The 2010 election promises to be the most significant for business for a generation, but City lawyers remain uncertain of its impact. Alex Novarese assesses the key policies for the profession and gauges the mood among legal veterans

It seems the legal profession faces what will in policy terms be by far the most significant general election since 1997 like much of the general public: confused about which way to go.

For once, that is not because the election will be of little relevance to the hardened City lawyer; it is a long time since an election campaign has been so heavily focused on issues directly affecting the Square Mile.

In part, this ambivalence is due to the shifting ground of the UK's three main political parties, which has become even more complex since the rise of New Labour in the 1990s upset the left/right dynamic between the UK's two primary parties.

One on hand, Labour's agenda has clearly edged leftwards since the credit crunch, moving to a more interventionist stance. On the other hand, the revival of One Nation Conservatism under party leader David Cameron, together with strenuous efforts by party leaders to move towards more socially progressive ground, has stopped clear ideological distance opening up between the two parties.

In addition, the Liberal Democrats under Nick Clegg, whose success in the first two televised leader debates has defied the pundits to transform the election into a genuine three-way contest, have also shifted right in policy terms over the last two years.

Denton Wilde Sapte chief executive Howard Morris sums up the mood of many when he observes: "Not much separates the parties – the key issue is going to be to get this huge deficit down."

Lord Tim Clement-Jones, a partner with DLA Piper's government relations practice and currently a Liberal Democrat spokesperson on culture, media and sport in the House of Lords, argues the competing policies and emergence of the Lib Dems as a real force will make this a historic election.

"It's going to be the most exciting election since 1974 because there is going to be a three-way fight. There is a chance of a new order opening up."

However, it would be naive to regard the commercial legal profession as either politically neutral or inherently free-thinking in its outlook. The 'Conservative with a small c' comment about the profession has become a cliche for a good reason and it is clear that the profession has instinctively swung back behind the Conservatives, if somewhat grudgingly.

A Legal Week poll of partners' political views last month found almost two-thirds (63%) of respondents saying they were likely to vote Conservative, against 20% for Labour and 15% Liberal. This is a figure well ahead of the level of support the Conservatives have attracted even before large leads they had enjoyed in polls throughout 2009 faded in recent months.

Neither is this mood reflective of the wider decline in Labour's popularity in the latter years of the Tony Blair and Gordon Brown administrations. Research by Legal Week shows that senior lawyers swiftly fell out of love with Labour after its 1997 election victory, with a poll of partners ahead of the 2001 election finding that 44% of respondents planned to vote Conservative against 30% for Labour. This was an election in which Labour went on to secure a second landslide victory.

Blue but not true

Yet the overwhelming level of support that the commercial profession professes for the Conservatives is accompanied by little apparent love. Even in off-the-record discussions, few senior lawyers display much enthusiasm for Her Majesty's Loyal Opposition.

Some of this ambivalence appears to be directed towards a policy agenda for the City and business which fails to create much distance with Labour and in some cases is viewed as more interfering or 'little Englander' than the current Government.

So while both parties enter the election promising substantive measures to reform the banking industry and financial services regulation, the Conservatives' policies have failed to set lawyers' pulses racing.

Both parties have come out in favour of a new taxation on banks to compensate for the costs of bailing out failing institutions. The proposals are controversial, with critics arguing it would increase instability by making banks take greater risks due to having explicit protection.

However, while such proposals would have been unthinkable a few years ago, the UK looks in line with the current mood in other Western countries with the US, International Monetary Fund and Continental Europe all exploring broadly similar measures (leaving Japan and Canada as primary exceptions).

As a related factor, while there is still a general unease about the extent to which the UK has lost its unquestioned position as a business-friendly environment, there is currently less concern among City lawyers that the election will substantially damage the City's standing compared to, say, six months ago.

Allen & Overy (A&O) senior partner David Morley (pictured) argues that despite the considerable challenges facing the debt-laden UK economy, the UK has much to offer the world. "There's no doubt that the UK has taken a knock – but perhaps that needed to happen. There is a resilience in this country – an ability to bounce back. There's plenty wrong with the UK economy, but there's no lack of ingenuity."

It is also a measure of the extent to which City lawyers have in many cases lost their instinctive, knee-jerk support of the banking profession that such moves to shackle or reform the industry fail to inflame.

