In a nutshell
Banking and finance lawyers deal with the lending and borrowing of money, and the management of financial liabilities. Their task is to help structure their clients’ transactions, to protect their clients’ best legal and commercial interests, and to negotiate and document the contractual relationship between lenders and borrowers. It’s a hugely technical, ever-evolving and jargon-heavy area of law. For anything banks do with capital raising or financial instruments, see Capital Markets.
"This area allows you to push yourself and increase the percentage of time spent doing things that are new, interesting, challenging and occasionally frightening." – James Florack, Davis Polk
Straightforward bank lending: a bank or other financial institution lends money to a borrower on documented repayment terms. Bank loans may be bilateral (made by one bank to the borrower) or syndicated (arranged by one or more financial institutions and made by a group of lenders).
Acquisition finance: a loan made to a corporate borrower or private equity sponsor for the purpose of acquiring another company. This includes leveraged finance, where the borrower finances the cost of an acquisition by borrowing most of the purchase price without committing a lot of its own capital (as typically done in leveraged buyouts).
Real estate finance: a loan made to enable a borrower to acquire a property or finance the development of land, commonly secured by way of a mortgage on the acquired land/buildings.
Project finance: the financing of long-term infrastructure (eg roads or power plants) and public services projects (eg hospitals) where the amounts borrowed to complete the project are paid back with the cash flow generated by the project.
Asset finance: this enables the purchase and operation of large assets such as ships, aircraft and machinery. The lender normally takes security over the assets in question.
Islamic finance: Muslim borrowers, lenders and investors must abide by Shari'a law, which prohibits the collection and payment of interest on a loan. Islamic finance specialists ensure that finance deals are structured in a Shari'a-compliant manner.
Financial services regulation: lawyers advise financial and other businesses on everything that they might need to know about the legal limits of their financial and investment activities. They focus especially on new and complex federal and state regulations. Major clients are usually banks, hedge funds, private equity firms, broker-dealers and insurance firms. Post-recession there has been a multifold increase in the volume of legislation governing the financial sector.
What lawyers do
- Meet with clients to establish their specific requirements and the commercial context of a deal.
- Carry out due diligence – an investigation exercise to verify the accuracy of information passed from the borrower to the lender or from the underwriter of securities to potential investors. This can involve on-site meetings with the company’s management, discussions with the company’s auditors and outside counsel, and review of material agreements and other documents.
- Negotiate with the opposite party to agree the terms of the deal and record them accurately in the facility documentation. Lenders’ lawyers usually produce initial documents (often based on a standard form or an agreed precedent) and borrowers’ lawyers try to negotiate more favorable terms for their clients. Lawyers on both sides must know when to compromise and when to hold out.
- Assist with the structuring of complicated or groundbreaking financing models, and ensure innovative solutions comply with all relevant laws.
- Gather all parties to complete the transaction, ensuring all agreed terms are reflected in the loan documents, all documents have been properly signed and delivered and all conditions to closing have been met.
- In a secured loan (most bank loans to below investment-grade borrowers require collateral), ensure that the agreed-upon collateral has been properly granted and that all filings, registrations and other procedures necessary to ‘perfect’ the security have been or will be made.
“We work at the intersection of law and markets, so lawyers in our field not only need an understanding of the law, but an inquisitive mind and an interest in real-world economic and political developments." – Robert Tortoriello, financial services partner, Cleary Gottlieb
Financial services regulation
- Receive calls from banks and other financial institutions that seek guidance as to how business initiatives can be implemented most effectively in US markets, in full compliance with the letter and policy of US law.
- Sit down with the client – speaking to individuals at a very senior level – to find out what the client's business plan and intentions are.
- Analyze the implications of implementing that plan based on what current or future regulation looks like, or can be expected to look like, and what the legal, compliance, reputational, strategic, cross-border and related risks of that plan might be.
- Give advice on what changes may need to be made to the business initiative to achieve regulatory compliance and minimize risk.
- Regulatory lawyers are not just involved with compliance counseling: they also advise on enforcement and internal and external investigations; the restructuring and disposition of bank assets; the organization of bank units and subsidiaries; acquisitions, investments, strategic alliances and joint ventures; capital raising initiative and the creation and distribution of bank securities and deposit and other financial instruments; the structuring of 'living wills' and recovery and resolution plans; and the implementation and evaluation of bank marketing, cross-selling and similar initiatives.
Realities of the job
- Some firms act for investment or commercial banks on highly complex and often cross-border financings, whereas the work of others generally involves more mainstream domestic finance deals.
- A good working knowledge of the bankruptcy laws is critical for lawyers practicing in the area of leveraged finance. Banking lawyers advise for the worst-case scenario, which is often a bankruptcy filing by the borrower. Understanding how the rules change once that filing is made is critically important, even for lawyers who never expect to set foot in a bankruptcy courtroom.
- Lawyers need to appreciate the internal policies and sensitivities of their clients in order to deliver pertinent advice and warn of the legal (and reputational) risks involved in the transactions. Deals may involve the movement of money across borders and through different currencies and financial products. International deals have an additional layer of difficulty: political changes in transitional economies can render a previously sound investment risky.
- Banking clients are ultra-demanding and the hours can be long. On the plus side, clients will be smart and dynamic. It is possible to build up long-term relationships with investment bank clients, even as a junior associate.
- Working on deals can be exciting. The team and the other side are all working to a common goal, often under significant time and other pressures. Deal closings bring adrenalin highs and a sense of satisfaction.
