Regulation or strangulation?
14 November 1995
As from this month, firms that wish to carry on investment business have to do more than simply register with the Law Society. They have to prove their competence to do the business. Once the dust has settled, it will be interesting to see how many firms the market will support.
David Lough, head of financial services at Tunbridge Wells firm Cripps Harries Hall, says: "The number of firms offering investment management will probably round off at about 50 or 60. It will not go much higher than that. You need a good size private-client base."
The provision of financial services is nothing new to the profession. Some of its more senior members will remember when 'men of affairs' gave advice on financial matters across the board. But when the conveyancing boom got under way, providing as much as 70 per cent of a practice's business, the need for financial services to complement other work dwindled. But a renaissance seems to be under way.
Christopher Jones-Warner, director of investment management at Bircham & Co in Westminster, says: "The Scots are far more advanced in financial services. They never let it slip the way we did in England."
Says one market player: "I can't see how, as a solicitor, you can be properly discharging your duty to your client without being able to offer them advice on financial services. You can win your client £100,000 in a personal injury case, but if they then walk down the high street and fritter it away, it hasn't done them much good.
"The sad fact is that many market opportunities are going unexploited. Solicitors are in a position to give advice but they are turning away from it. There is a whole market out there of clients looking for good advice. For a multi-disciplinary partnership, not having a financial services department is like not having a conveyancing or matrimonial department."
On the face of it, financial services work should be very lucrative for solicitors. Says one lawyer: "We are instructed by local accountants. It is a strange irony that most accountants do not have a clue about pensions. The client's file lands on their desk and the first thing they want to do is move it on."
Those gearing up to do financial services should aim for a minimum level of business of about £15 million in the first year, and be prepared to make a heavy investment of management time. Firms have found it a struggle to set up a department with the necessary personnel and systems. Explains Lough: "You really need at least four people, though they do not necessarily all have to be full-time. That gives you two people on the investment management side and two on administration. The admin people may be personnel that the firm already has for trust administration. You should aim to have a turnover of around £15 million in the first year to make it worthwhile. From there on in, it is very attractive business. You tend to attract more and more business as you go along, as people gain confidence in you and word gets around."
Richard Pearce heads Services to the Professions at the Law Society. He visits 200 firms a year, advising them on how to identify opportunities in financial services. He says: "There is as much interest as there ever has been in financial services, but firms are very slow to take advantage of the opportunities. The number of firms in direct investment business has reduced substantially. On quite a few occasions, I have to tell people not to waste their time developing the financial services work. It is a mistake to think that you can start off by trying to attract non-legal clients. You need to build from your existing client base. I can almost tell by the geographical location of the firm whether it is likely to do well or not."
If membership of the Tonbridge-based Association of Solicitor Investment Managers (Asim) is anything to go by, the future looks bright. It currently has 73 members. Association secretary Heather Martin says: "Our membership has been increasing steadily, at about 30 per cent per year. Initially, our members were concentrated in the provinces. We thought that in London people just went to their stockbroker, but we were wrong. Clients do like a service all under one roof. It's the local high street factor."
The society has recently run a course on the attractions of the Alternative Investment Market (AIM) and has been making representations to the SIB on its rules revision.
Cripps Harries Hall is planning to launch a formal private banking service, possibly linking up with a merchant bank. Lough says: "Most of the elements of the service are already in place. We just need to finalise them and round them out. Financial services are no longer something just for Saudi princes. The business is obviously profitable as all the commercial banks have set up some form of private banking operation. We will be aiming to look after the complete financial affairs of the client, from portfolio management through to estate planning and the administration of settlements.
"We will be making an announcement at some stage during 1996."
There are those who believe that, through over-regulation, the Law Society is stifling the industry at birth.
West End firm Kidd Rapinet decided to hive off its financial services business to a separate arm, in part to free itself from Law Society regulation. A solicitor is not normally allowed to share commissions, but this restriction does not apply to a hived-off business.
Kidd Rapinet's senior partner Andrew Lewis is pessimistic about the future of financial services under the Law Society: "The regulation is almost overbearing compared with the amount of business you are doing - it is an administrative nightmare. The whole of the financial services area is getting ridiculous. You have to put people off a product you are selling to them. There will have to be deregulation in the future or there will be no financial services industry left. Or there will only be the big firms left. The small trader is getting squeezed out by bureaucracy. There is total over-regulation."
Not everyone agrees with this. Alan Horne, independent financial adviser with Nottingham firm Nelsons, says: "We can't see the point in hiving off the financial services side of the business to a third party. It is only worth it if you have a very small turnover of legal work, because there is a Law Society rule that the FSA component cannot be more than 20 per cent of your total business. This is a figure that the Law Society is currently looking at. The other reason is to escape Law Society regulation. Under Law Society rules, you cannot do anything that is not in the best interests of the client, whereas under the Personal Investment Authority's rules only the investment business is covered by that. There is a tremendous depth of rules for covering the investment business, but nothing covering anything else. Under PIA rules, you can sell somebody a poor quality mortgage, even though you have to give them best advice on the endowment policy that goes with it. In other words, an unscrupulous operator can take their client for a ride on 80 per cent of the business. A lot of people have been making money out of doing remortgages even when it has not necessarily been in the best interests of their clients."
Jones-Warner says: "The Law Society is in a difficult position. In return for being allowed to police their own, they have had to be seen to be rigorous. I sympathise with the view that the regulations can throttle an operation which involves so much paper. The public do tend to trust a solicitor. The PIA has not been going long enough to have established a track record. The public are not familiar with it. If you want the title of solicitor, you have got to go along with all that entails."
But, adds Pearce: "The SIB is saying that in 18 months' time, everyone will have to operate under the quality standards we have already set."
An important factor for firms to bear in mind is that they must be able to accept the challenge of having someone to lead the investment management function, someone who comes from a different background.
Says Lough: "When recruiting that person, you have to be able to assess them accurately, and then to trust them. Some firms find that difficult. They do not want to look at the risk involved."
Others have, and are doing very well, thank you.