City lawyers' doubts in the areas of tougher regulation and taxation of the banking industry are more linked to the effectiveness of individual policies rather than blanket ideological doubts regarding the need for reform.

As such, one flagship Conservative policy continues to divide the views of City lawyers: ending the tripartite regulatory system of banking regulation that led to the creation of the Financial Services Authority (FSA). The Conservatives aim to hand powers back to the Bank of England. Supporters argue this would create clear lines of responsibility and that the system failed during the credit crunch. Critics, which among lawyers are probably the larger group, say it is the style of enforcement rather than the regulatory architecture that was to blame, pointing out that the FSA has shown itself willing to reform and take a more robust stance.

Some would also assert that the Bank's record for supervision was hardly spotless, given the collapses of Bank of Credit and Commerce International and Barings on its watch.

What seems a given when assessing the general policy debate ahead of the election and the actions of bodies like the FSA, the Office of Fair Trading and the US Securities and Exchange Commission, which this month shocked US markets by launching a civil fraud case against Goldman Sachs, is that western economies are facing a concerted push towards tougher enforcement and regulation across a range of sectors.

Those needing more evidence of this shift can point to the much-trumpeted passing of the Bribery Act this month and the Conservatives' pledge to introduce a unified agency to pursue white-collar crime.

This shift towards a more prescriptive mode of regulation for the City has certainly not been lost on commercial law firms, which in many cases are seeking to redouble their investment in regulatory practices.

Cadbury's Law – back on the agenda?

Until recently, M&A practitioners could have largely dismissed calls for so-called Cadbury's Law reforms, named after Kraft Food's controversial takeover of Cadbury. But the eleventh-hour emergence of the Lib Dems as potential king-makers in a hung Parliament has put the issue back on the agenda.

The Lib Dems, like Labour, have pledged to reform the UK's takeover regime to introduce a public interest test and reforms favouring long-term shareholders over hedge funds, which critics argue have become a decisive force in sealing corporate takeovers.

Another strand of criticism about the UK takeover regime is that the UK's ultra-liberal stance to foreign takeovers puts British business at a disadvantage, given that few other countries take such an open-market approach.

Unsurprisingly, many corporate lawyers, who have benefited from the UK's M&A-friendly regime, oppose such reforms, arguing it would undermine the City's position and that the UK economy benefits by attracting investment and expertise.

Many practitioners argue that it would be difficult to create tools that effectively lessen the influence of 'hot money' investors (though the example of the US, where target companies enjoy substantial scope to slow or block unwanted bids, arguably suggests otherwise).

However, the argument against Cadbury's Law reform is less conclusive than some corporate lawyers concede. While there is undoubtedly some evidence that the UK's free-market credentials have benefited the economy, the current takeover regime was constructed for an age in which long-term institutional investors drove the markets. It was not designed for an age in which hedge funds have become such a major force in corporate bids.

But not everyone is opposed, with Ashurst senior partner Charlie Geffen commenting: "You can see that there is an area for debate when you have a company coming into play and two days later the shareholder register undergoes significant change into short funds. I think it is entirely appropriate to have a debate about it."

Despite the Conservatives rejecting any such move, the increasing odds of a hung Parliament suggest the debate could re-emerge, particularly if another controversial bid comes along to put the issue back on the agenda.

Deficit reduction – music to lawyers' ears

If supporting a liberal M&A regime is a clear mark in the Conservatives' favour for the profession, there is another factor that plays well with lawyers: the Conservatives' tougher stance on dealing with the deficit.

Arguably, this comes less from an economic standpoint than from lawyers' own business model, which already shied away from debt before the credit crunch.

The differences between the two main parties on this crucial area are considerable, though ironically less so on the point that has hogged the headlines: whether to begin cutting the deficit in 2010. The Conservatives are talking of cutting spending by around £6bn this year before stepping up a gear in 2011. Yet this is an insignificant sum in the context of fiscally tightening a £1.5trn economy currently running an annual budget deficit of more than £160bn.

The differences in approach become more pronounced in the next Parliament, with Labour proposing to halve the deficit by 2014 while the Conservatives have pledged to eliminate "the bulk of the deficit" by the end of the Parliament in 2015, implying a far tougher squeeze on public spending during 2012-15.

