This discussion took place in November 2021 as part of the
Ahead of the Curves series, in partnership with Stifel Europe. This phase of the programme focuses on a new sunrise for the Professional Services, Health Tech. and Competition & Regulation.
Out of the post-Brexit Big Bang 2.0 (which might not even be that big or bangy) what will emerge? Almost certainly more nimble, agile, dynamic professional sectors within new regulatory frameworks. But how can legacy institutions and organisations get rid of the disadvantages of legacy? What if professional services firms are just money-making businesses like any other?
You can also listen to the podcast interviews which provoked
this discussion here.
We have a large and successful professional services sector in the UK. It continues to provide high-value, good quality jobs and adds £190bn to the economy annually. Across the country, 1 in 14 UK-based workers (2.3 million people) work in financial and related professional services – two-thirds of whom are outside London. Financial services jobs have the second-highest level of productivity, twice as high as the whole-economy average in terms of output per-job.
A variety of factors have contributed to this success. The English legal system, our positioning in the global time zone grid, our higher education system, maybe even an innate sense of “professionalism.” However, the sector hasn’t always been proficient in setting out to governments and the broader public why it’s important to our national wellbeing.
The gradual decline of UK manufacturing is widely lamented but its replacement by the professional services sector is just taken as a given. The professions – who were regarded with suspicion by everyone from Adam Smith, through Bernard Shaw to Margaret Thatcher for their self-interest – are less easily distinguishable from other occupations than was the case even fifty years ago. What do they profess? Many have adapted well post Big Bang and the Financial Crash to service international capital but one of the greatest risks for any successful financial centre is complacency. Europe is littered with cities that were once the leading international centre of their day.
They don’t occupy the pedestal they once did. The deference offered them by previous generations has gone – the doctor has her diagnosis Googled and argued with. The lawyer has his bills haggled with or even forced to accept a contingency fee to ensure he has skin in the game rather than a fixed sum of money for his professional opinion. Is it possible that a combination of technological change, the Pandemic and external political factors (Brexit for one), have changed the landscape for good?
There’s a phrase in journalism “company X has appointed advisors” which normally means big things are afoot, either in a positive or negative way. Individuals and organisations require advisors when their knowledge and experience alone might not hack it when it comes to making important decisions. Most of the time these advisors are members of the various professions – lawyers, accountants, bankers plus the later arrivals into the professional ranks: management consultants and PR or communications people.
Of course advisors and experts have returned to the news in the last couple of years. In the days pre-COVID and indeed pre-Brexit they were populist expressions that “we’ve had enough of experts.” But during the pandemic professional experts – epidemiologists and vaccine creators, for example – came rather back into favour. But, of course, with the proviso that “experts advise and politicians decide.”
The public interest argument here is intriguing. One of the oldest professions of the lot – medicine – has at its heart the Hippocratic oath – do no harm. Not least in response to the greatest challenge of our age – climate change. Some architects now campaign for the re-purposing, the refurbishment of buildings not their demolition and removal to be replaced by something else.
So where are the professions in 2021? Many are doing very well despite the pandemic. As knowledge workers who operate largely from keyboards, once they had grown accustomed to working from home, the change suited many of them very well. Anecdotal evidence suggests that after an initial panic which saw cost-cutting, lawyers, for example, especially those involved in commercial law, have benefitted handsomely from a wave of activity in M&A and other market disruptions. A combination of higher revenues and lower overheads, means that if you are a partner within one of the magic circle outfits in London you can earn over £1.5 million annually.
But this unusual coincidence obscure the underlying fragilities of the legal model? A number of law firms including the celebrated firm Mischcon De Reya are going onto the stock exchange to raise capital. To answer these questions Jericho and Stifel Europe convened a Zoom roundtable discussion in October 2021 as part of the “Ahead of the Curves” series supported by Stifel.
“We have a strong regulator and I take personal responsibility for those who work around me but there is no professional body that could exclude me for misconduct. Banking is not a profession”.
Eithne O’Leary, the President of Stifel, Europe, is a manager and leader of professionals in service although she said that she didn’t regard bankers as professionals themselves – “we have a strong regulator and I take personal responsibility for those who work around me but there is no professional body that could exclude me for misconduct. Banking is not a profession.” The FCA is a regulator of the financial services industry but it isn’t like the General Medical Council, for example.
