The departure of Allen & Overy underlines the Wharf's failure to woo City lawyers

While hardly representing a fatal blow to Canary Wharf's status as a world-class banking hub, the news that one of only three major law firms to have headed east in the 20-odd years since the development's launch is to now leave must be a tad disappointing for Docklands' backers.

Allen & Overy's (A&O) decision to transfer 200 staff in its banking practice to its Spitalfields HQ leaves Clifford Chance (CC) and Skadden Arps Slate Meagher & Flom as the only major legal players on site. Given the lack of success the development has had in enticing law firms eastwards even during the boom years, the chances of a legal community by the Thames now look remote. Law firms are a funny breed – as much as they like to put their rivals down, they want to be in the community of their peers.

The Wharf has also had to cope with a few high-profile reverses since the credit crunch, with Nomura moving out following its acquisition of Lehman Brothers' UK business. There are also doubts over whether JP Morgan, which has arguably emerged from the banking crisis as the world's most powerful finance house, remains committed to its Riverside South development.

A&O's reasoning behind the move is one of cost-saving and logistics with the firm having considerable free space after recession-related cutbacks last year. The firm – which initially moved groups of lawyers to its Bank Street offices in 2003 – maintains that since it is retaining sizeable meeting facilities, clients will notice little difference.

The firm still has a large crop of key clients in Docklands, among them Barclays, HSBC, Citigroup and Morgan Stanley. But there is also a strong pull of clients in central London, such as Royal Bank of Scotland, Deutsche Bank, UBS and Nomura.

By consensus, while a Docklands outpost sent out a strong message to clients, splitting its banking practice in two wasn't always a logistically happy experience. Such issues would have been more to the fore in the wake of last year's restructuring. Ironically, after the shake-up, A&O last summer transferred more finance lawyers to Canary Wharf. Though partners downplay such issues it is not hard to see how it would be easier to galvanise a team that has faced considerable upheaval from a single location.

Banking lawyers also agree that Canary Wharf has recently lost some drawing power compared to central London. The easing of restrictions on tall buildings in the City and the narrowing of the gap in rental rates between the two districts has made it harder going for Docklands. In a broader sense, this reflects the development of London as the financial district has spread out further beyond the confines of the Square Mile. Increasingly 'the City' can be taken to refer to developments in Liverpool Street or the hedge fund and private equity stamping grounds of Mayfair.

In this context, veteran City watchers will remember with some amusement the mild shock that greeted Freshfields' decision to set up shop as far afield as, er, Fleet Street in 1990, a move which did nothing to blunt its investment banking assault. The City has become an amorphous beast and given the choice, it appears that City law firms are reluctant to congregate to the east. As one CC partner drolly comments: "Who knows what impact it will actually have. How often do people have face-to-face meetings these days?"

For more, see A&O quits Docklands as 200 banking staff move back to firm's City base.