"I'm conservative with a small 'c'," says Travers Smith managing partner Andrew Lilley (pictured). "I guess in my water I feel that we should be cutting the deficit more quickly."

But if the Conservatives have struck a chord on economic management, there are two areas in which the legal profession has major reservations: one a practical issue, the other regarding big picture policy.

The first is immigration, where the Conservatives' policies have been badly received in the City in general, and particularly in law firms. The pledge would introduce a cap on the number of non-EU migrants, potentially causing problems for law firms that have often recruited heavily from markets like Canada, Australia and New Zealand.

Labour has also said it would tighten up the existing points system, while the Liberals have promised to adapt the current model to reflect regional labour requirements.

Kingsley Napley immigration head Nick Rollason comments: "The Conservatives' plan for quotas on the numbers of sponsored migrants will simply not work and will act as a barrier to UK companies being able to sensibly plan their recruitment needs. Law firms will be particularly affected, considering they plan far in advance when hiring future trainees – they could pay significant sums for their legal education and have no guarantee that the trainee would be able to start if the quota had already been exhausted."

The more profound area that commercial lawyers are uncomfortable with is over the Conservatives' attitude to Europe. The Conservatives' fractious relationship with the EU is probably the biggest broad-strokes area in which they fail to win over City opinion, reflecting the unambiguously internationalist outlook of major law firms.

And while the party under Cameron has considerably toned down the rabid anti-EU sentiment that disfigured the Conservatives in the 1990s, flagship policies like abolishing the Human Rights Act in place of a Bill of Rights grate with many lawyers.

"The fact is that professionals know that Europe is going to have a huge influence on us and we've got to have as much influence on Europe as we can," says DLA Piper's Clement-Jones. "The Tories' stance of dealing with Europe while holding their nose is most contradictory." Another head of a major City firm says that Conservatives are "as hostile to Europe as we've ever seen".

Also getting short shrift from lawyers are Conservative plans to introduce a Sovereignty Bill to enshrine the powers of UK Parliament in relation to the EU. This strikes most lawyers as pure grand-standing, since the UK's constitutional arrangements with Brussels make it impossible to substantially redraw without the UK pulling out of the EU (which Cameron has ruled out).

One senior banking lawyer describes such moves as "all rather gimmicky. We need to be moving forward – we need ideas that will connect with the world, not go into retreat".

Law between the lines

If there are substantial issues of business and economic policy for corporate lawyers to get their teeth into, as ever, the election and manifesto commitments remain light on issues directly affecting the legal profession.

Even in the more headline-friendly areas of criminal law, the manifestos come up relatively light while there is little hope for those expecting any renewed commitment to legal aid.

As Clement-Jones observes: "I've been involved in every election since the 1970s and it has always been a struggle to get law in there. It's just not a big issue at elections."

However, there are issues directly impacting on the profession even if in many cases they receive little space in the manifestos. For one, there remains the implementation of the Legal Services Act, the most radical elements of which are not due to come into full force until well into 2011.

While the few public statements from the Conservatives on the Act indicate little chance of outright opposition, shadow minister for justice Henry Bellingham, who would be directly responsible for legal services if elected, has indicated concern about the speed of implementation.

Another area in which policy looks to be well and truly in play is libel reform. Following an effective media campaign backed by bodies like Sense about Science and Index on Censorship, Labour swung increasingly in favour of substantial reform of the UK's libel laws.

Justice minister Jack Straw issued proposals in March for sweeping reform to make it harder for foreign claimants to use UK courts and usher in a new public interest defence, and if elected is expected to put forward a full libel reform bill. The Lib Dems are also committed to moves to tilt the playing field away from rich claimants, a model that critics claim is open to abuse from lawyers using success fees and litigation costs as tactical weapons.

However, many defamation specialists remain cynical over the current mood for reform, with Olswang litigation partner Dan Tench commenting: "All parties have been somewhat vague on libel law reforms in their manifestos. Despite Labour taking a strong stance in the last few months, it is not clear whether this enthusiasm will survive the election.

"Libel reform is surely unlikely to loom as an important issue when compared, for example, with forming a coalition or sorting out the deficit."

Lord Justice Jackson's wide-ranging report on of civil litigation costs, which was published in January, also includes proposals that would directly impact on defamation cases, including abolishing the recovery of after-the-event insurance premiums and success fee uplifts from the losing party.

