Commercial Awareness Update – W/C 25th November 2024

SRA CLAMPDOWN ON KEEPING INTEREST ON CLIENT MONEY

The SRA Code of Conduct mandates that solicitors keep client assets safe per the SRA Account Rules. Money is kept in a separate account from the firm’s own, spent solely on services performed for that client, and promptly returned once such services have been rendered.

However, the SRA’s ongoing three-part consultation highlights the importance of consumer protection for clients when law firms retain interest on client funds.

Retaining interest on client money

Currently, the SRA Accounts Rules require firms to pay their clients a fair sum of interest earned on client money but have not explicitly defined ‘fair’, with firms taking varied approaches, such as pooling client money into one account rather than individual accounts for each client to receive a more significant overall sum of interest.

Some firms keep excess interest while paying their clients’ interest at the rate they would have received if their money had been held in a separate account. In contrast, others make arrangements with their bank not to receive interest in exchange for free business banking.

Nevertheless, the SRA has raised concerns about firms holding client money for longer than necessary after a recent survey by The Law Society found that firms could have made as much as £27m (total net income) in interest on client money in 2022/2023.

Associated risks with retaining large amounts of client money

Many firms argue that retaining this interest is vital to their operation and personnel retention, while others argue that it ensures affordability and, therefore, access to adequate legal services.

However, the SRA noted in their consultation that these claims were not independently assessed. Larger firms have also reported higher profits because of client money interest.

Although the SRA Accounts Rules allow firms to enter different arrangements with their clients regarding the payment of interest, the SRA notes that firms may attempt to sway clients into signing away their right to receive interest payments on their money.

This could be seen as taking advantage of clients’ limited knowledge of their rights and promoting client-unfriendly practices by profiting off money that is merely held on clients’ behalf.

Solutions considered by the SRA: The way forward for law firms

While the consultation is ongoing, set to conclude in February 2025, the SRA has expressed the need for a greater understanding of law firms’ practices regarding retention of interest on client money, including those firms which choose not to retain such interest at all, as well as the impacts of tightening these rules.

Exploring solutions in other jurisdictions such as Canada, Australia, and France, where this interest is put toward free legal services and legal education rather than profit for law firms, the SRA noted that the current practice has not been adequately justified as benefitting consumers.

Although this consultation’s outcome remains unclear, it reflects the SRA’s commitment to ensuring that law firms do not unjustly prioritise the pursuit of profit over working in their clients’ best interests. Firms may rely on clients as customers to keep business running, but there is still an imbalance in knowledge of one’s rights.

Thus, their foremost consideration should be maintaining the integrity of the legal profession by providing client-focused service rather than deriving maximum monetary benefit.

• By Natasha Saeed Ikramullah

REVOLUT SECURES UK BANKING LICENSE AFTER THREE-YEAR WAIT

In July, Revolut received confirmation from the PRA that its application for a banking licence had been approved, concluding a three-year wait.

Revolut initially applied for a UK banking licence in 2021. The three-year waiting period for approval from the regulator proves the significant hurdles financial institutions must overcome to operate as licenced banks entrusted with public funds.

Revolut’s challenge was to convince regulators that it had addressed several accounting issues and EU regulatory breaches. These issues include delayed financial filings for 2022 and an audit from BDO LLP that revealed that two-thirds of its 2021 revenues were not fully verified.

Outside of these, Revolut has been alleged to have an overly aggressive corporate culture, with some employees leaving the company, risking its reputational image.

All looking good?

From an ‘e-money’ institution whose main income streams lie in incentive transaction fees and premium subscription payments, Revolut is transitioning to a fully-fledged bank.

With a banking licence, Revolut can now hold deposits with added deposit guarantees for customers, helping the London-headquartered firm attract new customers and incentivise existing ones to increase their deposits with Revolut. Investing customer deposits is a potential avenue for boosting Revolut’s revenues.

Moreover, Revolut can also offer lending products, including loans and mortgages, generating new income streams and stabilising its income streams.

The UK licence could also be a persuasive precedent for regulators in other key countries to grant Revolut their licences. Having a licence can enhance Revolut’s growth in the US and Australia.

With its plan for an IPO, the banking licence strengthens Revolut’s case for the $45 billion valuation it is seeking for a future stock sale. That market capitalisation would put Revolut behind only HSBC and Lloyds Banking Group. Perhaps such a licence is what Revolut has been looking for before proceeding to its long-awaited IPO.

Will Revolut’s banking licence do any good for customers?

When a new player enters any market, one often thinks there will be increased competition among the industry players, potentially resulting in lower customer prices.

However, this is not guaranteed, as Revolut needs to consider its profitability in establishing its interest rates – it needs to “balance attractive rates for customers with the need to generate sufficient income to cover operational costs and meet regulatory capital requirements.”

