Plans for uniformity could lead to chaos
6 February 1998
2 December 2013
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8 November 2013
Government reforms for solicitors who carry out investment business could bring confusion, undermine quality, and cost practices time and money, warns Andrew Murray. Andrew RET Murray is a solicitor at Lawrence Graham.
Our legislative masters have decided to introduce uncertainty to lawyers carrying out investment business. The Government has plans for a Financial Services Reform Bill, due to be published next month.
The authorisation of solicitors in the conduct of investment business will be through the Financial Services Authority (FSA). What little is known of the new legislation has alarmed the Law Society and the major body for lawyers in investment business, the Association of Solicitor Investment Managers (ASIM).
There are concerns about the plans because their implementation may affect the interests of clients or undermine the role of the Law Society. The society is currently one of the recognised bodies under the Financial Services Act. It is able to regulate 7,200 firms in the conduct of investment business. It has commanded the confidence of the Securities and Investment Board (SIB) and has provided an efficient service.
There are particular areas in the proposed new rules that stand out as being of concern.
There may be separate bodies regulating lawyers investment and mainstream matters and clients could be unsure as to where to make a complaint when both services are provided through a solicitors' practice.
The problem of compensation has been covered in the past through the Solicitors Indemnity Fund, and the Compensation Fund which provide cover of up to £1m, on top of which there is security through mutual insurance, partners' unlimited liability and then the ultimate statutory "intervention", under the Solicitors Act 1974.
This is not enough for the new FSA, but how can a proposed standard ceiling in compensation of £48,000 under the Investors Compensation Fund which the SIB used to operate be an improvement?
Solicitors are going be subject to a capital adequacy rule, apparently because the FSA considers it should establish a "level playing field".
Not only do we already have good compensation schemes, but client moneys and assets are segregated from the law firms' own monies under statutory approved solicitors accounts or other practice rules.
Capital adequacy rules proposed by the FSA are similar to IMRO rules and have complicated accounting regulations requiring ongoing maintenance. Most firms will need access to the required capital and to an extra member of staff to monitor this. Recent ASIM research shows that an average firm offering investment business advice would be looking to an own-fund requirement running at approximately £100,000.
The SIB seemed satisfied with the qualified persons status of certain lawyers, but now there is a question of whether those qualified through experience under the Law Society will be automatically qualified.
To the SIB's satisfaction, the Law Society already puts individuals through a rigorous testing process. I wonder just how able busy solicitors are at a senior level to start taking examinations and setting aside more time from their clients to re-comply and qualify.
In a nutshell, this is all a question of the one-stop shop. If solicitors are to be regulated only by the FSA for investment business, many will cease to provide investment advice or will provide it through a separate business. Providing legal and investment business advice through separate businesses would make it more difficult to provide a one-stop service. Solicitors dropping out of investment business would reduce the availability of independent - as opposed to tied - advice.
It seems as though the regulations are going to be more expensive, complicated and no more safe for clients, and may take away the benefit that we provide our private clients with one professional service correlating, balancing and administering their financial affairs.
Solicitors deserve the right to offer an investment management service as a part of their main business. We deserve a multidisciplinary approach to regulation, not to be forced into non-aligned regulating regimes.
In June we see the integration of the FSA and current self-regulating organisations, and the Bill's publication. Firms are being driven to "hive off", because of uncertainty over how the rules (expected to come into force in 1999) will affect them. ASIM, whose members manage over £2bn, believe it would be bad for the consumer if hiving-off were a consequence of an regime of dual regulations.
The Law Society and the SIB, through the RPB and solicitors' rules, ensure that clients are guaranteed a high level of advice with a virtually unlimited compensation foundation. The new rules try to impose uniformity, but with a profession as controlled as ours, surely there must be some room for manoeuvre.
We need a "professional regime" within the new regulations. Although ASIM and the Law Society have been making representations to the DTI and the FSA, time is running short.
The profession must support their aim to allow us to bring clients the level of expertise that has received admiration from the financial services industry.