Lawyers will also be watching the new administration's attitude to Jackson's proposals, which include the introduction of contingency fees, a potentially controversial move, and the banning of referral fees. The Conservatives have so far made supportive noises regarding Jackson but have yet to make substantial commitments on implementing any proposals.

If the legal issues remain largely between the lines during this election, the same can not be said for legal policy's distant cousin, constitutional reform. Despite the fact that little of the election debate has focused on constitutional issues, the manifestos all contain substantive proposals, certainly the most far-reaching since the 1997 Labour manifesto, which ushered in devolution in Scotland and Wales, partial reform of the House of Lords and a string of EU-related legislation.

These include the aforementioned Conservative proposals for a Bill of Rights and Sovereignty Bill, which are primarily of interest to constitutional classicists, scholars and lawyers, but also encompasses the kind of issues that could have huge practical impact on the political process. Labour is promising referenda on moving to a more proportional voting system and the creation of a democratic second house by October 2011.

Once again the Lib Dems want to go further, though the difference in this election is that their wish list could actually have an influence on policy. The Lib Dems are backing a purer model of proportional representation for elections to the House of Commons, a move that would probably make coalition government a regular fixture in Britain, a fully-elected second house and a referendum on a written constitution.

Big issues, little influence

Given the range of substantive issues that are up for debate, perhaps one question for the legal profession is why it has generally struggled to plug into the policy process, and politics in general. This contrasts sharply with comparable industries like banking, fund management, insurance and accountancy, which have for years made assiduous efforts to keep up with and influence the direction of policy. Neither have City practices achieved the kind of prominence that top Wall Street law firms have demonstrated in the development of policy regarding securities, regulation and M&A.

This disparity is all the more pressing, given that the legal profession has been one of the largest suppliers of the political class in the post-war Britain – including producing Labour's most electorally successful prime minister in the shape of Tony Blair. In addition, one of the core duties of central government – law-making – is inherently legalistic.

"It's a perfectly valid point to make," says Ashurst's Geffen. "It's a shame. We are well behind the accountants, [and] if you look at the Wall Street firms they not afraid to make their voices heard. Look at Wachtell [Lipton Rosen & Katz] – they put out some really punchy briefing notes."

By consensus, this is partly due to the diversification of commercial legal practice, which leads lawyers to often think in terms of dozens of practice areas or industry sectors rather than as a unified whole. Others point out that, unlike accountants and much of the investment industry, commercial law firms generate very little of their income from the public purse.

There is also the paradox that lawyers, as advisers to industry, are affected by virtually every new major piece of legislation and yet are hardly ever directly impacted. During Labour's 13-year administration, arguably only two statutes had major impact on the profession – the Limited Liability Partnerships Act and the Legal Services Act – and there is little evidence that the profession had much impact in shaping either of those statutes.

However, the end result is that the legal profession in the UK continues to punch under its weight in the policy process, even as western economies have increasingly focused on tougher approaches to regulating business which play to the profession's skill-set.

This has left lawyers with some influence for clients, albeit at the legislative end of the process, rather than helping to shape the polices going in. It may explain why the legal profession tends to approach general elections – even ones as significant as this – as interested but somewhat disconnected parties rather than full-blooded participants in the business and legal debate.

Nevertheless, City lawyers will inevitably be affected by what looks certain to be the most radical period for regulation and management of business since the 1980s. In the short term, the profession will almost certainly benefit from a renewed onslaught of primary legislation under a new government. But, like the rest of the country, lawyers do not seem to know quite how to feel about the change that is coming on 6 May.

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CONSERVATIVE PARTY – KEY POLICIES FOR LAW AND BUSINESS

Business and City:

• Abolish tripartite system of financial regulation and hand the Bank of England the supervisory duties currently held by the Financial Services Authority
• Introduce levy on banks, ideally with international agreement but not ruling out acting unilaterally
• Pursue international agreement to prevent retail banks fromengaging in high-risk activities
• Introduce regulatory budgets so Government bodies cut regulation before introducing new measures
• Set annual limit on the number of non-EUmigrants allowed towork in the UK, limiting access to those who will bring "most value to the British economy"
• Create a green investment bank to provide private sector capital to finance new green technology start-ups

Taxation and the economy:

