12 November 2001
On 30 November 2001, the Financial Services Authority (FSA) will acquire its full range of powers under the Financial Services and Markets Act (FSMA). Originally scheduled for 1999, the two-year delay indicates how problematic the task has been to unite such a wide array of regulatory and supervisory bodies under one statutory regulator.
Solicitors are faced with a choice on regulation. This decision hangs on whether they wish to pursue mainstream investment business or not. Mainstream investment advice includes activities such as direct advice to clients on investment products, discretionary investment management and certain types of investment management activities.
Solicitors have three options available to them. The first is to become FSA authorised. If firms are currently authorised to offer mainstream advice, they can use the grandfathering scheme, which will allow them to carry on performing equivalent business from 30 November 2001 when they fall under FSA regulation. They will, however, have to become FSA compliant and follow the rules and regulations of the new regulator.
The burden of compliance with the FSA will undoubtedly be higher than that which is experienced under the Law Society. The FSA follows four key objectives - to maintain market confidence, promote public understanding of the financial system, to protect consumers and to fight financial crime. This client-centric remit will put opting-in solicitors under tight controls to ensure the client is fully aware of the range of advice available.
Another option for solicitors is to give limited advice under a designated professional body status. Under exempt status solicitors will be able to give limited advice on investment activities 'incidental' to their core business. This is subject to conditions on the type of firms that may become an exempt professional firm, and the types of activity an exempt professional firm may carry out.
The Law Society has been confirmed as a designated professional body, and all firms regulated by it for investment business will become exempt professional firms. Consequently, solicitors who qualify for exemption will be limited in the range of non-mainstream investment advice they can give.
Solicitors can also form a beneficial third-party relationship. They can become exempt professional firms, but benefit from mainstream investment advice for their clients through a contractual relationship with an FSA-authorised third party. The third-party route is an important one for those firms not wishing to assume the high cost levels of direct authorisation and also firms which wish to avail themselves of a wide range of investment expertise. Clearly, choosing the right third party is essential to the viability of this option.
The rapid and dramatic changes in taxation seen in the past three years, the rising volatility of financial markets and the increasing array of consumer choices make the decision far more complex than it was in April 1988, when the Financial Services Act 1986 came into force.
So what option should solicitors take? This is a key decision that has to take into account a firm's corporate goals, strategy and current situation. It is a decision that solicitors will think long and hard about, to ensure they are best placed to deal with this new challenge.
What looks certain is that the FSA Marketing Act will be the beginning of a new age for business relationships between professional firms and independent financial advisers. It provides the opportunity for further specialisation in professional client services, which will be to the benefit of clients, ensuring higher service levels and higher quality advice. That, if nothing else, should be considered a positive development.