While there have always been local alternatives to using English law in the financial sector, some markets are almost wholly dominated by London. Take the 660 trillion-euro ($742 trillion) European derivatives market, where the City’s primacy as a legal jurisdiction has been unchallenged. The British capital offers the flexibility of English common law, the predictability of using precedent rather than codified statutes and – as an EU member – the automatic Europe-wide enforcement of legal rulings. A contract dispute over a derivative between a German investment bank and an Italian client will, for example, often end up in an English court.
Britain’s departure from the EU will remove one of those key advantages for London, and other cities are seizing on this. Last year, the International Swaps and Derivatives Association, a global standard-setting body, published new French and Irish law versions of its “master agreement,” which is used to govern over-the-counter derivatives.
If English law becomes “third-country law” after Brexit, English court decisions would no longer be automatically recognized and enforced across the EU and counter-parties would lose out on certain bankruptcy protections, according to the ISDA. This isn’t quite as urgent as the banks’ imminent loss of their EU financial passports. But it’s still a potential hassle for finance firms and their clients, and a risk.
Paris and Dublin have wasted little time in trying to capture ground here. France’s top asset-management association, AFG, lent its official support to the French master agreement in January. Paris has also opened a new appeals court to hear disputes in English and to use English practices, a clear nod to those who want to keep doing business the old way. It’s also cheaper to file a case there. The Irish government, meanwhile, is pitching Dublin to firms who prefer common law to French civil law. Cautious U.K. lawyers worried about losing access to business have rushed to join the Irish Roll of Solicitors, according to reports.
None of this will matter if clients don’t follow. But they do seem to be voting with their feet. Paris lawyer Laurent Vincent, at Gide Loyrette Nouel, says that the French contract is seen as a useful tool by big corporate clients and banks as part of their contingency planning ahead of Brexit. Judith Lawless, a partner at McCann FitzGerald in Dublin, says she has seen “significant” client interest at her firm for the Irish version of the contracts. Capital-markets traders say investors are asking for local law over English law.
As with all things Brexit, there’s plenty of skepticism from within the City that legal alternatives to London will ever really take off. Allen & Overy, headquartered in London, and New York’s Shearman & Sterling argue that any post-Brexit effects will be technical and easily resolved in most cases. Marc Benzler, a partner at Clifford Chance, says it may take 10-15 years to really see whether EU counter-parties change their habits to shift enforcement to their own backyards.
Still, it’s a bet worth making for Paris and Dublin. Chipping away at London’s financial and jurisdictional primacy will be a long game.
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Lionel Laurent is a Bloomberg Opinion columnist covering Brussels. He previously worked at Reuters and Forbes.