Revolutionary changes coincide with caution over ‘disruptive’ technology

Revolutionary changes coincide with caution over ‘disruptive’ technology

Gibraltar’s lawyers are witnessing the greatest professional changes in 50 years after a comprehensive overhaul of legal services regulation that will bring greater transparency and openness to their practices, reports Ray Spencer

Described as being “no short  of a revolution” the imminent implementation of the Legal Services Act (LSA) will in a stroke for the first time see all of the jurisdiction’s advocates – Crown and in-house lawyers –regulated by a new body, the Legal Services Regulatory Authority (LSRA) to a uniform Code of Conduct.

The LSRA – described by some as the lawyers’ FSC (Financial Services Commission) – will be independent of the Bar Council that is to be replaced by the Law Council as soon as the LSA takes effect.  The move underscores Gibraltar’s fused profession – unlike in England from where most laws have originated – to involve barristers, solicitors, in-house counsel, legal executives and law costs draughtsmen.

In January, Gibraltar’s Supreme Court listed 233 lawyers, associated with 38 practice offices.  Now the new LSRA will also embrace an estimated near-100 qualified lawyers working in government, its associated bodies and the private sector.  Some 42 are government lawyers.

Keith Azopardi QC, Bar Council chairman at the opening in September of the 2017-18 Legal Year, said: “The Legal Services Act is more far-reaching than the system of regulation it replaced…. and a modernisation of the system of legal services that is long overdue.”

At the time of Gibraltar International going to press no information could be obtained from the Justice Minister, Neil Costa, as to when the Act would be implemented, nor the constitution or operation of the LSRA, but it is expected to be by the summer. Annual fee income it is understood could be £1,000 or more per head for lawyers and £1,500+ for Gibraltar’s 17 Silks and will be swollen by the addition of non-Crown counsel to support the new LSRA administration and premises.

Following UK experience, law changes in September permitted practices to incorporate as Limited liability companies or Limited Liability Partnerships (LLPs), the latter route having been taken by ISOLAS to mark its 125th anniversary.  It is the first large legal firm to do so.

Protected from errors

Senior partner Peter Isola, explained: “As the firm grows, having limited liability becomes important, because when it’s just family who are partners, you are probably quite happy to carry each other’s risks: when it’s more of a professional business relationship, you want to be sure you are protected from other people’s mistakes.  Of course, an LLP doesn’t protect you against individual negligence, but it protects other partners from it”.

He added: “Limited companies have Articles and a Memorandum, but with an LLP being a partnership, within that document we had to set out the terms of membership in a way in which I don’t believe any other law firm in Gibraltar has.”

Two other large Gibraltar firms – Hassans with 75 lawyers and 260 staff, and Triay & Triay (T&T) with 22 lawyers and 66 staff – both plan to morph into limited companies this year.

Melo Triay, T&T senior partner, revealed: “We were going to pursue the LLP route, but we plan to incorporate as a Limited Company after the LSA commences, probably this summer; a limited company structure provides more protection and gives certain tax advantages which an LLP structure does not.”

A partnership’s profits are taxed as partners’ income at their personal rate regardless of whether distributed or not. “The personal rate of tax is always higher than the corporate rate of 10%. The effect is that partnership profits are inevitably distributed and it is difficult to create reserves,” Triay declared.

Ramparts, an 11-strong specialist firm in financial services, payment, eGaming and Fintech, was established in 2012 and founder, Peter Howitt, opened a Manchester office two years ago.

Recruiting issues

Most clients are international and he expects to add two more lawyers and extra support to bring the total to around 15. “All of our lawyers here were born in  Gibraltar, but we struggle to find suitable candidates, given that we are small and younger than most other major firms, and we have a culture derived from having worked close to businesses rather than a traditional law practice,” he declared.

All major Gibraltar law firms report a surge in business interest in Distributed Ledger Technology (DLT) and Initial Coin Offerings (ICOs) following the government’s decision to regulate those sectors, (see Token Regulation, p10).

Howitt notes: “We have been involved with ICOs and have used an informal protocol that we established last summer with the GFSC to ensure they understood what we were doing and how we were working in the unregulated areas.  So far we have completed six ICOs and there are more in the pipeline: we also have four DLT providers with GFSC applications pending.”

Triay maintained crypto and DLT work is of concern.  “Gibraltar has been very brave being the first jurisdiction to regulate this type of activity and all within this industry must take great care and act with some trepidation.  The technology is very new and very technical – I don’t think our local professionals fully understand the technology – and as a result, we will need to ensure that our legislation is sufficiently flexible so that Gibraltar is not held hostage to fortune by abuse.

“Inevitably some bad eggs will be attracted to the industry because there is an opportunity to make money  - we therefore need to tread carefully.”  Some enquiries to Triay’s firm were “not within our risk appetite” and he observed: “Regulation isn’t a cure for everything; even with well-regulated financial services, there are still scams and you are never going to stop that entirely. Regulation of ICO’s will make it better, but there is a risk and Gibraltar is addressing it through this new legislation.”