- You need to become absorbed in the finance world. Start reading The Wall Street Journal, the various deal-related trade publications or other good business-oriented websites.
- Regulatory lawyers need to remain constantly aware of the latest political developments (potentially) affecting regulations. “We are not management consultants, but our role involves a huge amount of market-based business analysis. Lawyers who want to work in this area need to become very knowledge-focused. Staying on top of the latest news in all the areas involved is a great ongoing challenge of the job,” says Robert Tortoriello, a partner in Cleary Gottlieb's financial institutions practice.
- Regulatory lawyers operate on shifting sands. “Abnormal is the new normal,” says Robert Tortoriello. “It is a constantly evolving practice. At present lawyers are advising on the 'likely' implications of the 'likely' regulatory framework that will emerge from the ongoing legislative process, which has come forth from proposed regulations.”
- Reforms to the Dodd-Frank Act remain a priority for the Trump administration. In 2017, Republicans passed the Financial Choice Act – pat of which would allow financial institutions to bypass the Dodd-Frank reform if they chose to be well-enough capitalized. It failed to get enough support in the Senate, but bipartisan legislation emerged in the form of The Economic Growth, Regulatory Relief and Consumer Protection Act. The bill cleared the Senate, 67 to 31. It is predicted to reduce the burden on smaller community and regional banks.
- Another major focus for the Trump administration is tax reform. In December 2017, Trump signed the Tax Cuts and Jobs Act which included lowering corporate income tax rate from 35% to 21%. Experts predict this will make the US more attractive for inbound M&A activity and may also increase the value of US-domiciled businesses. The changes will have a significant impact on deal-modeling, tax diligence and acquisition agreement negotiations.
- Following widespread cyberattacks on US financial institutions, the Department of Financial Services published requirements for financial services companies to boost their cybersecurity. Some of these rules came into effect late 2017, while others are expected to be introduced throughout 2018.
- Fintech may only make up a small share of the market but it's rapidly growing. While these start-ups can compete directly with banks in areas such as wealth management, loans or payment products, larger financial institutions are beginning to explore the opportunities fintech platforms can provide in areas such as mobile banking apps or services.
- Interest in blockchain (the database technology which underpins digital currency bitcoin) continues to increase. The security of the blockchain, its transparency – anyone using the system can view trades – and the irreversible nature of blockchain transactions have all proved attractive to financial institutions. Although the practice is yet to go mainstream, banks continue to experiment with how the tech can be applied to benefit their businesses. Seven large banks in Europe have partnered with IBM to introduce a blockchain for their cross-border transactions for smaller and medium-sized business clients.
- As Brexit continues to unfold down an unclear path, big US banks including Morgan Stanley, Citigroup and Bank of America, are drawing up plans to try to avoid moving hundreds of jobs out of London before the UK leaves the EU. The UK's exit could have major implications for overseas banks based in London if their access to the wider continent is cut off or the UK's banking industry undergoes a regulatory overhaul. Several US firms, particularly those with a base in London, have been quick to capitalize on the opportunity to provide financial regulatory advice to clients investing in both the UK and European Union. Some experts predict that Brexit could even allow US banks to extend their market share opportunity over their European counterparts.
Advice from the banking and finance gurus
Marc Hanrahan, partner and leader of the leveraged finance group, Milbank:
"It's a demanding area. People often work all night and into the next day."
“Since the economic troubles began, there's an increased emphasis on identifying and controlling risk. Issues that might not have been paid much attention five years ago are given tremendous focus now. Clients respect our contribution to transactions today. Lawyers are seen as less of an impediment and businesses know that they can't just disregard what we say."
James Florack, partner and co-head of the global credit group, Davis Polk:
"This area allows you to push yourself and increase the percentage of time spent doing things that are new, interesting, challenging and occasionally frightening. You'll be confronted with a puzzle, like a logic puzzle, and you have to find a way out of it that doesn't compromise your client – the bank – or indeed the bank's clients. You need an ability to solve problems creatively."
"It's important to realize that while we're running a business, the client is also running a business. If you solve a problem in a way that impacts negatively on the client's client – the borrower – you may end up reducing the usefulness of the financing and, as a result, corrode the overall relationship among the parties."
"Confidence in your intellectual ability, discipline and patience are necessary to work in this area. An even temperament is important because transactions aren't always negotiated in perfect conditions – they might be going on against the backdrop of a larger M&A transaction or under time constraints. You also need to recognize that the agreement you're putting into place needs to work for the client long-term. The banking lawyer has to have the discipline to calmly approach the problem and sort it. It's difficult because there's lots of pressure to get the thing done. Those who develop into the most respected lawyers complete the deal while taking into account the commercial objectives and context, and all the other abiding factors."
Jonathan Schaffzin, partner, Cahill:
"In this practice there are extraordinary opportunities for client contact and responsibility. Young lawyers have counterparts of the same age group at the financial institutions we deal with, so there's a unique opportunity to grow with clients and develop relationships that endure. Acquiring a knowledge of financial products and the client's business is a terrific part of the job. It's a very interdisciplinary practice where associates acquire knowledge of accounting and finance as well."
Robert Tortoriello, financial services partner, Cleary Gottlieb:
“We work at the intersection of law and markets, so lawyers in our field not only need an understanding of the law, but an inquisitive mind and an interest in real-world economic and political developments. So if you aren't prepared to learn how to read a balance sheet, or work with care through the footnotes in a financial statement that describe a derivative, you will not be successful in this field.”