The impending opening of the Malaysian market may not be a high priority for international law firms, but for their domestic counterparts it presents a perfect opportunity to broaden their horizons and push plans for regional expansion into overdrive

On the cusp of change, the Malaysian legal market is at something of an impasse. Liberalisation has stalled and intrigue between the country’s Central Bank, the Bar Council and the Attorney General’s Chambers, not to mention a lack of interest from foreign firms, have contributed to the delay.
This is welcome news for the nation’s domestic firms, the majority of which oppose the presence of foreign firms. But as is the case with other legal markets on the verge of liberalisation, talk of increased competition, the mere potential for foreign law firms to enter the market is enough to spring domestic firms into action. Whether it be shoring up regional and international expansion plans, adjusting mindsets to the way firms are run or proactively seeking out the green shoots, Malaysia’s law firms are rising to the occasion.

Differing opinions

Something strange happened in the Malaysian legal services market earlier this year. Bank Negara Malaysia (BNM) – the country’s Central Bank – jumped the gun and announced that foreign law firms would be allowed to enter the previously closed legal market on a standalone basis, but that they would be allowed only to practice in the area of Islamic finance. It should be noted that the announcement was made without the knowledge of the Malaysian Bar Association or the Attorney General’s Chambers. All three have been in talks about the subject of liberalisation for the best part of a decade and agree that liberalisation is sorely needed, most notably to help establish Malaysia as the hub of Islamic finance in Southeast Asia. But while all three bodies agree on this, each has differing views on whether liberalisation will actually work.

“The Bar Council’s position is that a managed system of liberalisation, in which foreign law firms are required to enter into joint ventures with Malaysian law firms, represents the best of both worlds as the Malaysian Bar has, among its members, sufficient practitioners with experience in the area of Islamic finance at the international level,” says Ragunath Kesavan, president of the Malaysian Bar.
“The Bar Council has made known to the Government its preference for this method of liberalisation since November 2004 and have even prepared the relevant amendments and rules and regulations. It is therefore extremely disappointed that the views of BNM have prevailed.”

The objections to the model advocated by BNM are threefold: first there is a concern that allowing foreign firms into Malaysia will adversely affect domestic law firms – the protectionist argument. Second, allowing foreign firms to establish standalone offices will mean that there is no need for them to, as Kesavan says, “share or transfer any technology or knowledge to Malaysian practitioners”. Third, and perhaps most important, not one foreign firm has expressed an interest in opening in Malaysia.

Ignored internationally 

Two of the firms with the largest Islamic finance practices, Allen & Overy and Clifford Chance, have not warmed to the idea of a Malaysian presence, stating that making a business case for opening an office in just one practice area is less than compelling. “In terms of bond issuance there hasn’t been a high number of sukuk issues in Malaysia in recent years. You can’t expect an international firm to launch for just one practice that’s not particularly vibrant at the moment,” says a partner at one Magic Circle firm.
Norton Rose, which has been one of the most active in the Malaysian Islamic finance market, concurs, saying that a full-service liberalisation model is needed to pique the interest of international firms. “We welcome the opening up of Asian legal markets and will always consider options to launch,” says Stephen Parish, Norton Rose’s chairman. “However, I think that the launching of a pure Islamic finance practice would be a difficult thing to do. You need to have the opportunity to provide full-service capabilities for it to be a worthwhile venture.”

Another partner at a UK-based firm adds: “It could potentially be a bit of a non-event. Local firms don’t seem to care for it and international firms don’t want to take the chance during such trying economic conditions. I can’t see many firms being interested.”

The tremendous growth of the Malaysian Islamic finance market notwithstanding, the Gulf is still the place to be for Islamic finance lawyers. “If you have Middle East offices you probably don’t need to worry too much about Malaysia. International opportunities are always welcomed, but in this case they are not as exciting as they may first appear,” says Parish, whose firm has offices in Abu Dhabi, Bahrain, Dubai and Riyadh.

The majority of domestic law firms are, of course, only too happy to hear such news. But putting aside their views as to the merits of liberalisation, they agree that BNM has gone about it in the wrong way.
“There is no way that any foreign law firm would want to enter Malaysia under the model being advocated,” says Azmi Mohammed Ali, the founding partner of Azmi & Associates – one of only a handful of Malaysian firms to openly support liberalisation.

Azmi says that to attract foreign firms into Malaysia, regulators must devise a model that absorbs some of the costs associated with opening international offices. “A joint venture model, which would make it less costly to open an office, would be favoured, I think. Also, it would allow our young lawyers to interface with internationally experienced lawyers,” he says.

Leonard Tan, a partner with Tay & Partners, agrees with Azmi but cautions against Malaysia looking to mimic the joint-law venture scheme that has failed in Singapore. “Singapore is proof that a conventional joint venture model doesn’t work and probably never can,” he says, noting that regulators may find the necessary guidance in the professional services industry, most notably the large accounting and auditing firms. “What needs to be looked at is the model similar to what the PwCs and KPMGs of the world have done. Local law firms in Malaysia could adopt the brand of international players,” he says.
“The branding power of a big UK or US law firm would be tremendous and for some clients that is what they want to see; they want to see lawyers with international experience handling their international deals.”

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