Hong Kong’s legal-services industry has been facing several adverse market developments of late, such as stronger in-house legal teams, tougher competition and shrinking legal fees. Despite these setbacks, some bright spots remain, including a steady stream of China work and the compliance requirements of financial institutions.

In-house legal teams of large corporations have expanded over the last few years, and they have become big enough for law firms to seriously consider as competition for work. “The corporate law departments of some companies are bigger than many law firms,” says Elaine Lo, partner and head of China practice at Mayer Brown JSM in Hong Kong.

Furthermore, many of these in-house legal teams are headed by general counsel (GCs) who previously worked for large corporate law firms. As such, they demand more from outside law firms in the form of thought leadership, training and secondments, along with more efficient delivery of legal services at lower prices, according to Lo. Coupled with the fact that the legal industry is very much a buyer’s market, clients have never been in a better position to extract more value from law firms.

These GCs are also familiar with the commoditisation of legal work to further slash costs. As a result, some ask their external counsel to break down complex projects into different components, and contract out the more process-orientated ones to legal process outsourcing (LPO) firms in cheaper locations like India and Philippines.

This is a significant development as Hong Kong is just catching up with the Western trend of engaging LPOs. “It has been only one or two years since law firms in Hong Kong have started to seriously adopt this practice,” shares Lo.

At the same time, the competition within Hong Kong’s legal market remains as strong as ever, and this, in turn, has affected legal fees. “Even for our most loyal clients, we have to provide a very realistic fee estimate for transactional work,” explains Lo. Moreover, she points out that capped fee arrangements have also become the norm for capital market deals, IPOs and bond issues.

NOTABLE WORK

According to Steve D. Winegar, chair of Paul Hastings’ Hong Kong office, every firm needs to find its equilibrium in Hong Kong, and this is toughest for the firms that do not align their international strength with the right clients and the right team on the ground. “This is a critical formula in any market, but the competitive pressures in Hong Kong have certainly made it more difficult now than at other points in the past.”

While evaluating the business prospects, some of the law firms in Hong Kong are anticipating that many distressed companies will require restructuring, while others are expecting a more aggressive regulatory enforcement activity, notes Winegar. Hong Kong’s IPO market has also seen fewer offering this year, but activity did pick up in the third quarter.

As Mayer Brown’s Lo observes, “Future for the legal work flow in Hong Kong remains promising, with expected growth for law firms that handle M&A, capital markets, and project finance work. Understanding the business strategies and challenges of clients is key for law firms to differentiate themselves from competition.”

In addition, “growth in the financial services sectors, including financial technology and insurance has been particularly encouraging,” according to Milton Cheng, managing partner of Baker & McKenzie’s Hong Kong office.

Regulatory and compliance lawyers in Hong Kong are also in demand because of tighter regulations and increased scrutiny of the banks and financial institutions.

Many global banks still face investigation from multiple regulators in the U.S. and Europe – one of the many consequences from the global financial crisis that led to the enactment of tougher rules, says Lo. Some of these banks also face scrutiny on their risk monitoring frameworks and compliance policies relating to anti-money laundering, anti-terrorist financing, and anti-corruption legislations. “Assisting bank clients in crafting strategies to respond to regulatory investigations and enforcement actions in multiple jurisdictions is a growing area of legal work for law firms,” she adds.

Furthermore, financial institutions, insurance companies and client-facing companies that handle large amount of data have become increasingly concerned about cybersecurity risks and compliance with data-privacy regulatory obligations.

THE CHINA FACTOR

Hong Kong continues to be a conduit, firms in the city are positioning themselves to capture legal work by hiring the required transactional lawyers. “There is a big demand for lawyers in Hong Kong who have experience in assisting Chinese clients with executing M&A transactions that span multiple jurisdictions,” stresses Lo.

The value of outbound foreign direct investments made by Chinese companies in 2016 is expected to surpass the 2015 figure of $145.7 billion, and a significant amount of these investments are directed at or channeled through Hong Kong, thus creating a need for Hong Kong legal services. “In last few years, we have been doing more and more M&A transactions for Chinese clients,” she shares.

Some of these outbound acquisitions have been funded with money raised in Hong Kong through equity placements and bond issues in the capital markets. According to Lo, “Many Chinese companies use their Hong Kong listed vehicle to finance overseas acquisitions. We have been very active in helping clients to issue U.S. dollar denominated bonds.”

Among the various factors propelling the outward Chinese investment are the decline in the value of renminbi against the U.S. dollar, a desire to diversify and the expectation that the U.S. economy will continue to strengthen, says Winegar of Paul Hastings. However, political and economic uncertainties in many of the target countries might have an impact on this trend, he adds.

Being the second largest economy in the world, China provides the biggest opportunity for most law firms wanting a presence in Asia. “While Hong Kong can be a regional hub for a law firm, it would be unusual for a firm to have a Hong Kong office but no China-facing practice,” he explains.

While mainland Chinese firms have also been active in Hong Kong, Winegar notes that only some firms have the talent and expertise to match their clients’ expectations. Furthermore, some firms are raising their rates to be more in line with global law firms, which could affect their ability to gain market share.

At the same time, however, international law firms have grown increasingly careful while evaluating their plans in Hong Kong and mainland China. This comes after some U.S. law firms have shuttered their China offices over the past two years. “We have seen a few U.S. and U.K. law firms forming alliances with Chinese law firms recently in order to satisfy the needs of their clients in mainland China,” observes Lo.

Indeed, one of those firms was Mayer Brown JSM, which entered into an association with Beijing-headquartered corporate law firm, Jingtian & Gongcheng. According to Lo, Mayer Brown is also recruiting and grooming Chinese-speaking lawyers in Hong Kong and other jurisdictions in order to better serve the needs of its Chinese and multinational clients.