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12 December 2013
Linda Packard says law firms that avoid giving advice on Discrete Investment Business are ignoring on a prime opportunity
Financial services can be a lucrative part of a legal practice. However, many firms have been disillusioned by the ever-increasing number of regulations and rules that apply to financial services advice and have shied away from this potential area of growth.
To undertake financial advice, firms are required to apply to the Law Society for an Investment Business Certificate.
Although many firms are registered with the society, their income from financial services advice rarely makes a sizeable contribution to the
firm's profits. This is primarily because of the distinction between discrete investment business (DIB) and non-discrete investment business (NONDIB), and the fact that most firms only undertake NONDIB advice where there is little opportunity to earn large commissions.
The Solicitors Investment Business Rules 1990 regulate the giving of financial advice by solicitors and it is these rules that make the distinction between DIB and NONDIB.
A solicitor carries on DIB if he is "buying, selling, subscribing for or underwriting investments, or offering or agreeing to do so whether as principal or agent". A solicitor undertakes NONDIB when the firm acts for a named client, and the transaction is carried out through a permitted third party, or the activity is incidental to other legal services.
The distinction is important because of the additional rules which apply only to DIB work. These include the obtaining of personal and financial information concerning clients and the establishment of systems within the firm to satisfy the record-keeping requirements, in particular the need to keep a central register to demonstrate compliance with the rules.
The position will become even more complex after 1 November, when DIB work will be divided into two categories: retail branded/packaged products (including life policies, and unit trusts); and securities or portfolio management.
Firms wanting to provide DIB advice will have to ensure that such work is only undertaken by a "qualified person". There are various ways in which an individual may become a "qualified person" including accreditation through prior experience or by passing the appropriate exams.
These new regulations, together with the Money Laundering Regulations 1993, will cause even more firms to undertake only NONDIB advice. This is a missed opportunity because there are sizeable commissions to be earned by undertaking DIB advice.
It would appear that the complexity of the rules and regulations, the number of forms and records that need to be kept, and the requirement for supervision and training deter firms from DIB advice.
Yet there are many practical and cost-effective steps that firms can take to ensure they comply with the rules, keep sufficient records, and provide adequate supervision and training. These steps include:
- Employing a qualified person part-time. The rules governing the appointment of a qualified person do not insist on full-time employment. Alternatively, several firms could share a qualified person. Firms would share the cost of supervision and training, although they would each remain individually liable for the advice given to clients of their particular firm.
- Appoint a partner to be responsible for supervision. The partner does not need to have more expertise than the qualified person as long as they supervise effectively.
- Check your employee induction process. Make sure your induction process and office manual contain sufficient information to enable a non-solicitor to understand the rules governing the conduct of investment business by solicitors.
- Establish a budget for training needs. Incorporate in your training budget sufficient allowance for special training courses and reference material.
- Review your quality control systems.
- Check you have appropriate systems to review files.
- Set up a computerised record system. It may be possible to adapt your current software for the purpose of keeping the necessary records, but if not, there are alternatives available.
- Get a health check. If there is any uncertainty about whether all the regulations have been complied with, a specialist can be employed to check this.
The commissions earned by supplying financial advice for DIB can make a valuable contribution to profits. The regulations and rules can be complied with if the firm has the necessary organisational and management controls in place. With profit levels coming under pressure, firms ignore this growth area of financial services at their peril.
Linda Packard is a solicitor at Binder Hamlyn.