A financial clout
22 October 2001
11 December 2013
28 October 2013
19 December 2013
18 October 2013
9 July 2014
On 1 December 2001, a date known as N2, the Financial Services Authority (FSA) will be confirmed as the regulator for all mainstream advice. Solicitors, who currently conduct investment business under the umbrella of the Law Society, will not be exempt. The implications for solicitor investment advice are huge, and with a multi-billion-pound industry at stake, the strategic decisions that solicitors make today could be crucial to maintaining investment revenue.
So how will N2 impact on solicitors? Presently, solicitors are able to offer financial services while regulated by the Law Society as a regulated professional body (RPB). Under N2, the Law Society will become a designated professional body (DPB), and solicitors will find themselves unable to offer 'mainstream investment advice'.
Restrictions on offering mainstream investment advice means that solicitors cannot advise on the following: accepting deposits; effecting insurance contracts; dealing investments as principal; collective investments; stakeholder pensions; Lloyd's syndicates; funeral plan contracts; and mortgages.
However, under the Part 20 exemption regime, Law Society-regulated solicitors will be able to provide certain 'regulated activities' if these are incidental to the provision of professional services. (Normally, these could only be provided by FSA-authorised firms.) Thus, non-FSA-authorised solicitors can only advise on: decisions to sell or not sell existing investments; the mix of existing investments; the appointment or approval of fund managers; and any other decision that does not concern the acquisition of a particular investment.
If solicitors wish to offer financial services outside this remit, they will have to become authorised by the FSA.
To become and remain authorised presents many problems for solicitors. FSA regulation requires the introduction of stringent compliance check systems to ensure that consumers' interests are protected, creating cost and resource implications. Solicitors will have to adhere to the FSA rulebook, which delineates FSA requirements. Management systems and controls will have to be introduced, and a 'compliance culture' introduced into corporate ethos. Strict business standards on training, business and market conduct and money laundering must be assimilated. Regulatory processes on authorisation, supervision and enforcement must meet FSA stipulations, and a compliance officer would need to be appointed.
Financial promotion will fall under FSA regulation, severely impacting the scope of marketing and media communications. Stationery will need to be changed, new information sent to clients and new client agreements drawn up.
There are further threshold conditions to satisfy the FSA. Companies must have adequate 'capital' resources and convince the FSA of the fitness and propriety of their staff. The FSA can also interfere with ties to other companies that they feel might prevent effective supervision of a firm, or even in the location of a company's offices. Prudently, the FSA has introduced a 'grandfathering' scheme, affording solicitors more time to comply with FSA regulation should they choose to become authorised. Regardless, the cost and resource hit of authorisation will be immense to most solicitors, who face some crucial strategic decisions.
Fundamentally, solicitors are faced with three key strategic choices. They are:
1. Solicitors can choose to become FSA-authorised to give mainstream advice. They will be grandfathered into the scheme, which will allow those currently regulated by the Law Society to initially continue their permitted regulatory activities (although these will be subject to review later). However, this will generate compliance costs, as well as the resource costs of diversifying the management focus. Furthermore, repositioning into the financial services industry could create a perceived dilution of brand quality through moving away from the highly reputable legal sector.
2. Solicitors can conduct solely investment advice classified as 'incidental' to the provision of a particular service to a client. This would ensure Law Society regulation and the avoidance of compliance costs, but could lead to a significant loss of investment business revenue.
3. Solicitors can develop strategic relationships with a third party provider which is already FSA-authorised, and they themselves can remain regulated by the Law Society. They can develop introducer or revenue-sharing arrangements (for which a DPB firm does not need to account for any commission it receives), outsource compliance issues and avoid brand dilution. The foremost concern among solicitors would be creating and sustaining a mutually beneficial relationship which ensures their clients receive high-quality service. However, commission-lowering Computer Assisted Training (CAT) standards and the introduction of fee-based charging structures have helped to bring financial advisers' standards more in line with the high standards of solicitors.
So will the introduction of N2 spell the end of solicitors providing financial advice? It would be extremely unwise to suggest so. The DPB capacity of the Law Society should ensure incidental investment remains in the hands of solicitors. There are also sufficient areas exempt in N2 regulation to protect solicitors' revenue channels.
It is solicitors' 'mainstream advice' that is truly under threat. With the 30 November deadline looming, they are faced with a difficult choice to maintain this revenue: adopt FSA regulation and embark into the uncertainty of the financial services industry; or enter a relationship with a third party capable and experienced enough to offer clients a high-quality service, and so remain under the DPB status of the Law Society.
While one magic circle firm has already decided to opt in to FSA authorisation, smaller firms would do well to consider the options available. With mainstream investment management booming, and the financial services market projected to grow by 51 per cent by 2005, this could prove to be one of the most crucial decisions solicitors have to make.
Nevin Weakly is director of professional alliance at Inter-Alliance Group