One of Eithne’s concerns was the recruitment of talent into professional services post-pandemic and Brexit. Tier 4 student visas are 36% down and the shortage of qualified staff is creating wage inflation especially among the legal profession. There has also been much discussion about The Great post-Covid Resignation among the professional classes. Many have taken the opportunity while working from home to consider and re-address their work/life balance.
And 2021 is, of course, the first true year of real Brexit. Ministers have been accused of muddled handling of a post-Brexit regime for recognising the qualifications of foreign professionals, intended to help make Britain “the best place in the world to work”. The government introduced the professional qualifications bill into parliament without fully grasping which professions would fall within its scope.
Baroness Sheila Noakes, a Conservative peer, said the bill had the hallmarks of one “conceived and executed by officials with little or no ministerial policy direction or oversight”. She deemed it “no way to legislate”. In response, Lord Gerry Grimstone, business minister, admitted that the government’s handling of the legislative detail was “not good enough” and that he felt “uncomfortable” listening to criticism of it. Having previously listed 160 professions and 50 regulators affected by the legislation, Grimstone has published a revised list of almost 200 professions and almost 60 regulators.
It all seems to be handled in a way that is less than professional. But then maybe this shouldn’t surprise us. When Ipsos MORI revealed its annual Trust Barometer for the professions recently politicians were at the bottom along with journalists.
It’s certainly true that the public attention post-Brexit given to labour shortages has been in the blue collar service sector. Discussion surrounds a lack of pub or Pret a Manger staff plus the lack of Eastern European builders. Little mention, thus far, has been made about professionals beyond mention of a national shortage of vets. Pre-Brexit about 30 per cent of architects in the UK were from EU countries, rising to 70-80 per cent in some of the biggest practices.
Anthony May of Catalyst Lex made the point that it might be “a tricky argument to draw sympathetic attention to a lack of newly qualified lawyers on one hundred and fifty thousand pounds a year…. It’s too early to see how it [Brexit] will unfold and to disentangle it from the virus. There may be a few [post-Brexit] positives and a far greater number of negatives. Certainly, large law firms with international operations will just recruit into non-UK offices. That won’t do London any good.”
Gareth Hunt of Stifel has been a close watcher of the legal services industry for a number of years. He was a key member of the team that raised DWF £95m in an IPO that valued the firm at £366 million and made it the biggest firm ever to list in London.
He reminded us of the colossal size of the markets in the USA. The legal market measured in billable revenue is estimated to be over $340 billion and the Institute for Legal Reform estimates the mass tort damages system is over $400bn in size. The industry has, for the most part, had very little contact with global capital markets and is funded entirely by partners from legal firms. However, as we move from one generation to another, having partners be the sole providers of capital may no longer be appropriate. Litigation finance accepts outside capital and there is a growing set of ALSPs or alternative legal service providers which are mopping up the commoditised ends of the market. A combination of internal and external pressures means the industry is changing.
“Commoditised law is rapidly moving online. In this market, you either grow or defend yourself via external capital. Tens of millions will be required for investment into technology and many partnerships are reluctant to take it from the partnership drawer”.
“There is, however, a gradual move to external capital provision,” he said. “Commoditised law is rapidly moving online. In this market, you either grow or defend yourself via external capital. Tens of millions will be required for investment into technology and many partnerships are reluctant to take it from the partnership drawer.” He also pointed out that the US state of Arizona has been the first to permit ownership of legal partnerships by outside shareholders. This is a trend that may well gather speed.
Gareth also spoke of the burgeoning litigation finance market which he says has real “moral worth. Litigation funders sue on behalf of people who have neither the funds nor the expertise to take on large corporates. They finance cases lawyers are not prepared to work contingently. We don’t agree with the characterization this is a social nuisance.”
The issue of working practices and a very long hours culture is also influencing the attitudes of younger members of the profession. “We thought partners would be enthusiastic and associates less keen on the idea of a flotation but it’s often the associates that can see merit in an alternative to the all or nothing struggle to work their way right up to equity partner. They can see that the collection of share options would be an attractive alternative and indeed this seemed like a modern and forward looking alternative to conventional partnership ownership structures. This isn’t a particularly novel idea – the listed investment banks, of which there are many, have been incentivizing staff like this for a long time, with successful results.”
