The liberalisation of Malaysia’s legal sector, more than a decade in the making, has finally begun moving ahead in a concrete manner with the amendments to the Legal Profession Act 1976 and the Legal Profession Rules 2014 coming into force on June 3. Ranajit Dam assesses how this could impact the legal industry in Southeast Asia’s third-largest economy, and how local firms can prepare for the entry of foreign outfits.

Following in the footsteps of neighbouring Singapore, and more recently, South Korea, Malaysia has become the latest country to begin liberalising its legal sector. While the issue of admission of foreign lawyers into Malaysia’s legal profession has been discussed since at least 1999, the momentum for such liberalisation had picked up pace in recent years as the country has become increasingly keen to develop itself as an international Islamic financial hub. In 2012, Malaysia passed amendments to the existing Legal Profession Act of 1976 allowing foreign law firms and foreign lawyers to practise and advise on foreign law in Peninsular Malaysia, and these amendments came into force on June 3.

Under the new regime, foreign lawyers and law firms will only be allowed to practise in certain permitted areas. Foreign law firms can either apply for a Qualified Foreign Law Firm (QFLF) licence – which will allow them to operate on a standalone basis – or in partnership with a Malaysian law firm, in which the equity distribution of ownership and voting rights, as recommended by the Bar Council, ought to be the Malaysian firm controlling at least 60 percent. For QFLF licences, the Bar Council recommends that its foreign lawyers must be residents in Malaysia for 182 days in a year, and not less than 30 percent of the lawyers in the QFLF would have to be practising Malaysian lawyers. Additionally, this needs to be backed up by a demonstrated expertise in international Islamic finance.

Foreign lawyers will now be able to practise with a Malaysian law firm; however, the Bar Council recommends that  the number of foreign lawyers employed by a local law firm should not be more than 30 percent of the total number of lawyers in that firm.

Dato' Azmi Mohd Ali, senior partner of Azmi & Associates, says there are five main aims behind the liberalisation of the Malaysian legal sector. “Firstly, it will provide a higher level of competition, which in turn will benefit the clients because it gives them more choices. Secondly, it will force Malaysian law firms to raise their standards,” he says. “Additionally, it will bring in foreign legal expertise, and also promote knowledge transfer of experience and expertise of foreign firms entering Malaysia.” The final aim, he adds, is to prevent foreign lawyers from flying in and flying out of Malaysia to provide advice and to carry out any work relating to Malaysian law.

Immediate impact

Foreign law firms aren’t complete strangers when it comes to the Malaysian market. Wong & Partners, the Malaysian member firm of Baker & McKenzie, was established in 1998; Beng Chai Tay, a partner with Singapore’s ATMD Bird & Bird, is the managing partner of Malaysia’s Tay & Partners; and three of Singapore’s Big Four law firms have associate firms or alliances on the other side of the Straits of Johor – Rajah & Tann with Christopher & Lee Ong, Allen & Gledhill with Rahmat Lim & Partners, and WongPartnership with Foong & Partners. Even smaller law firms in Singapore have tie-ups - Oon & Bazul is associated with T S Oon & Partners, while KhattarWong has a cooperation agreement with KK Chong & Co.

In addition, UK law firm Trowers & Hamlins opened a non-trading representative office in Kuala Lumpur in 2012, after becoming the first foreign firm to obtain such an approval from the Malaysia Investment Development Authority. A number of foreign law firms do Malaysia work through desks based in Singapore, including Allen & Overy, Clifford Chance, Herbert Smith Freehills, Linklaters, Shearman & Sterling and Watson, Farley & Williams.

Dato’ Azmi believes that initially the liberalisation will have minimal impact on law firms, both large and small. “Initially, we believe a maximum of five licences will be available,” he says. “Then, foreign lawyers and foreign law firms will only be allowed to practise in permitted practice areas which will also specifically provide exclusion of areas such as constitutional and administrative law, conveyancing, criminal law, family law, succession law, trust law, retail banking, registration of patents and trademarks, and appearing or pleading in any court of justice in Malaysia. Therefore, it appears that foreign lawyers and foreign law firms may be brought in to advise primarily – or solely – on foreign law and they are excluded from work that deals with Malaysian law.”

