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Brexit and the Legal Services Sector: Count Down to the End of the Transition Period

There are just 13 days to go until the end of the transition period, and despite optimism in the headlines this week that a UK-EU trade deal is on the verge of being reached, we still cannot say with any certainty what the UK’s relationship with the EU will look like from 1 January 2021. For the UK legal services sector, which relies heavily on the EU as a significant destination for the export of its services, understanding and being ready for the implications of the end of the transition period (whether or not an agreement is reached) is crucial. In this article, we look at the challenges the UK legal sector is likely to face from 1 January next year, two recent updates (one good, one less good) and the steps firms should be taking to prepare.

What will happen at the end of the transition period?

From 1 January 2021, the current EU regulatory framework which allows UK law firms and lawyers to provide services and/or establish and practise in other EU member states will, even if a trade deal is reached, almost certainly fall away. Instead of being subject to a single EU-wide legal framework, UK law firms and lawyers will be subject to a myriad of rules and regulations in each of the EU/EFTA states – and ultimately will only be entitled to those rights granted by the national regulators of EU member states to “third country” (non-EU) lawyers.

Depending on the local regulations in the countries in which the law firm operates (which are still adapting as the end of the transition period nears), UK lawyers and law firms may face an array of challenges including:

  • Restrictions on providing services in EU member states on a temporary basis using home state qualification (“Fly in fly out” or “FIFO”).
  • Restrictions on use of the UK LLP structure.
  • Loss of rights of audience before the EU courts from 1 January 2021, unless UK lawyers hold alternative EU/EEA (but not a Swiss) qualification.
  • Restrictions on practising with, or sharing profits or equity with, non-EU lawyers.
  • Loss of the protection of legal professional privilege (“LPP”) in front of EU courts and EU institutions with respect to communications between UK qualified lawyers and their clients.

The Irish “backdoor” appears to be shut…

In the wake of the Brexit vote, many England and Wales qualified solicitors sought to get around some of the above issues by joining the roll of the Law Society of Ireland. By becoming registered, and dual-qualified, in Ireland, UK based lawyers, and their firms, hoped to be able to retain the protection of LPP, rights of audience, the ability to practise in EU countries and FIFO rights.  However, last month the Law Society of Ireland announced that “only solicitors who are practising (or intending to practise) in Ireland from an establishment in Ireland will be provided with practising certificates”, appearing to close this backdoor route to EU practice.  We may now see more UK law firms setting up offices in Ireland.

But there is welcome good news from France…

There was collective sigh of relief this week when the French Government published an Ordinance grandfathering the practising rights of law firms operating in France as branches of UK LLPs. The Ordinance confirms that whilst the UK LLP will not be recognised as a valid legal structure in France following the end of the transition period, law firms that have previously established UK LLP branch structures in France under the EU Lawyers Establishment Directive will be permitted to continue operating using their existing structure from 1 January 2021, irrespective of the outcome of the trade negotiations between the UK and the EU27.

However, the exception only applies to existing law firm structures and it will not be possible for a law firm to establish a new branch of a UK LLP in France from 1 January 2021. Furthermore, the Ordinance contains a restriction on increasing or transferring the shareholding and/or voting rights held by UK entities/individuals after the end of the transition period. While it was initially assumed that this restriction would apply to existing UK LLPs grandfathered under the Ordinance, an analysis by the Law Society (with input from a French regulatory specialist) has concluded that the restriction in fact applies to French corporate bodies that have individuals or entities based in the UK as shareholders. Firms using a French legal structure should therefore assess whether and how this may impact them.*

Preparing for “no-deal”

Most UK law firms with a presence across the EU will have expended a considerable amount of time and resources in understanding the relevant national regulatory frameworks, and will have in place contingency plans to, as far as possible, allow business to continue from 1 January 2021 in the event of a “no-deal Brexit” (or, as is presently looking more likely, an agreed trade deal which does not cover professional services) when the UK will be considered a “third country”. For example, in member states where the UK LLP corporate form will no longer be accepted, restructuring may be required (for example, moving the LLP’s centre of administration, or converting EU offices into local partnerships or subsidiaries). Some firms appear to have already activated some of those contingency plans (for example, a number of international law firms have restructured their UK LLP operations in Germany in the last few weeks), whilst others may be waiting until the last possible moment in the hope of a comprehensive trade deal or a favourable announcement from the national regulator. What is clear is that firms need to be prepared to act very quickly in order to ensure business continuity in the event that the UK/EU trade negotiations are ultimately fruitless.

The Law Society of England and Wales has been in dialogue with national and regional bars across the member states and law firms, and the position in each of the countries (including with respect to the issues highlighted above) is still changing. Law firms are encouraged to check the Law Society’s website for updates on the latest confirmed information on practice rights in key jurisdictions from the end of the transition period.

To discuss any questions arising from this alert or for specific legal advice on particular circumstances, please contact Zulon Begum (Partner). Also see our recent article Getting Ready for the End of the Brexit Transition Period: Four Issues for UK Employers.

*This paragraph of the article was updated on 21.12.2020 following the publication of this Webcast by the Law Society.