What does this mean for law firms?

As Revolut prepares to offer loan products to customers, in-house lawyers would work with banking lawyers in private practice on complex financial products. Moreover, a banking licence would come with more complicated financial regulations that Revolut must comply with, requiring lawyers to consult on the regulatory aspects.

With an IPO from Revolut on the horizon, equity capital markets lawyers would be hands-on in preparing legal documents such as the prospectus and underwriting agreements and ensuring that the share sale adheres to relevant regulations, including securities laws and corporate governance standards.

It is interesting to see where Revolut will choose to list, whether in the UK or the US. As a UK-based company, it may seem natural for Revolut to list on the LSE; however, the US market offers more capital, and more tech companies have listed there, so a US listing cannot be ruled out for Revolut.

Revolut’s choice of listing place would have implications for the trend of companies favouring US listings, which has prompted the LSE to revamp its red tape to remain competitive.

As said above, obtaining a UK banking licence can lead to permits being granted to Revolut in other jurisdictions. Lawyers would work with Revolut, guiding it through the regulatory process to secure a banking licence. In the UK, Linklaters has advised Revolut on obtaining its licence.

However, one caveat is that while it may seem that Revolut is poised to grow and expand its offerings, its ambitions could be threatened by increasing customer complaints of scams.

Revolut must vigorously address this issue before expecting a new wave of customer influx.

• By Trinh Nguyen

LABOUR GOVERNMENT BUDGET-2024

On October 30th, 2024, the UK Chancellor, Rachel Reeves, unveiled the first budget of the new Labour government that was elected in July 2024.

After discovering a £22 billion ‘black hole’ in the public finances, the government had already warned that the budget would be painful.

Due to the dire fiscal situation inherited from the previous government, the Chancellor announced £40 billion in tax rises aimed at businesses and the wealthy to help fund new public spending of approximately £70 billion.

To boost compliance with these tax changes, the government has also revealed one of the most extensive compliance measures ever taken, involving the hiring of thousands of extra HMRC staff.

This article will outline the main tax changes introduced by the budget, the compliance package, and their implications for law firms.

Main tax changes announced in the budget

Employers’ national insurance contributions

The most considerable revenue-raising measure in the budget was an increase in employers’ national insurance contributions (NIC) by 1.2%, from 13.8% to 15%, from April 2025.

Moreover, the threshold at which employers start paying NIC for each employee has been reduced from £9,100 to £5,000.

These measures are expected to raise an additional £25 billion each year.

Capital gains tax

Capital gains tax, the tax paid on profits when an asset is sold, has been increased from 10% to 18% for those paying the lower rate and from 20% to 24% for those paying the higher rate.

Capital gains tax on carried interest (the tax chargeable on the performance-related rewards received by fund managers when the fund reaches a particular profitability level) has also been increased to 32%, taking effect from April 2025.

Oil & gas windfall tax

The government has increased the Energy Profits Levy (EPL), the windfall tax on oil and gas profits, by 3% to 38%, bringing the headline tax rate on oil and gas activities to 78%. This measure came into effect on November 1, 2024.

The primary investment allowance under the EPL has been scrapped, while the decarbonisation investment allowance has been reduced to 66%.

Inheritance tax

While the government has confirmed that inheritance tax thresholds will be frozen until 2030, it has significantly adjusted the inheritance tax relief schemes for business and agricultural property.

Before the budget, business and agricultural property enjoyed 100% relief from inheritance tax, regardless of the property’s value.

That has now changed.

From April 2026, the 100% relief status will only apply to any combined agricultural and business property worth £1 million or less.

Any inherited agricultural/business property which exceeds £1 million in value will be subjected to a new 20% inheritance tax rate.

VAT

From 1^st January 2025, VAT will be charged on private school fees at a 20% rate.

New package of compliance measures

In addition to these tax changes, the government has announced an extensive new package of compliance measures to crack down on tax avoidance and ensure compliance with UK tax laws.

This package’s central plank is hiring 5,000 additional HMRC staff, who will investigate instances of tax avoidance and evasion and closely monitor tax compliance.

The government has also confirmed it will invest in HMRC’s technology infrastructure to make it more efficient and improve customers’ experiences interacting with the authority.

Implications for law firms

The substantial national insurance tax hike will drive demand for employment law advice as companies consider adjusting their employment structures to mitigate the additional costs. For instance, lawyers must review employment contracts to determine whether specific terms can be amended.

Lawyers might also advise on tax relief schemes that help employers minimise their tax liability. One example is ‘temporary workplace relief’, which, should certain conditions be met, allows employers to cover an employee’s expenses on a tax-free basis when working at a temporary workplace.

Corporate lawyers must also provide strategic tax advice on asset sales as clients look to manage the increased capital gains tax liability.