Mariette Peters, a partner with Zul Rafique & Partners, agrees. “Although there have been concerns that liberalisation may lead to compromising local law firms, this may not be the case,” she says, “Apart from the restrictions with regard to the areas in which foreign lawyers will be allowed to practise in, I am not even sure that there will foreign firms applying for licences by the droves. Will there really be an influx of foreign lawyers fighting for slices of the same pie? I am not sure. I think it will have to be a wait-and-see exercise.”

That said, Peters believes that the liberalisation will have some amount of positive impact on the legal sector in Malaysia. “There will definitely be a higher level of competition that will be beneficial to clients giving them more choices while also ensuring that the Malaysian firms raise their game to compete, thus ensuring better service standards,” she says, “It is also hoped that the opening up of the legal services would promote change which is much needed to raise the calibre of legal education and training in Malaysia as law firms will likely grow in tandem with the increase in the volume of work received.  Malaysian firms will be able to extend their reach internationally, thus creating opportunities for Malaysian lawyers to hone their skills overseas. At least it will give us a reason not to rest on our laurels.”

For Dato’ Azmi, while it is too premature to talk about positives, given that changes are still not in force and the liberalisation is to be gradual and progressive, he expects Malaysian lawyers to get more exposure to the international arena. “Local lawyers have the opportunity to learn from their foreign peers – from strategising and managing their legal affairs to gaining clients’ confidence,” he says.

Raise your game

Writing in the Malaysia Chronicle, Christopher Leong, managing partner of Chooi & Company, and president of the Malaysian Bar Council, noted the opportunities and challenges that liberalisation would bring. “The opening up of Malaysia to foreign law firms and foreign lawyers is a natural progression as world and regional economies become more integrated in trade in goods and services,” he wrote. “The liberalisation of our legal market should be seen as a challenge that brings opportunities. The challenge is for Malaysian lawyers to build capacity and abilities to be more competitive, to broaden our horizons, spread our wings and forge new paths.”

Among the challenges for Malaysian law firms will certainly be the fight to retain the best young talent as foreign competitors come in armed with war chests. “Gen Y lawyers will definitely be spoilt for choices should there be the entry of foreign law firms into Malaysia,” she says. “We are bracing ourselves for that, and we are definitely looking into creating a more conducive work environment.”

That said, law firms believe that salary will not be the only factor that young lawyers consider when choosing which firm to be part of. “Career development and work-life balance are also important considerations, and we are looking at retaining talent from all angles,” says Peters. Dato’ Azmi says that in order to retain the best people in the industry, his firm will treat its lawyers as partners in growth, develop suitable career paths for its employees, provide training opportunities in both hard and soft skills, provide a conducive learning environment without unnecessary hierarchies, and provide a remuneration package that is competitive with top- tier firms. However, “in the early years, any fight for talent in the legal sector may be minimal given that foreign lawyers and law firms are excluded from work which deals solely with Malaysian law.”

Despite the QFLFs having to demonstrate an expertise in international Islamic finance, most foreign law firms will look to expand beyond that into higher-end corporate work, thus putting them in direct competition with larger local firms. This in turn will lead to Malaysian firms having to further improve their standards to compete on an international footing.

Zul Rafique & Partners is “definitely trying to innovate,” says Peters. “One of the things we have done is to form a strategic alliance with Indonesian firm Bahar and Partners,” she says. “We hope to see some development from that venture.” Meanwhile, Dato’ Azmi says that his firm is “continuously upgrading our infrastructure and continuously improving our strategic position through short- and long-term planning. We formulate clear human resources strategy, combined with the market’s best practices involving abig network of law firm collaborations and strategic alliances.”

But it’s not all challenges for Malaysian law firms as Peters points out. There are opportunities as well. “If the foreign firms and lawyers make their way into Malaysia, there will be more Malaysian firms turning from local into global,” she says. “In fact, there are already now several Malaysian firms with informal alliances with foreign firms. However, as I mentioned earlier, it is a wait-and-see exercise. It will not be as easy as it sounds as there are processes and protocols prescribed by the Selection Committee.”

Given that liberalisation of the legal sector is intended to be gradual and progressive, Dato’ Azmi does not expect many changes in the next year or two in order to give the local market ample time to develop and mature. “We expect law firms that can envisage the opening of the legal market will better position themselves to be more competitive,” he says, “Law firms must anticipate that there will be some tough competition coming their way.”