UKFI goes off-panel for Northern Rock sale as Freshfields takes first piece of 'sexy' work

"It is yet another manifestation of the Treasury's inconsistent approach to legal procurement," states one agitated Government adviser in response to this week's news that UK Financial Investments (UKFI) – the body which manages the Government's stakes in UK banks – has gone off-panel on the upcoming sale of Northern Rock.

Despite having gone through a formal panel process in 2009 to select four firms to handle the sale of its stakes in big banks, UKFI ultimately bypassed its formal line-up of Slaughter and May, Allen & Overy, Herbert Smith and Simmons & Simmons to instruct Freshfields Bruckhaus Deringer corporate partner Barry O'Brien and global head of finance Alan Newton on the mandate.

"The appointment makes a complete mockery of the panel," laments one commercial partner. "The first sexy piece of work since its launch, and the mandate goes to Freshfields, which wasn't even on the panel."

O'Brien, who had been put forward to pitch by Northern Rock's board alongside the four designated panel firms, had not been considered for the line-up in 2009 due to Freshfields' close links to financial institutions. However, his longstanding relationship with the mortgage lender – coupled with his recapitalisation experience – were motivating factors for the appointment.

The sale, which is hoped to generate around £1.5bn for the Treasury, is obviously a coup, being likely to generate several million pounds in legal fees and a headline-friendly mandate for Freshfields. The appointment has been taken as a reverse for Slaughters, which advised the Treasury in the wake of the near-collapse of Northern Rock in 2007 partly due to its impeccable privatisation credentials and also because it has fewer ties to banking institutions than some of its peers.

UKFI's panel had originally been set up in response to criticism following the news that Slaughters had earned over £25m in legal fees from the Treasury after acting on a string of bank support matters, starting with the Rock.

The Government appointed only four firms to the panel out of 17 that tendered, but this has not resulted in any mandates for the three firms appointed alongside Slaughters, except for a small regulatory matter.

Aside from the UKFI panel, the Treasury also appointed legacy Lovells and Herbert Smith alongside Slaughters to a three-firm bank stability panel in 2009 – apparently also to head off criticism over its legal procurement. The consensus among legal advisers is that both panels were set up for political reasons rather than to manage a clear procurement need – and that Slaughters' stranglehold on choice Whitehall work is weakening.

As one partner comments: "Seventeen law firms invested in pitching for UKFI, and it turns out the panel was just a gesture – a response to public pressure."

Some take a more charitable view. "It was always going to be an appointment for the long term," says one partner at a panel firm. "Some of these assets are simply not worth selling until they have progressed along the recovery path. There will be opportunities on restructuring, regulatory and capital markets work."

Indeed, the unwinding of the Government's stakes in the banks – it owns 84% of Royal Bank of Scotland and 41% of Lloyds – is expected to generate substantial fees for law firms. Yet there is little doubt that patience among City lawyers with the procurement methods of Whitehall is wearing thin, with many expecting City firms to focus rather more on acting for potential commercial bidders.

"I sympathise with law firms wanting to move away from the public sector," concludes one partner. "The majority of UKFI officials are former investment bankers – being financially shrewd comes with the territory."