Law firms’ fightback: financial services

The emergence of two phenomena has left law firms in a state of existential angst. First, there is the rise of artificial intelligence-based services, such as data-miner Lex Machina, helping companies win cases and close deals. Second, consultancies such as Deloitte have been launching legal management consulting arms.

Eugene McNamee, head of the school of law and executive director of the Ulster Legal Innovation Centre at Ulster University, says the pressure stems from a critical tension increasingly felt around innovation in legal technology.

On the one hand, law firms want to hold on tightly to the legal services they have offered for decades. On the other, they believe that to survive and compete against management consultancies and tech start-ups encroaching on their space, they must innovate in areas of business operations where they might feel less comfortable, such as financial technology.

“Law firms feel they need to do something big with technology and analytics, but they’re not exactly sure what,” says Prof McNamee.

Add to that a sense that other law firms are doing exciting things that will give them an edge, mix in some confusion from an inundation of new product suppliers “promising to deliver the next big thing” and, says Prof McNamee, law firms are concerned they may be left behind.

“Everyone is looking over their shoulder at everyone else, and over their other shoulder are the big insurance and accountancy firms that are holding themselves out as able to do a lot of the work that lawyers have traditionally done,” he says.

Two law firms stand out for tackling the situation head-on in the financial services sector, and producing innovations seemingly at odds with the age-old business model of charging billable hours for legal services.

Allen & Overy has made a modest equity investment in fintech start-up Nivaura, which is registered with the UK’s Financial Conduct Authority. The law firm helped the company design a platform for issuing financial instruments.

The platform can service bonds for the instruments’ lifetime, then redeem them at the end of their life cycle. The process is completely automated and could arguably do away with much of the lawyering in the traditional transaction process.

Then there is Linklaters: it partnered with the bank UBS, which is leading a consortium of banks, and financial technology company Clearmatics to develop a digital representation of money, dubbed the utility settlement coin (USC). The system is a blockchain-based interbank payment system that can settle transactions instantly. The law firm gave initial advice for free and was paid once the project went ahead.

Paul Lewis, global co-head of innovation at Linklaters, says the USC project is one of a significant number of blockchain-related mandates on which the firm is working. In such instances, it often works with other partners in a consortium rather than simply charging billable hours.

“Blockchain is looking to disrupt areas where the legal framework has evolved over hundreds of years and in a different paradigm,” says Mr Lewis. “Current financial law often looks to where an asset or a person is located in order to determine various legal rights, such as who owns the asset, who can transfer it, and so on. With blockchain, where there is no single location, existing approaches simply do not work.”

Whereas many see blockchain as a natural enemy of lawyers, Mr Lewis says Linklaters is busy coming up with “groundbreaking legal structures” designed to put blockchain-use cases on a sound legal footing. This, he says, is because it will enhance the firm’s ability to take advantage of the way some clients are using the technology.

“It is like traditional legal services, but with everything being done for the first time and breaking new ground,” says Mr Lewis, referring to the way law firms need to adapt the way they provide services to clients.

At Allen & Overy, senior associate Richard Cohen foresees a time when law firms will need to change their method of remuneration and types of services they offer. “Capital markets are likely to see much greater use of technology and automation,” he says. “We will be there to advise on the legal implications of that and how you can manage the introduction of the technology in a way that complies with existing regulations — which invariably do not keep pace with the technology.”

Mr Cohen rejects suggestions that automation is replacing lawyering, although he admits it will affect the current law firm model, particularly the billable hour. “Law firms are still going to be advising on the law and helping clients achieve their commercial goals and manage risk,” he says. “One can also see law firms being able to offer more of a consultancy-style service to clients wishing to deploy this type of technology. It offers the opportunity to be much more of a strategic adviser.”

Mr Lewis says legal services will become increasingly “tech-enabled” and there will be some form of technology element to their delivery.

In areas such as regulatory compliance, which could be embedded into the coding of compliance software, or so-called smart contracts for financial products, which digitally verify or enforce themselves, Mr Lewis thinks the involvement of law firms is likely to change rather than vanish. “There is a huge legal input required to be able to codify the legal requirements in a tech wrapper,” he says.

Mr Cohen says lawyers must understand what technology in various forms can do, but not the minute detail of how software systems work. “You can then advise as to its legal implications and work out how you can use the technology to improve delivery of legal services,” he says.

While the financial services sector is in the vanguard, tech innovation will not be specific to financial services law. “There is obvious application to conveyancing but also areas like shipping law,” says Mr Cohen. “The automation techniques we’re using could be used in pretty much any area of law that has relatively commoditised documents.”

Mr Lewis says: “Even in the blockchain space there are any number of other uses that are not financial services.” He cites property ownership registration and anti-money-laundering initiatives.

Prof McNamee warns there will be winners and losers as the efficiency and innovation drives form a new battleground for legal services. But “whether it will all happen so quickly as to turn things upside down as opposed to allow some to press ahead relatively before the others respond, is an open question”, he says.