate government issues stemming from Enron, Andersen and Sarbanes-Oxley.”
In the case of Merrill Lynch, an innovative system has been set up to give the US investment bank greater control over the law firms it instructs on particular deals. It is understood that the electronic system compels staff to instruct firms from a reduced list of preferred advisers, split into sub-groups categorised by the type and value of deals firms have been selected to advise on. Several firms that do not receive regular work from the bank have been excluded from the list.
A source at Merrill Lynch has told The Lawyer: “[The system] will help to filter out frivolous appointments and control legal costs.”
It follows a similar approach to the ongoing review at RBS, being conducted via an online auction. The bank is looking to cut its estimated annual legal spend of £150m by up to 25 per cent. Like Merrill Lynch, RBS has divided all transactional work into lot sizes, with firms bidding on hourly rates for a slot on the £0-£10m, £10-£50m, £50m-£100m and £100m plus panels. RBS has pre-selected firms for particular lots, but is also allowing them to choose a limited number of other lot sizes or areas when posting their bids on the secured website.
RBS’s review has attracted as much criticism as it has interest. One magic circle partner described the auction process as “a blatant cost-cutting exercise”.
A partner at another magic circle firm adds: “RBS has gone about it in completely the wrong way. We might as well be called its office cleaners because the auction process ignores what added value firms can offer.”
Indeed, as revealed by The Lawyer in July, RBS made the unprecedented move of writing to several law firms in a bid to appease them. The letter said: “We continue to value highly our relationships with law firms and recognise the importance of issues such as reciprocity.” (The Lawyer, 21 July).
However, Barclays, which completed an overhaul of its legal panel in June, appears to have been able to both reduce its external legal spend and improve the working relationships with panel firms. A partner at one of Barclays’ relationship firms says: “If anything, I’ve noticed an improvement in the way in which it deals with external lawyers.”
As revealed in The Lawyer last month, ING launched a global panel (The Lawyer, 15 September) to cut costs and allow the general counsel’s department to exert more influence over which firms should advise the bank on deals (see box).
The review was launched in May after Jan Willem Vink, the former managing director of Euronext Amsterdam, joined ING as group general counsel. The handful of firms that made it on to ING’s panel will be required to offer fixed fees, flexible hourly rates and discounts for aborted deals in return for their coveted places.
Meanwhile, Société Générale slashed its legal panel from 24 firms to just 14 (The Lawyer, 17 March), with Denton Wilde Sapte, Herbert Smith, Lovells, Norton Rose and Watson Farley & Williams gaining a place for the first time (see box).
The French bank was hoping to take advantage of the discounted rates offered by preferred suppliers, aiming for 70 per cent of the bank’s legal spend to go to panel firms.
Despite the emphasis on cost-cutting, the magic circle firms at least have yet to feel the pinch following the spate of reviews. Clifford Chance banking partner James Johnson says: “Panel reviews are a fact of life and I don’t think any private practice lawyers have really suffered.”
The burden of reduced legal budgets has fallen on the mid-tier, with several firms facing reduced roles with banking clients post-review. For instance, Addleshaw Goddard failed to secure a place on Barclays’ general advisory panel. Legacy firm Addleshaw Booth & Co had been in the running for a place, but it is understood to have missed out because of concerns at Barclays about the merged entity.
|Bank panel reviews in the past 12 months|
|Bank||Principal legal advisers|
|Barclays||Allen & Overy (A&0), Clifford Chance, DLA, Linklaters, Lovells, Simmons & Simmons, Ashurst Morris Crisp, CMS Cameron McKenna, Sidley Austin Brown & Wood, White & Case (W&C) and Wragge & Co|
|ING||A&O, Clifford Chance, Linklaters, Freshfields Bruckhaus Deringer, Lovells, Sullivan & Cromwell and De Brauw Blackstone Westbroek|
|Merrill Lynch||A&O, Clifford Chance, Linklaters, Freshfields, Shearman & Sterling and Sidley Austin|
|Royal Bank of Scotland (ongoing review)||Addleshaw Goddard, A&O, Ashursts, Berwin Leighton Paisner, Clifford Chance, Camerons, Dentons, DLA, Eversheds, Freshfields, Hammonds, Linklaters, Macfarlanes, Masons, Norton Rose, Pinsents, Richards Butler, SJ Berwin, Slaughters, Stephenson Harwood, Travers Smith Braithwaite, Watson Farley and Wragges|
|Société Générale||A&O, Clifford Chance, Freshfields, Simmons, W&C, Denton Wilde Sapte, Herbert Smith, Lovells, Norton Rose, Gide Loyrette Nouel, Watson Farley|
|Standard Chartered||A&O, Clifford Chance, Linklaters, Lovells, Slaughters|
|Source: The Lawyer|