It has been almost eight months since Bank Negara Malaysia’s (BNM) announcement to allow up to five top international law firms with expertise in international Islamic finance to practise in Malaysia. So, where are all the foreign lawyers?
After years of discussing the prospect of liberalizing the legal services industry and fears that liberalization would bring a tirade of hungry foreign lawyers, the reaction to BNM’s announcement has been singularly underwhelming.
BNM’s announcement was part of an initiative to further develop Malaysia as an international Islamic financial hub and was coupled with announcements to liberalize the financial and banking sectors, including offering two new foreign Islamic banking licenses, two licenses for foreign insurance and Takaful agencies and five new licenses to foreign commercial banks.
It would appear however that BNM misjudged the market when it formulated the announcement. Norton Rose, Allen & Overy and Clifford Chance, which are among the top international firms with expertise in Islamic finance, have all reportedly not warmed to the idea of setting up a Malaysian presence under the current model offered by BNM.
There appear to be two key reasons for this.
From a financial standpoint, it would not be cost effective for an international firm to spend money to open an office in Malaysia which solely operates an Islamic finance practice. For it to be a worthwhile venture, international firms need to have the opportunity to provide full-service capabilities.
Also, notwithstanding the growth of the Malaysian Islamic finance market, many perceive the Gulf as the place to be for Islamic finance lawyers. Given that most of the international law firms with expertise in Islamic finance already have offices in the Gulf, why would they want to or need to open offices in Malaysia?
It is not only abroad that BNM’s announcement has been met with disappointment. The Malaysian Bar Council, which has labored over discussions with BNM and the Attorney General’s Chambers for years on the topic of liberalization, was disappointed by the announcement which came as a surprise even to it.
According to council president Ragunath Kesavan, “the Bar Council has always been in favor of liberalization. However, we advocate a managed system of liberalization whereby foreign law firms enter into joint ventures with Malaysian law firms after the necessary reviews and checks have been carried out”.
He told Islamic Finance news that the form of liberalization announced by BNM means that Malaysian counterparts may not benefit from the transfer of knowledge or technology from these foreign firms. A joint venture model, in Kesavan’s view, will help to avoid this problem.
The joint venture model between local and international firms has been tried and tested in many other countries. However, it has not been without problems. Critics in Malaysia of the joint venture model look to Singapore as proof that it doesn’t work.
Kesavan, however, is less pessimistic. “No other country has allowed outright liberalization of the legal industry, so why should Malaysia? Singapore has its success stories too,” he argues. “What we are advocating is phased liberalization … we are OK with competition but it is important to ensure that we protect public interest by preventing ‘fly-by-night’ operators to move in and out of Malaysia without controls.
“We also want to avoid a situation where law firms set up representative offices in Malaysia but take all the work to Singapore and Hong Kong.”
Notwithstanding the comparative attractiveness of setting up offices in Singapore and Hong Kong, Kesavan identified three key strengths of the Malaysian legal industry which may help to attract foreign law firms to the country in the future:
• English is widely spoken among practitioners as well as support staff and is of a good standard.
• Malaysia offers a much cheaper hub than Singapore or Hong Kong in which to set up and operate a firm.
• Malaysia has developed expertise in Islamic finance which, as yet, is unmatched in Singapore or Hong Kong.
According to a recent report, the legal industry globally is facing its worst slump in decades with jobs and bonuses being drastically cut. Against this backdrop, it is understandable that the top international firms have not responded to BNM’s announcement with enthusiasm despite the appealing growth of the Islamic finance market in Malaysia.
Sadly, it seems that the apparent inadequacy of the terms of BNM’s announcement has resulted in no change to the Malaysian legal environment eight months on. The previous excitement surrounding the prospect of liberalization seems to have been quelled for the moment.