The beginning of the year is the ideal time to take stock of how the last 12 months have been for a legal market, key trends witnessed, and how some of the important players are doing. The State of the Market report for Singapore and Hong Kong captures the mood going into the New Year, and what 2016 holds.

Part 1 - Singapore

An eventful year for the city-state’s legal market has seen the launch of the Singapore International Commercial Court and a legal services regulator as well as mergers or alliances between local firms and international outfits. Ranajit Dam finds an industry in flux, with firms having to think outside the box as they look to survive - and thrive - in a changing market

The ever-dynamic Singapore legal market saw another year of evolution in 2015. It started with the launch in early January of the Singapore International Commercial Court (SICC) – the third point in a triangle that also includes the Singapore International Arbitration Centre (SIAC) and the Singapore International Mediation Centre (SIMC). The SICC, which appointed 11 international judges to go along with a number of local ones – including a former chief justice – had begun hearing two cases at the time of writing. In November, the Ministry of Law established the Legal Services Regulatory Authority (LSRA), a body that will handle all licensing matters related to law practices in the city-state, and also, in a bold move, allowed non-lawyers to become partners of firms.

In between, the market buzzed with the news of mergers, alliances and other tieups between local firms, generally midsized, and international outfits. In February, KhattarWong entered into a Formal Law Alliance with international firm Withers to form Withers KhattarWong. The month after that, Stamford Law Corporation entered into an merger agreement with Morgan Lewis & Bockius, the largest law firm in the U.S., becoming the first law firm in Singapore to fully integrate with an international outfit. Named Morgan Lewis Stamford, the integrated outfit will henceforth act as the centre of the international firm’s Asia-Pacific practice. And in early November, Dentons and Chinese firm Dacheng Law Offices announced plans to merge with Rodyk & Davidson, Singapore’s oldest firm.

These developments generally demonstrate an upward trend of internationalisation within – and emerging from – Singapore’s legal sector. For long one of the more liberal markets in Asia, Singapore is now embracing global in an unprecedented way. “We’re not just inviting foreign firms to come here; we’re inviting foreign work as well,” says Hri Kumar Nair SC, a director with Drew & Napier. “And foreign firms are able to expand the choices available not just to local clients, but also to local lawyers.”

On the flip side, he notes that Singaporean law firms are expanding their coverage beyond their home base. “For Drew, a significant part of our work is now outside Singapore,” says Nair. “Our clients expect and deserve our lawyers to be hands-on and responsive. As a result, more lawyers are now traveling to where our clients are doing business, particularly in Asia.”

Of course, this is as good a time as any to go global. The ASEAN Economic Community is around the corner, with Singapore primed to play an important role. Other global initiatives with strong Asian involvement – think China’s One Belt, One Road project, and the Trans-Pacific Partnership – are also in the offing, providing adequate incentives for both corporates and law firms. But adapting their thinking to look beyond Singapore’s shores might also be an act of preservation in a market that continues to evolve. “For those of us in the legal industry who are ready and willing to embrace change and opportunities for growth, new work and new markets, Singapore’s legal industry is, and will continue to be, very exciting – it offers great promise,” says Edmund Kronenburg, managing partner of Braddell Brothers. “However, for those stuck in their ways and unwilling to adapt and compete in a global environment, it can be quite frightening.”

MIDSIZE AT RISK

The general feeling is that law firms, particularly those specialising in corporate/commercial work, aren’t doing as well as they should, but opinions differ on the main cause behind that. Chan Leng Sun SC, principal with Baker & McKenzie.Wong & Leow, says that foreign law firms in Singapore focus on selected areas: corporate work, financial markets and international arbitration. “These have traditionally been key practice areas for medium and large domestic firms,” he says. “The domestic firms therefore have to raise their game to compete in this space.” For Nair, however, the amount of work going around is being affected by the economic downturn and not by the number of firms. “It’s the global economy that’s causing uncertainties, because in Singapore, we do a lot of international work,” he says. “It’s not that some are doing worse because others are doing better.”

Chan notes that at the moment, the gap between small firms and big firms appears to be growing, with medium-sized firms having to find a role between the large firms that dominate in high-value, global services and small firms that serve a cost-conscious domestic market. Indeed, it has been telling that the mergers and alliance cited above all involve prominent Singapore firms in the midsize space.

Tie-ups are not new in the Singapore market, of course, with firms in the Big Four having teamed up with well-known international outfits about a decade ago: there was the Allen & Gledhill-Linklaters alliance and also the Drew & Napier-Freshfields and Clifford Chance-WongPartnership joint ventures. But today, the consensus is that it is the midsize firms that look vulnerable unless they seek tie-ups or look to specialise. “There has to be a degree of specialisation – not at a granular level of course, but firms can’t afford to be a jack-of-all-trades,” says Nair. “Medium-sized firms want to play outside the domestic space, but the international firms and the larger local law firms are already there. So they either need to shrink or grow, but they cannot stay where they are. Perhaps there will be a hollowing-out in midsize space.”

