Taking centre stage - Philip Hoult

As group general counsel at one of the world’s largest banks, Mark Harding has had a ringside seat on the extraordinary upheaval in the industry. There is a risk that reforms to the sector could go too far, he tells Philip Hoult.

‘It has been two years of extraordinary challenges.’ Since 2007, Mark Harding, group general counsel at Barclays, and his 750-strong legal team have handled transactions covering the whole gamut of corporate activity. First, there was the ultimately unsuccessful €67.5 billion bid for ABN AMRO. Then, amid the near meltdown of the global banking industry, Barclays snapped up $1.75 billion worth of assets from the defunct Lehman Brothers, secured a £7 billion fund-raising from Middle East investors and disposed of its £3 billion iShares fund management business.

Harding, who joined in 2003 from Clifford Chance, counts himself fortunate. Unlike some general counsel, he has not had to battle to get the department heard during these unprecedented times. ‘We shouldn’t be driving the business but there are legal issues that arise in a bank that mean you need to have a seat at the appropriate tables and we have always had that’, he says.

Larger role for lawyers

He does acknowledge, though, that Barclays’ lawyers have been more centre stage of late than in the past. ‘It’s great to be more intimately involved – you can’t execute the sort of transactions that we’ve been executing without having the significant involvement of the legal team.’

In fact, Harding says, there has been a larger role for lawyers right across the bank. This is whether they are based in the corporate centre, the three business units in the investment banking and investment management (IBIM) division or the six business units and corporate centre of the group commercial and retail bank (GCRB). The Lehman acquisition added substantially to an already large presence in the United States at Barclays Global Investors in San Francisco, Barclaycard US in Delaware and Barclays Wealth (in multiple locations). But there are also substantial numbers of lawyers across Asia, Europe and Africa (particularly South Africa).

‘We have to drive our law firms to be more efficient producers ... It's about delivering more for less, or at least as much for less’

Despite the industry turmoil and frenzied corporate activity, the Barclays legal team has remained stable over the last 18 months. ‘There has been an uptick in litigation, but we haven’t been swamped by it’, says Harding.

‘The area where we deliberately recruited people ahead of time was on the recoveries, insolvency and bankruptcy side, not just here in the United Kingdom but outside. That’s proved a very, very good investment. It also fitted precisely with the plan on the business side to increase our capability to help clients through the downturn.’

A decision in 2006 to ‘beef up’ the senior team with the hiring of Gibson Dunn & Crutcher partner Judith Shepherd has similarly been vindicated by the subsequent corporate work. It also gave Harding more space for his broader management role – he oversees compliance and chairs the bank’s group operating committee as well as a number of other committees.

Reforms

Although Harding has no plans to change the department’s structure, he recognises that inevitable reforms to the sector could have an impact. In this respect, he is concerned about what lies in store. ‘The world has benefited greatly from the global reach of the banking industry over the last 20 years and we mustn’t forget that’, he argues.

‘Although we are now in the middle of difficult times and many banks, regulators and politicians didn’t get things right, it is very important not to throw the baby out with the bath water. What I hope the world’s regulators will do is find a way to allow the benefits to the world economy of global banking to be retained, while at the same time introducing some measured steps to ensure the stability of the banking system.’

Most of the focus for reform, he predicts, will be on the prudential side – on levels of capital and liquidity – rather than to business conduct.

‘The reforms are bound to include – and it’s a very sensible thing to do – some measures to cope with what is currently a pro-cyclical capital regime, to change the capital regime to require banks to retain more capital in the good times and allocate more capital against the riskier proprietary trading businesses. It’s very important to distinguish between the market-making activities of financial institutions and speculative hedge fund-type activity, which is where the issue lies.’

Harding rejects claims that the banking crisis was caused by a lack of competition, arguing that it would be a mistake to restrict the size of banks, split them up or separate investment banking from retail banking. ‘At the macro level there is enormous competition’, he insists.

‘One of the things that drove down pricing on corporate lending prior to the credit crunch was the enormous amount of competition and the free availability of liquidity.’

Although recognising the problems caused by national regulation of global flows of finance, Harding believes a global banking regulator or even a regional one – for the European Union, say – would be impractical. ‘Banks are corporate entities’, he says. ‘That means they exist in particular legal jurisdictions, they are incorporated in particular countries, they are licensed in particular countries and they go bust in particular countries.’

Regulators have to be very close to the markets they cover, he adds. However, Harding predicts a more common rulebook for the European Union; while there has been a huge step in that direction with the Markets in Financial Instruments Directive and various banking directives, there are still significant discretions and differences between Member States. ‘There’s no doubt that we will see those differences reduce, and the European Union has already indicated that with the capital rules a lot of the discretions will be taken away.’

‘In theory, that will simplify things’, he says. ‘The problem is that you’ve still got to set those rules against the national systems of law, whether civil law or common law. How those are applied and identifying the rights and obligations are still going to be different unless you have a common legal system. And I don’t see that happening in my working lifetime.’