Lawyers could also advise private equity funds on adjusting their compensation structures for managers in light of the changes to the carried interest tax regime.

The increase in the Energy Profits Levy, combined with the abolition of the investment allowance for oil and gas capital expenditure, will probably encourage oil and gas companies to invest more heavily in decarbonisation projects.

Lawyers will play a key role in helping oil and gas clients take advantage of the decarbonisation allowance, which has been retained in the Energy Profits Levy tax package, albeit in a reduced form. For example, lawyers could advise a client on structuring a carbon capture project in a way that qualifies for the decarbonisation allowance.

The government’s recruitment drive will bolster HMRC’s investigative capabilities. Therefore, businesses must ensure that their tax processes are fully compliant.

Complying with the off-payroll working rules (IR35) requires special care since those measures were explicitly introduced to combat tax avoidance. Hence, whenever a company engages a contractor, it must ensure that IR35 rules are complied with. Tax lawyers will be highly sought after to ensure IR35 compliance.

The inheritance tax changes will boost demand for private client lawyers who can help clients structure estates efficiently.

Meanwhile, imposing VAT on private school fees will increase the number of tax lawyers advising educational institutions on tax compliance and cost-saving strategies.

• By Tommaso Johannes Forni

THE KLARNA IPO AND EUROPE’S ISSUE

Klarna, a Swedish fintech success story, was founded in 2005 by Sebastian Siemiatkowski. Thanks to years of innovation and investment from A-list firms like Sequoia and SoftBank, it has grown into a unicorn company from a simple concept.

Despite facing controversy along the way, Klarna has made impressive strides. Now, the time has come for it to go public—a clear sign of its success. However, instead of listing on a major European exchange like London or Frankfurt, Klarna has opted for a U.S. IPO.

In this article, I explain what an IPO is, why companies have different geographical options, and why Klarna may have chosen a U.S. listing rather than one in Europe.

What is an IPO?

An IPO (Initial Public Offering) occurs when a private company offers its shares to the public for the first time, enabling investors to buy a stake in the company. It’s a way for the business to raise capital, increase visibility, and fuel growth.

Startups like Klarna often begin by securing initial funding from friends, family, or venture capitalists. As the company proves its potential, it may raise more funds in private rounds. It considers going public once it has a robust business model and financial track record.

Where can a company go public?

When companies decide to go public, they must choose a stock exchange. Factors like investors’ locations, geographic ambitions, listing costs, the regulatory environment, and market reputation all influence this decision.

Historically, many European companies, like Deliveroo, Dr Martens, and Darktrace, have opted to list in Europe. But times are changing.

An article in the Financial Times quoted an unnamed source, likely an expert, who stated, “There is just no question: the US has the customers, the market; it has the VC funds; it has the investors. If you are going to list, why would you choose Europe today?”

Why Europe is less attractive for companies like Klarna

There are several reasons explain why Klarna—and other companies—might avoid Europe:

1. Policymakers: Generally, the EU has a more regulated environment than the U.S. The debate over AI regulation highlights this difference, with the EU taking a more comprehensive and coordinated approach. This could be a factor in Klarna’s decision to go west, as less regulation would theoretically give Klarna more freedom to grow.
2. Investors: Though Klarna is European, many of its major investors, including Sequoia, Silver Lake, and Blackrock, are based in the U.S. These investors might have influenced Klarna to list in their home market. SoftBank, based in Japan, is an outlier in this regard.
3. Trump factor: The political climate in the U.S. also plays a role. Following Donald Trump’s election, concerns arose over tariffs on exports and an increasing regulatory divide between the U.S. and EU. While Klarna likely decided before the election, Trump’s victory may have solidified the move.
4. Prestige: this point is more general but can’t be ignored. U.S. exchanges like the New York Stock Exchange (NYSE) and Nasdaq are big names for a reason. Listing there gives companies like Klarna global visibility and boosts their credibility with investors, customers, and partners. By going public in the U.S., Klarna is showing it’s ready to play on the world stage and cementing its spot as a major player in the fintech industry.

Commercial awareness takeaways

1. Regulation’s impact on business decisions
   Stricter regulatory environments, like those in Europe, can influence where companies list their shares. Aspiring solicitors should understand how regulatory frameworks affect corporate decision-making, particularly in IPOs and cross-border business operations.
2. Global capital markets as a competitive landscape
   The competition between U.S. and European stock exchanges highlights the importance of capital market dynamics. Solicitors advising businesses must know the benefits and challenges of different listing venues, such as access to investors, costs, and market reputation.
3. Investor influence on strategic choices
   Major investors, particularly venture capital firms, often significantly guide companies’ strategic decisions, including IPO locations. Aspiring solicitors should be prepared to navigate and advise on these investor-driven decisions, especially for high-growth, investor-backed businesses like Klarna.

• By Avishai Marcus