• Start cutting the UK's deficit this year. Public spending to be cut by £6bn in 2010. Party aims to get rid of the bulk of structural deficit by 2015
• By April 2011 raise the primary threshold for National Insurance by £24 per week and the upper earnings limit by £29 per week as well as the secondary threshold at which employers start paying National Insurance by £21 per week
• Cut headline rate of corporate tax to 25%and smaller companies rate to 20%, funded by cutting other allowance and reliefs
• Consult on a move towards a territorial tax system that only taxes profits generated in UK
• Permanently raise stamp duty threshold for first-time buyers to £250,000
• Raise inheritance tax threshold to £1m paid by flat-fat levy on all non-domiciled individuals
• Freeze council tax for two years and give residents right to veto proposed increases

Constitutional reform:

• Cut ministers' pay and reduce number of MPs in Parliament by 10%
• Ban ex-ministers from lobbying Government for two years after leaving office
• Abolish Human Rights Act and replace with Bill of Rights
• Introduce Sovereignty Act codifying the primacy of Parliamentary power in relation to the EU

General policies at a glance:

• NHS budget protected from real cuts over next Parliament
• Encourage parents, charities and other groups to set up new publicly-funded schools
• Encouragemarriage through tax breaks
• On the record as concerned about the pace of implementation of liberalisation under the Legal Services Act, though the party has not opposed the general trust of the Act
• Review and reform libel laws to protect freedom of speech, cut costs and deter libel tourism

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LABOUR PARTY – KEY POLICIES FOR LAW AND BUSINESS

Business and City:

• Backing so-called Cadbury's Law reforms to takeover regime. Includes requirement of a two-thirds majority shareholders' vote in corporate takeovers, increase disclosure requirements for share ownership, adviser fees and financing arrangements for bids
• Institutional shareholders required to declare how they vote
• Banks compelled to keep more capital and create 'living wills' to ensure orderly wind-ups without damaging the entire banking system
• Creation of green investment bank to boost environmental business
• In favour of introducing new taxation on banks to compensate for implicit state guarantees
• Tighten points-based system for immigrants but no specific cap

Taxation and the economy:

• Freeze basic, higher and new top rates of income tax during the next Parliament
• Abolish stamp duty for first-time buyers on all house purchases below£250,000 paid by new
• 5% rate on homes worth more than £1m
• Deferred spending cuts and major tax increases until 2011, with target to halve budget deficit by 2014 through combination of growth, tax rises including higher national insurance from next year and spending cuts

Constitutional reform:

• Hold referenda by October 2011 onmoving to alternative voting system for election to House of Commons and a democratic second chamber

General policies at a glance:

• NHS mostly shielded from real terms cuts until spring of 2013
• Pledge to maintain real terms spending on education and more intervention with failing schools
• In favour of substantive libel reform, with justice secretary Jack Straw inMarch issuing proposals to curb use of English courts by foreign litigants, introduce a new public interest defence and usher in new cases on limits that can be pursued.

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LIBERAL DEMOCRATS – KEY POLICIES FOR LAW AND BUSINESS

Business, City and employment:

• Legislation to separate retail and institutional banking. Manifesto talks of creating "a clear separation between low-risk retail banking and high-risk investment banking"
• Introduce a levy to charge banks for financial support they have received until they can be broken up to split investment and retail banking
• Broadly echoes Labour with Cadbury's Law reforms. Specifically proposing a public interest test in takeover rules to account for "broader range of factors than just competition". Reforms to support power of long-term shareholders
• Introduction of regional points-based system to ensure migrants can "only work where needed" Introduction of fair pay audits for companies with over 100 employees to combat discrimination
• All employees to gain right to request flexible working

Taxation and the economy:

• Tax capital gains at the same rate as income tax
• Replace council tax with "a fair local tax"
• Plan net savings of £10bn a year. Take 3.6 million low-earners out of income tax funded by higher taxes for better-off

Constitutional reform:

• Introduce single transferable vote for general election (system usually called proportional representation); cut numbers of MPs by 150
• Create fixed-term Parliaments
• Replace House of Lords with fully-elected second chamber
• Hold referendumon a written constitution

General policies at a glance:

• Phase out university tuition fees within six years
• Turn primary-care trusts into elected local health boards
• Committed to libel reform to curb libel tourism and support free speech

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