Banks and other financial institutions are paying the highest hourly law firm rates despite managing largely to keep the lid on fee rises during the Covid-19 pandemic, according to a new Wolters Kluwer report.

The 2021 Real Rate Report shows that banks in the US are paying $620 an hour on average, roughly 9.5% higher than industrials – the second-highest payers – and almost three times more than the $229 an hour rate insurance companies pay. Consumer services companies were paying $523 an hour on average, while tech and telecoms companies pay $513.

However, the financial services industry was able to limit rate rises to 2.8% in 2021. By contrast, industrials saw their average rates jump 10.8%. In dollar terms though banks were paying more than $17 extra per hour, compared to roughly $6.50 extra for industrials.

Yet despite higher hourly rates, banks and other financial institutions have been cutting their external legal costs consistently since 2016 – more so than any other industry. On average, banks spent $96m a year on outside counsel in 2016, falling to $81m in 2020 – a drop of more than 15%. By contrast, consumer services external legal spend rose from $34m in 2016 to $42m in 2020.

The report noted that one reason banks pay higher rates is that they are highly regulated with niche legal needs and not enough external legal talent to meet those needs.

Nathan Cemenka, director of legal operations and industry insights at Wolters Kluwer ELM Solutions, said: “This drives up rates on both the front end and the back: regulatory and compliance attorneys come at a high premium, as does the specialty litigation work that crops up when disputes arise.”

Banks are also more likely to hire elite firms where fees are higher, the report stated. That propensity to only engage the largest firms is partly driven by the need for speciality talent and wider geographic coverage, but it is also because in-house counsel are often elite-firm alumni and therefore hire old colleagues who they know and trust – even if that is not the best option for the bank, Cemenka said.

Cemenka said: “[The fall in bank legal costs] could be for a host of reasons, including a gradual tapering off of work stemming from the 2008 world financial crisis and subsequent regulatory reforms, but some of these savings undoubtedly resulted from the hard work of those corporate law departments in financial institutions that have evolved into a legal ops mindset.”

The high fees commanded by law firms from banks helps explain the controversial complaint last July by Morgan Stanley’s chief legal officer, Eric Grossman, about a ‘lack of urgency’ among lawyers to return to office-based work.  

The report's findings were drawn from Wolters Kluwer’s ELM Solutions LegalVIEW data warehouse, which includes more than $150bn in anonymised legal data.