Peter Montegriffo QC, a Hassans partner, admitted to being excited about DLT developments, but also concerned at potential risks.  “I approach the sector with caution.  ICOs are disruptive by definition and there are obvious signs of some pushback from the traditional areas affected – banking as an example.  Gibraltar, as a jurisdiction must not be seen to be going out too much on a limb: it is a delicate balancing act.”

Howitt was pragmatic: “ICOs, it is fair to say, are a high risk area and for lawyers too.  The new DLT law brings high standards and uniformity of approach.  The DLT and crypto space is not dissimilar to the dotcom space a few years ago when thousands of businesses were formed and most didn’t survive; most who did progress were regulated entities and some on the Stock Market.”

Isolas, with 114 staff, including 24 lawyers, gets “20-40 Fintech approaches a day from all over the world”, but turns down around 90% as not meeting requirements.  “There’s a lot of bulls..t around blockchain.  It is a nascent market and there are people who do not have defined products, or understand the risk criteria clearly,” commented chief executive, Marcus Killick.

Joey Garcia, an Isola’s partner who has helped form Gibraltar’s new DLT legislation, is listed by Chamber directory as one of 12 world experts on Fintech, saying he is “a pioneering distributed ledger lawyer, hailed as a “super” practitioner by market sources”.

Since early last year, the sector has taken off “massively” growing the firm as a result, “but there is not a bank of DLT-trained lawyers in the world, so we have had to switch resources and adapt skill sets for existing and new staff”, Killick said.

Hassans too has seen significant growth in recent months as a result of DLT and crypto business.  Its overall income from 100 fee-earners grew 4.7% in 2017-18, (against 3.6% a year earlier), and it attributes 70% to “the FinTech phenomenon”.

Complacency warning

Generally, local law firms are finding greater competition and tougher markets.  “Even though there is no sign of business leaving Gibraltar because of Brexit, we cannot be complacent,” Killick maintained.  Issues include new AML requirements since February under the Proceeds of Crime Act and imminent Data Protection Legislation.  Later this year clients face MIFID ll and the Insurance Distribution Directive.

Montegriffo pointed out: “The whole business of law – here and in the UK – has been evolving, because clients today are better informed and in-the-know, given information is more open, and that is driving competition.  The tendency is for firms to become leaner and meaner; the trend is to downsize as Gibraltar firms, particularly, may be carrying greater overhead costs than are strictly necessary.”

Montegriffo, who remains Gibraltar’s only non-litigating QC after taking Silk in 2014, opined: “Gibraltar’s legal profession is diverse and the majority of practitioners have a range of experience, but there is probably a need for greater specialism in some areas.”

In his Legal Year address Azopardi declared there had been a spate of cases where “Gibraltar lawyers are being relegated to a sometimes nominal role by unregulated lawyers physically present in Gibraltar, for Gibraltar cases, on Gibraltar law. English Counsel get called to the Gibraltar Bar and submit to our Code of Conduct. English Solicitors however, do not.”

He noted: “It is important for the litigation Bar to develop and compete against English Counsel that are briefed in cases on Gibraltar. That is positive from the perspective of ensuring the continual professional development of local advocates.”

David Dumas QC, a Hassans partner and Bar Council chairman since December, added: “One doesn’t know when English solicitors are becoming involved in Gibraltar cases with, say, back office work or drafting of legal documents. This will require registration under the LSA and thus regulation by the LSRA. The Act creates various offences essentially where services are provided where a person is not entitled to do so, not registered to do so, or not exempt.”

Workload for Silks

Litigation and general contentious work has always been important to lawyers – big cases take a long time to resolve. The crash of the Marrache law firm in 2010 still provides litigation in 2018 with appeals by RBS International Bank and Jyske Bank – both cases will have incurred substantial fees.  More recently, the failure in 2017 of Enterprise Insurance is on-going. Triay disclosed: “These cases all provide substantial work for Gibraltar lawyers for many years, even though UK QCs have been involved.”

Launched in late 2016 by Elliott Phillips as part of a London-based firm, Signature Litigation (SL) identified a Gibraltar niche market. In July, SL senior associate Steven de Lara became the first litigator to be licensed by the GFSC to handle administrations, liquidations, receiverships and bankruptcies, a role traditionally identified with practitioners in major accountancy firms.

Formerly an in-house legal counsel at PWC locally and senior associate at Isolas, de Lara explained: “In practice 80% of insolvency appointments, involve legal work, especially when it is a compulsory insolvency.  The difficulty for lawyers is valuing businesses as going concerns. In the same way as accountancy firms instruct lawyers, I can instruct accountants to handle the financial side of things – there is complete synergy.”

SL was involved with the two largest value trust and commercial disputes in Gibraltar’s history the latest being a £1.9bn claim brought by a London-based client, who instigated parallel injunctive proceedings against a Gibraltar trust as part of an international divorce case.  The firm has also been instructed over substantial insolvency insurance cases – Lemma Insurance, (post administration), Hill Insurance and, currently, Enterprise where SL acts for a subsidiary.