Although the best-run legal practices now run leaner and more agile corporate-style business structures with an increasing focus on overseas expansion, particularly in emerging markets, a report published by Barclays Corporate highlights a surprisingly cavalier attitude from law firms toward risk management while seeking international growth, indicating that most are taking unnecessary foreign exchange risk.
Three-quarters of the UK’s biggest law firms do not hedge their FX exposure, according to the most recent survey undertaken by Barclays in conjunction with the Association of Corporate Treasurers. The majority (78%) consider FX exposure to be of only “slight risk” or “no risk” to the firm despite over half of the surveyed firms operating in at least five overseas markets and some operating in as many as 25. For comparison, the survey showed 74% of businesses outside the legal sector hedge the vast majority of their forecast FX transaction risks.
Although law firms do not necessarily operate using the same structures as conventional large corporates, they are comparable in terms of turnover and currency exposures, according to Sam Ford, managing director in the risk solutions group at Barclays Capital. Of the firms surveyed in the report, almost half stated that more than 10% of their fee income is generated in foreign currencies and, of those, 28% said over a third of their income came in foreign currencies. Yet despite the comparable figures “legal firms haven’t traditionally given the same degree of focus to FX risk management,” says Ford.
There is some evidence that risk management might be moving up the agenda for law firms. The report says 30% of those surveyed now have dedicated corporate treasury functions and 78% of firms discuss risk management at a board level. Ford explains that although there are signs that the tide might be turning – Barclays has seen twice as many trades by law firms in the first six months of this year compared with previous years “there is still a lot more which could be done to protect firms from unnecessary risk”.