It’s significant that there is, as yet, no sign of the large Magic Circle law firms showing much interest in public markets. Several panel members agreed that they are highly conservative and that their market moves very slowly. One added “If you are making margins of 40-45% and making equity partners millionaires each and every year why should you think it’s time to change?”
Paul Morell was senior partner of a large partnership of Chartered Surveyors before he became the UK government’s “Building Czar.” He remained convinced that partnerships retain value. “The best investment I ever made was my capital in my firm,” he said. “When it was taken over most of the good people left. When you consider this type of change you must answer the vital question ‘how does this help the client?’ I think one of the principles of a professional is that you must not be controlled, have your expert judgement influenced, by anyone but yourself. I wonder if other ownership models which involve importing capital or consolidating rarely have this critical issue of culture at heart.
“I think the collegial glue which partnership can offer is fading which is a shame. If you’re a professional what are you professing?”
“I think the collegial glue which partnership can offer is fading which is a shame. If you’re a professional what are you professing? If you don’t engage with the wicked problems of the world. Probably if professionals don’t engage with the big issues which face society they’re just transactional. Great businesses are characterised as much by what they won’t do as much as the things they will.”
Patience Wheatcroft wondered if professionals could have a public interest mission within their remit. “They have all got away with an awful lot – accountants more than lawyers. They are all regularly slammed by their professional bodies. They help clients avoid tax.”
Certainly, the recent publicity surrounding the Pandora Papers reminded the world that professionals, based frequently in London, have been involved in enabling and facilitating occasionally shady dealings even if most remain successfully hidden below the radar. Going public would make this arcane behaviour more difficult to carry out.
Wendy Jephson trained, qualified and practiced as a lawyer before retraining at 2 more universities as a Business Psychologist. She did so to better understand how business behaviours are driven and risk decisions made and managed. Retraining took 6 years but the reason to train professionally was, and still is that “a little bit of behavioural science knowledge can be a dangerous thing.” There’s a reason why we ask lawyers to draft and negotiate contracts, doctors to treat medical illnesses and should be working more with behavioural scientists in designing our organisations and products. It’s the depth of knowledge in complex areas combined with a support structure to go to when answers are not clear cut that defines professional bodies. Ignoring this expertise is something to do at your peril.
Sanjay Patnaik of Brookings in Washington noted some changes that have been occurring in the USA, “In the States even before Pandemic the student numbers entering law schools were down and this will affect the talent flow. In Europe, the UK stepping out of the Erasmus scheme received little attention but might prove quite damaging to the pipeline of talent from Europe. The perception of the UK is definitely that it’s less welcoming to professionals from other countries ”
Sanjay also thought there was some way to go on the issue of social mobility and the professions: “the old boys network remains strong in the States. The university system and its legacy and donor system certainly gives a leg up to the privileged and rich.”
The Big Four accounting member KPMG has become one of the first large UK businesses to set a target for the number of employees from working-class backgrounds. KPMG has defined “working-class” as having parents with “routine and manual” jobs, such as drivers, cleaners and farm workers. It has said it wants 29% of its partners and directors to come from working-class backgrounds by 2030. That compares with 23% of partners and 20% of directors at the moment.
This target could be as tricky to achieve as the 1.5 degrees global warming limit. Anthony May agreed that within law, for example, in the UK while there were laudable attempts to do something about social mobility it remains “a big and complex problem embracing societal and structural issues that are way beyond the ability of law forms to solve. It’s all about how you create a pipeline and get those young people placed into it in the first place.”
The discussion was attended by:
- Matthew Gwyther, Partner, Jericho Chambers
- Gareth Hunt, Managing Director, Corporate Broking Stifel
- Wendy Jephson, Head of Behavioral Science, Market Technology, Nasdaq
- Anthony May, Partner, Retired from Hedley May
- Paul Morrell, Chartered quantity surveyor and was formerly senior partner of Davis Langdon (now part of Aecom)
- Eithne O’Leary, President, Stifel Europe
- Sanjay Patnaik, Director, Center on Regulation and Markets (CRM)
- Vicky Pryce, Economist and Business Consultant, Board Member, Cebr
- Lesley Smith, Vice President of Corporate Communications & Public Affairs, Revolut
- Baroness Wheatcroft, Member, House of Lords