As interest rates rise and multi-billion-pound bank mergers and acquisitions grab the headlines, law firms appear to be increasingly running scared of taking on the mammoth financial institutions.

The London firm Manches recently made a public stance of its own position, declaring that it does act against banks, even though other law firms are reluctant to do so. Clive Zietman, head of commercial litigation at the firm, says: “I think some banks are deliberately spreading work far and wide to put firms in a position where they can’t take a legal action against the bank because of a conflict of interest.” But others are less willing to offend what are among law firm's most coveted of clients, with deep pockets and plentiful work.

“There is an environment where all big City firms act for banks in mergers and acquisitions and other major corporate deals and don’t want to set antibank precedents for fear of upsetting their clients. So firms are doubly hamstrung,” Zietman says. “There are remarkably few firms prepared to take action against banks. We’ve had a lot of referrals as a result of the situation.”

This nervousness means that the choice of firm for people wanting to sue a bank is severely limited compared with their choice for a similar case against other types of organisation. “It is difficult to say how many firms will act against banks,” Clare Canning, head of litigation at Barlow Lyde & Gilbert (BLG), says, “but we are reported as being one of a few ‘major litigation practices in the UK willing to litigate against the banks’. The fear is that public interest is being neglected as insufficient law firms are prepared to take banks on.

“Any firm that secures a large amount of corporate work from banks is unlikely to want to jeopardise that income – and so is guided by commercial considerations. Equally, some firms will simply be precluded from acting for reasons of legal conflict. But there will always be specialist litigation practices such as ours who are able to act and bring a high degree of expertise to the task.”

The climate of fear that seems to affect some firms is illustrated by a reluctance to talk about the issue. Clifford Chance (CC) lost the opportunity of acting for British Energy, its top corporate client, which instructed BLG in a dispute with CC’s leading banking client Credit Suisse. Yet no one from the “Magic Circle” firm would comment on the case. A spokesperson simply says: “The issue is not so much about banks, it is more about firms being reluctant to engage in litigation against any client. An awful lot of our clients are banks and a lot of firms who do end up acting on these cases would like to act for banks but don’t.”

Banks are not keen to comment, but a spokesman for Barclays confirms that over the past few years “there has been a generalised growth in the number of law firms” it instructs. The company has a general panel with 11 law firms on it. It also has specialised panels, but the spokesman does not reveal what the specialised panels are called, what they deal with or which firms they include. She does, however, confirm that the growth has been “spread across most of the specialist panels. Barclays has grown over recent years. Our decisions are based on value and who is best for the work.”

Of the leading legal players who have faced difficulties acting, few lawyers (solicitors or barristers) would comment and those who would do so would allow neither their names nor their firms to be identified.

“From a number of commercial perspectives it would be interesting to see if banks are deliberately putting firms on their panels to create conflict and prevent them from acting against the bank,” one senior figure, who refused to be identified, says. “I doubt that this is the case. If you look at the general approach of bank panels, they tend to be streamlining and reducing the numbers of firms they instruct, not increasing them.”

Somewhat contradicting this point of view, the lawyer adds: “The only thing that will cause a sea change is for a large number of banks to have claims against one another, for example if there’s a big market collapse and they find that they could not get the representation of their choice.

“Nevertheless, it is important to remember that there will always be conflicts of interest, but the numbers of firms banks try to put on their panels is probably small, so what seems to be a problem becomes more manageable.”

Critics argue that this does not really address the problem, because there is a relatively small number of firms with significant experience of banking. If they are mostly excluded from acting against banks, it creates a real problem for anyone seeking expert advice on suing financial institutions. Zietman adds: “There is pressure being applied indirectly and sometimes directly. I know of one law firm whose bank told it not to act in a case against the bank because it might affect their banking relationship. The message was that the bank might withdraw facilities. This sort of behaviour is shocking. We got the referral.”

It is hard see what practical change could improve the situation. But whether or not banks are deliberately setting up conflict situations to exclude lawyers from acting, the attitude to taking on financial institutions seems likely to remain tied to the economy. “People have forgotten the problems of the early Nineties,” Zietman says. As long as the growth of the past decade continues, litigation will be the poor relative of lucrative corporate-deal work. If the economy takes a dive, corporate deals start drying up and disputes explode, many bigger firms are likely to shift their emphasis to litigation.

Explore Law

• Columnists

• Law Panel

• Law Reports

• Student Law

Times Recommends

• The best legal yarns this Christmas
• Legal school 'earned £1m by exploiting bar course'
• Axe may fall on 5,000 more City lawyers