Noting that “the old days of practising insulated from foreign competition are gone, and they will never return,” Kronenburg is blunt about what he thinks is happening to Singapore’s legal industry. “I will make a rather controversial statement: The days of the 40 to 150-lawyer ‘full service’ firms are over,” he says. “They can no longer survive in this environment. They either have to focus on key areas of practice, and pare down their other practices, or they will need to merge with the larger firms to achieve an economy of scale. This is the only way they can remain competitive.”

He also has some advice for firms undecided on which path to take. “Some have taken the ‘if you can’t beat them, join them’ route. That isn’t at all wrong. It is a way of doing things,” he says. “But it is not the only way. I say: If you can’t beat them, then the game is wrong. Change the way the game is being played. Don’t play other people’s games; set your own rules – be different, stand out and carve out your own space.”

DISPUTES HEATS UP

The SIAC was established in 1991. In 2004, it handled 78 new cases, and by 2014, that number had gone up to 222. This year, as of Oct. 1, the centre was handling about 600 active cases. Its success means it is bringing more legal work to Singapore. “SIAC itself is now one of the world’s most popular arbitration institutions and Singapore is one of the world’s most popular seats of arbitration,” says Chan. “Companies that have no roots in Singapore are nonetheless coming to Singapore for its legal services.” Sriram Chakravarthi, senior director at the Singapore Academy of Law, and Nair agree that even with the slump in corporate work, disputes remain strong. “There has been a steady growth in disputes work, despite the fact that foreign firms have come in,” says Nair. “To some extent, disputes are not dependent greatly on the economy, though it has made clients more fee-sensitive.”

But more work doesn’t necessarily mean it’s easier for disputes practitioners, as law firms are currently setting up shop in Singapore simply for the arbitration work. “While the disputes pie may have become larger with Singapore’s growth as a disputes hub, competition grows ever fiercer,” says Kronenburg. “First, there is the continuing influx of international firms into the Singapore arbitration space, which since around 2004, no longer required the involvement of Singapore lawyers. Second, Singapore’s litigation market is no longer sacrosanct: with the implementation of the SICC this year, foreign lawyers are now able to argue certain types of cases in Singapore. Because of these developments, Singapore lawyers who practice in the commercial dispute arena – whether in litigation or arbitration – will face increasing competition from foreign firms entering the Singapore markets, and tie-ups between Singapore practices and foreign firms.”

The “trick” to succeed, Kronenburg adds, is to occupy a market that the foreign firms are either uninterested in or cannot occupy. “If you are doing commercial disputes work, then you need to occupy a space that the larger firms cannot get into,” he says. “As an example, large foreign firms are often conflicted from cases due to their large corporate client base – a product of their corporate practices.”

On the subject of the SICC, Chan at Baker & McKenzie.Wong & Leow says it has the potential to be a game-changer. “It changes the way that disputes are litigated and decided,” he notes. “The SICC is neither a conventional national court, nor is it an arbitration institution. It is a hybrid of both. The volume of SICC cases will increase slowly rather than exponentially. Companies will want to know about the enforceability of a SICC judgment, which has the status of a Singapore court judgment rather than an arbitral award. A Singapore court judgment is presently recognised and enforceable in a number of Commonwealth countries and the Hong Kong SAR.”

Kronenburg says that the SICC and SIMC work in tandem with the SIAC to create the “Singapore suite of options” all under one roof, and this makes for an exciting future for Singapore. “Singapore disputes lawyers need to be competent in all three arms of that suite,” he notes. “Litigators who say ‘I know nothing of arbitration’ or ‘I don’t believe in mediation’ are dinosaurs who will soon be extinct. The suite of options presents marvelous opportunities to those who are willing to invest the time and effort to improve and expand their skill set. Those who do not do so will certainly lose out.”

UNFETTERED BY GEOGRAPHY

Given the way that the Singapore legal market has been evolving, what are some predictions for the immediate future? “Delocalisation” is one trend foreseen Chan “By this, I mean that neither the services offered nor the service providers will be dependent on geography,” he says. “The legal services that can be obtained in Singapore will not be limited to Singapore law, nor will the lawyers who provide them necessarily be Singapore-qualified lawyers. Arbitrators and, in the case of the SICC, even some judges, will not have to be based in Singapore. The line between domestic and foreign work not be as stark. You will see more foreign lawyers operating within a Singapore-licensed firm and Singapore-qualified lawyers operating within a foreign-licensed firm.”