Pay

On reforms to bankers’ pay, Harding believes that remuneration structures were not the sole reason for the problems in some financial institutions, but thinks they did have some part to play in the current crisis. Warning against the imposition of a rigid structure, he says it is better to focus on the more technical area of how you create remuneration arrangements that appropriately take account of the risks generated by the business the bankers run and provide reward for success and not failure.

Having been the first chairman of the GC100, a group representing general counsel at FTSE 100 companies, Harding has long maintained that in-house lawyers should seek to influence the reform process. However, he is somewhat daunted by the current plethora of consultations and proposals. ‘I have a very big team here, but the difficulty – even for me – is that I don’t have a lot of spare resource.’

Looking forward, Harding believes there is scope for greater collaboration between lawyers at international banks in areas where there is no competitive advantage to be gained – compliance with shareholder reporting requirements is one – but he is aware there are limitations.

More fruitful, perhaps, ‘and something that hasn’t been exploited much so far’ is the potential for individual clients such as Barclays to push their panel firms to work more closely together. Last year, Harding’s team held a brainstorming session with its firms to consider issues coming onto the radar. The bank shared part of its business plans, and also ensured its in-house lawyers prepared sessions jointly with firms.

‘Some of the firms are more enlightened these days’, says Harding. ‘They are beginning to realise that if they collaborate with each other and with us, they get to know us bette and it solidifies their relationship with the client. It creates a network where the whole is stronger than the parts.’

So have firms stepped up to the plate over the last 18 months? Are they really open to doing things differently? ‘Absolutely’ is Harding’s reply. ‘At the moment we are going through our biannual major panel review. The encouraging thing is that this is not a case of us beating firms over the head – they have anticipated it. The major firms have already been thinking about how they can make themselves more efficient.’

Unsurprisingly, one of the questions Harding has posed is whether these efficiencies will be passed on to clients or simply used to support flagging profitability levels. He acknowledges nevertheless that clients have to be reasonable. ‘We do have to drive our law firms to be more efficient producers’, he says. ‘The previous “cost plus” basis of charging ought to be gone. It’s a question of putting more of a pricing risk onto the firms. They are looking to be more efficient and it would not be right for the client to require every penny of that efficiency to be passed on – both parties need to benefit.’

Any firm that sought to increase its rates would get pretty short shrift. ‘I’m in the business of wanting to drive down the unit cost of legal input’, Harding says. ‘I want firms to be creative about how they achieve that. It’s about them delivering more for less, or at least as much for less.’

‘The world has benefited greatly from the global reach of the banking industry over the last 20 years and we mustn't forget that’

New initiatives

In other measures, Barclays is experimenting with legal process outsourcing – to New Zealand – and has introduced (DataCert) e-billing software. ‘What’s very clear to us is that in-sourcing is even cheaper than outsourcing’, Harding claims. ‘It is cheaper to do this work inhouse, if you’ve got the appropriate resource, because you haven’t got the mark-up.’

For Harding, the Holy Grail is not cheaper firms. Instead, it is taking them completely out of the process of documenting transactions. It is standardising or commoditising as much as you can so that non-lawyers – within parameters defined by the legal department and with assistance from outside counsel – can generate relevant legal documents ‘That is really what produces the efficiencies’, he argues.

Harding does not expect radical changes to come from external firms, though. ‘It’s very difficult to cannibalise your own business model’, he says. ‘What they are doing is looking for ways to retain, for the most part, that model, while just delivering their product more efficiently and then finding different ways to charge for it.’ The real innovation ma therefore come from elsewhere – legal publishers perhaps.

Whether the relationship between banks and their external firms will change as a result of standardisation is a moot point. There is an argument also that an industry-wide drive for simpler financial products could have an adverse impact on advisory work. But Harding is not so sure. ‘Clearly, there is going to be more transparency about financial products – that’s a good thing’, he suggests. ‘I’m sure that at the margins the complexity will disappear. But one needs to be very careful not to associate anything that’s complex with the evil empire.’

Predictions

Harding does predict two significant developments, however. ‘One is that there will be less leverage in the financial system, and that will mean that there are some product lines that lawyers have advised on which will virtually disappear. The very obvious example is leveraged lending. Anyone who is a leveraged loans lawyer is either out of a job or has been retooled because that’s gone and we won’t see it back to the extent we had previously.’ The other development is that there will be less repackaging of financial products by banks for the sake of having their own proprietary product, when in reality there is very little to choose between them.

Nevertheless, sophisticated banks and financial institutions will continue lending money or financing transactions in efficient ways for international corporations. ‘Are these major firms suddenly going to wake up one day and find there is no work to be done? Clearly not.’

It is meanwhile up to the in-house lawyers to become a catalyst for change. ‘Up to now in-house lawyers haven’t really driven change, that’s the honest truth’, Harding says. ‘If they have, it’s only been at the edges. I strongly believe that there is no point criticising law firms if you don’t ask yourself first what you can do. To some extent clients do get the firms they deserve and now is the opportunity. If we don’t take it now, when are we going to?’

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Philip Hoult is a director of HB Editorial (www.hbeditorial.co.uk). He can be contacted by e-mail at philip.hoult@hbeditorial.co.uk.