RBS listens to advisers as Lloyds pushes for value but outlook will challenge banks' position, writes Suzanna Ring

Early last year, Legal Week asked whether law firms' love affair with banks could survive a series of tough panel reviews. Recent evidence, judging by reviews at two of the UK's most coveted finance clients, suggests that some accommodations have been made to external counsel but that banks are still intent on driving a hard bargain.

Still, perhaps it's ironic that it is the Royal Bank of Scotland (RBS) – which had a reputation for demanding tough and prescriptive panel terms even before the recession and its subsequent rescue with taxpayer funds – that has done much of the accommodating.

RBS confirmed that it was scaling back its sprawling panel from around 100 law firms to 60 and simplified its 13 sub-panel roster in favour of five panels: tier one and tier two 'own account' panels; a roster for work generated by RBS clients; one for volume work and a new alternative provider line-up, which comprises a mix of firms with volume experience and legal process outsourcers (LPO).

However, while it has obviously cut the number of advisers, the message from the bank – and its advisers – was that RBS has incorporated much adviser feedback in the shake-up.

rbs-insurance-sell-off-direct-line-churchill-ECMaking things simpler?

The simplified structure and reduction in firms is intended to ensure advisers receive the volume to compensate for the strictures and relatively tough rates demanded by the bank (RBS demands some of the most competitive rates in the City with reports that partners at major firms are often billing at around £350 an hour).

RBS, along with many banks, has also long attracted private criticism from advisers for operating huge panels, which may not generate much work for some individual firms, while still expecting panellists never to litigate against them.

RBS will also not allow its advisers to cap their own liability in relation to the bank's work. One sign that patience had run thin with RBS emerged last year after Slaughter and May stood down from the bank's panel due to its policy on advisers limiting liability.

Funnelling work through fewer firms and sub-panels is seen as a means of ensuring advisers get enough to justify jumping through RBS' hoops, while giving the bank enhanced bargaining power with its chosen counsel.

In addition, RBS, unlike its previous reviews, did not attempt to squeeze down further on rates or push unpopular measures such as e-tendering.

Kicking off its review in June, RBS' intention to scale back its panel was widely known, with a greater emphasis on the provision of LPO capability cited by partners as one of the main changes to terms compared with previous reviews.

The review was led by RBS deputy general counsel John Collins and general counsel of corporate M&A Rushad Abadan. Collins told Legal Week: "We see this as part of the continuing evolution of our group and UK legal panel structure, where we effect intelligent purchase of our legal services.

"We will judge success on how effective we are over the next three years in changing the behaviours of our own people and the legal suppliers we have included on our panel."

lloydsbankinggroupnewRival bid

If RBS has struck a somewhat more conciliatory note with advisers than in previous reviews, its rival Lloyds has maintained a robust stance during its recent tender.

The Lloyds pitch document included a request for firms to give detailed information about how they were going to deliver services, with requests for information about whether the work will all be handled from one office, or, if not, how firms were shifting their cost base to ensure the bank is not incurring any added expense.

Two partners at Lloyds advisers confirm that the bank was intent on securing further reductions on headline rates during the review, with firms expected to be compensated by an overall slimming of the panel, which cut its adviser roster by about 10%.

One partner at a panel firm says: "There are two reasons banks are reducing their panels. First, because business has decreased and you don't need as many firms on your panel as in good times.

"Second, with the increasing pricing pressure, banks need to be able to offer firms a greater volume of work against the tighter terms. If you know you are going to generate 'x' million, you can afford to drop your rates further and banks know this. That's the battle going on."

Still worth it?

Aside from individual reviews, the issue remains of whether the place that banks have as priority clients to major law firms will come into question as a battered finance sector continues to try to push down on rates.

One banking partner says: "There is a danger of some of the top firms starting to not go for panels if they reckon they can get enough work off-panel or from other clients on the borrowing side."

This view was corroborated this summer when several law firms told Legal Week they were discussing whether to pitch for RBS and Lloyds this time around in light of the increased pressure on reducing rates and the amount of work they were actually getting from the banks compared with the work they were kept away from as a result of the tight terms on conflicts.

One panel firm partner says: "Pressure on panel terms has continued to increase over several years. Some who have a huge flow of transactions – and RBS and Lloyds would be included in that category – are having to balance shrinking their panels with making sure there are enough firms to do all their work. Firms will be watching to ensure they are being offered the volume to make it worth their while."

There is no doubt that long-term trends strongly suggest banks' status as the most important clients to law firms will come under pressure given that tougher regulation and capital requirements are set to make the regulated banking sector shrink over the next 10 years.

Three magic circle firms are known to have initiatives focused on the expected reduction in the size of banks and a corresponding growth of alternative finance providers such as hedge funds and special situation investors.

It may be that retail-heavy banks – which are tougher on rates than investment banking clients – see their leverage over law firms eroded as advisers focus on higher-growth, high-margin areas.

And with banks once again in the headlines after being targeted in a series of regulatory probes this year – among them HSBC, Barclays and Standard Life – banks may find their ability to force down rates for high stakes contentious matters under challenge.

Traditional banks will remain hugely influential in the legal sector, but the high point of their clout may have already passed.