For Chakravarthi at SAL, technology is expected to be a massive disruptor, and law firms need to embrace that, along with innovation, if they are to survive. “Firms need to get savvy, or they won’t be serious contenders in some years’ time.”

In five years’ time, Kronenburg expects to see more mergers, joint ventures and alliances between Singapore firms and foreign firms. “Other firms that do not do so will expand into the global market on the strength of their own branding and expertise,” he says. “The latter firms need not be large in any given jurisdiction, but perhaps large as a whole, when you consider all their offices in total, with a wide geographical spread.” Nair at Drew & Napier says that entities that offer multidisciplinary services may pose a bigger challenge than foreign firms. “Take, for example, accounting firms,” he says. “Ernst & Young has an alliance with PK Wong & Associates in Singapore.”

But as Nair puts it, it’s really all about how the economy does. “If there is a sustained downturn in Singapore or Southeast Asia, all this becomes academic,” he says. “If our neighbouring countries don’t do well, then there are fewer reasons for international firms to be here. But if the ASEAN in particular sees its fortunes improve, there is no reason why everyone can’t do well.”

The recruiter’s view

Lynne Roeder, managing director of recruitment specialist Hays in Singapore, says that when hiring for partners, law firms demand candidates who are either qualified as solicitors in England & Wales or Singapore. Additionally, “as a result of increased activity on projects and corporate transactions in South East Asia, and due to Singapore’s status as a hub for Southeast Asia, candidates with regional experience, particularly having worked on matters concerning emerging markets such as Myanmar, Indonesia, Thailand and Vietnam, will have a slight advantage over others,” she says.

That said, given the shortage of quality candidates in the market, Roeder advises clients to be mindful that available and exceptional talent does exist in candidates who do not necessarily meet 100 percent of the required criteria. “Candidates are increasingly showing the initiative and dedication to expand beyond their current scope of work and broaden their skill sets,” she says. “We also advise firms that providing feedback to candidates is crucial to the reputation of these firms, as the lack of feedback from law firms on specific applications has given some candidates a negative impression of the value these firms place upon applicants. Finally, we also advise law firms that the key factors taken into account by candidates when seeking roles in Singapore are remuneration, work scope, the team, and possibilities for career progression.”

Looking ahead into the next year or two, Roeder says that she expects to continue to see high demand for lawyers with qualifications from Singapore and England & Wales, and believes that mergers and acquisitions and project finance will be the key areas of demand for 2016. “We do not anticipate any sharp downward trend in other areas of law, unless there is to be any unforeseen movements in economic activity,” she adds. “Candidates with Mandarin or Bahasa Indonesia language abilities will also be in high demand over the next two years, as well as those with transactional experience concerning the South East Asia region.

Part 2 - Hong Kong

While legal service providers in Hong Kong face several challenges ahead, most are confident that the special administrative region will remain a vibrant, competitive and international legal market in the years to come. Cynthia Claytor reports

Twenty years ago, Hong Kong was an inbound market, with Hong Kong-based law firms serving as a gateway for multinationals doing business in China. However, over the last five to ten years, the direction of workflow has reversed, with Hong Kong predominantly acting as an outbound market for Chinese corporations and nationals seeking access to foreign markets. As the market focus shifts more towards servicing China’s outbound ambitions and infrastructure projects, Hong Kong’s legal industry will continue to tailor its services to meet market demands.

In terms of recent developments in legal services on offer, one of the most pronounced changes is in the skill sets of staff. Local and international firms alike are filling their ranks with more China-facing lawyers; in-house roles are also more frequently being filled by PRC nationals. Another prominent change is the language used during the normal course of business. Most Hong Kong firms now have Mandarin-speaking lawyers on staff to handle transactional, regulatory and disputes work. Ten years ago, finding senior litigators with Chinese language skills was almost unimaginable; now, language skills are very much a prerequisite, says Colin Law, the China managing partner of Shearman & Sterling. However, this development goes beyond speaking a common language – it’s also largely about lawyers having an affinity and familiarity with Chinese culture.

In the years ahead, many believe Hong Kong will continue to be a gateway for China (and to Asia), but to what extent remains uncertain. As the renminbi becomes increasingly tradable currency and as the Chinese government continues to open up its markets and encourage overseas acquisitions, Hong Kong may become less relevant, but likely (and hopefully) not irrelevant.

REGULATORS START TO BITE

In the last few years, the Hong Kong Securities and Futures Commission (SFC) and the Hong Kong Stock Exchange have become quite active, whether investigating insider dealing or other general compliance issues. They have been very nimble and responsive to what’s happening in the market. “The SFC, for example, now has been heavily loaded by enforcement resources in terms of staffing at the Cheung Kong Centre,” says Law. “They are larger than most of the private practices that I can think of.”

In response, Hong Kong corporates have had to increase their legal spend – often by growing their in-house legal teams.

The expansion of in-house capabilities has caused some disruption in the workflow from corporates to external firms, mainly at firms that focus on a type of work that in-house teams can handle. While this hasn’t been a major issue for most firms, it has meant that external counsel have had to be more practical, commercial and understanding of their clients’ needs, and do the bits and provide the services and advice that their clients cannot access internally, explains Andrew Keith, chief operating officer (COO) of law firm Deacons.

ENTRANCES AND EXITS

While Hong Kong has seen an increase in the amount of new entrants in the market and a few firms retrenching, either shutting down or leaving or giving up their Hong Kong status and focusing as a foreign entity, Keith says that this is not uncommon in Hong Kong and that most of the movement is cyclical. Of the large foreign firms moving in and out of Hong Kong, Keith notes many have similar misapprehensions about the market and their ability to make significant headway in three or four years, which can be done in many Western markets. “This isn’t another London or New York, and the streets aren’t paved with gold. China and Hong Kong are long-term places – you have to be here for a while to make it work and all of the firms that have made it work have been here for a while,” he says.

Another interesting development is the internationalisation of Chinese law firms. The last few years have seen a number of these firms establish bases or enter into associations outside mainland China, either in Hong Kong or somewhere else. “I think it is a measure of PRC firms feeling much more comfortable and confident about reaching out directly to international markets, whether that is for inbound or outbound work. It will be an interesting space to watch,” says Keith.

As for how this trend will impact the local market, many lawyers say it’s too soon to tell. While the King & Wood Mallesons merger and the pending Dacheng-Dentons combination are certainly signs of the times, most lawyers do not expect other major law firms to follow suit. “They would rather take a more conservative approach in serving their Chinese clients’ demands in Hong Kong,” says Law.

Several local Hong Kong firms are positioning themselves as attractive candidates for Chinese firms to partner with. Many have already geared themselves towards servicing Chinese clients’ needs, such as assisting Chinese companies on transactional and regulatory compliance work or offering dispute resolution services in Mandarin.

GOVERNMENT INITIATIVES

As for government initiatives, Raymond Yip, Deputy Executive Director for Marketing at the Hong Kong Trade Development Council (HKTDC) says that in the coming years, the Belt and Road Initiative, which aims to promote connectivity between China, Southeast and South Asia, Central Asia and Europe through infrastructural development, trade and industrial co-operation, financial integration and cultural exchange, will be the most important development. When infrastructure-related projects are first kicked off in connection with this initiative, it will generate a plethora of opportunities for Hong Kong’s legal industry. To help Hong Kong’s legal service providers seize the opportunities arising from the Belt and Road Initiative, HKTDC launched a dedicated web portal in early December (www.beltandroad.hk). Apart from market intelligence and research reports, a comprehensive database of Hong Kong service providers (including legal firms) will be introduced.

WHAT LIES AHEAD

If the geopolitical situation remains stable, economic cycles continue as predicted and Hong Kong’s regulatory framework continues without any major overhauls, drastic changes are unlikely in Hong Kong’s legal market.

In the retail (or high street) legal sector, people will continue to need lawyers. The real challenges lie in the international business sector – whether there is an increase in investment into China, what happens with the Stock Connect scheme, what happens with the RMB, whether there will be increased outbound work and where China will invest, as well as trade liberalisation – all of these things are likely to affect the Hong Kong legal market.

Despite these uncertainties, Keith is certain that Hong Kong firms will have a pivotal role to play. The firms will still be key in advising foreign companies looking to access China and the rest of Asia, as well as in assisting Chinese and regional clients on their investments abroad. Hong Kong firms will continue to be successful as long as they are able to continue to look after their clients’ interests in a way that makes them happy. “Clearly, every firm in the world is facing up to these challenges,” says Keith. “As long as we continue to invest in our people and technology, and improve the way we deliver our services, firms in Hong Kong should be able to thrive.”

The Jersey factor

According to Richard Corrigan, the deputy CEO of Jersey Finance, Jersey remains well placed to provide the investment vehicles to conduit international capital into Greater China for the infrastructure projects it undertakes. “It possesses similar company entities to enable Greater Chinese businesses to expand internationally and access capital on foreign exchanges, including the London Stock Exchange and it has investment structures which are ideal for servicing the needs of the growing high net worth sector in China,” he says.

With Chinese companies looking more and more to expand in the West, the Jersey company structure is increasingly being used as the ideal listing vehicle for raising funds on leading global exchanges, adds Corrigan. “Jersey has the greatest number of FTSE 100 and AIM listed companies registered outside the UK,” he says. “One-fifth of Chinese companies that have listed in London have done so through Jersey and there are over 100 Jersey companies listed on exchanges around the world including a number on the Hong Kong exchange; these alone have a market capitalisation of $31 billion.”