At its December meeting, the Law Society Council passed the Solicitors' Investment Business Rules 1995 (SIBR). These rules have won the approval of the Master of the Rolls and will come into force on 1 June 1996.
One of the purposes of the new rules is to simplify the wording and make it easier for users to pick a path through what is undoubtedly a fairly complex set of regulations.
Consequently, practitioners who conduct non-discrete investment business will be able to refer to Chapter 5 for a list of compliance requirements while discrete investment business practitioners will need to refer to Chapter 5 and Chapter 6.
Many of the principles embodied in the SIBR 1990 survive the change. But there are also some amendments brought in by the 1995 rules and this explains the delays in their introduction – to allow firms to make the necessary adjustments to compliance procedures.
Application for certification from the Law Society
The SIBR 1995 confirm the amendments which took effect on 1 November 1995. Firms will be issued with either Category 1 certificates, which will prohibit them from conducting discrete investment business, or Category 2 certificates which, subject to the rules, will allow them to conduct discrete investment business. Where a firm has a Category 2 certificate, any discrete investment business must be conducted under the direct supervision of a principal or employee who has an approved financial services qualification.
Definition of discrete investment business
The definition of discrete investment business remains much the same as under the 1990 rules. In most cases where firms wish to avoid discrete investment business they will show the business is incidental to other services or use a permitted third party.
But under SIBR 1990, the incidental exception was generally not available where the investment concerned was a “specified” investment. This is replaced in SIBR 1995 by the term “packaged product”, which is defined as “a life policy, a unit in a collective investment scheme, or an investment trust saving scheme”.
The definition of permitted third party has also changed. A permitted third party is defined as “an authorised person…but in relation to packaged products [the definition] does not include a life office or an operator of a regulated collective investment scheme or investment trust savings scheme, their appointed representative or a member of their marketing group”.
The change is represented by the additional words included at the end of that definition. This ensures independently authorised persons cannot act as permitted third parties for packaged products where they are members of, for example, a life office's marketing group.
A further change to the definition of discrete investment business provides for an exception where the transaction is “execution only”. The SIBR 1990 only permits solicitors to avoid discrete investment business for “execution-only clients” where, for example, an arrangement was made for the acquisition or disposal of a specified investment. The new rules refer to “execution-only transactions” (not “clients”) and extend the scope of the exception to all types of investments, not just specified investments.
The definition of “discretionary management” has been simplified in the rules. It will be discrete investment business where a solicitor agrees to keep the client's portfolio of investment under review on a discretionary basis. But a solicitor does not act as a portfolio manager simply because the firm, a partner or an employee in the firm is a trustee, a personal representative, a donee of a registered enduring power of attorney or a trustee power of attorney, or a receiver appointed by the Court of Protection.
It will also be “discretionary management” where a partner or employee in the firm is a trustee, a donee of a power of attorney, or a receiver appointed by the Court of Protection. However, provided no remuneration is received for such discretionary management over and above the remuneration received for acting as a trustee, donee or receiver, the business will be non-discrete.
A small amendment has been made to the definition of discrete investment business which arises from advice being given by a firm. Recommendations to enter transactions will be discrete investment business, subject to exceptions where the recommendation is incidental or the advice of a permitted third party. But a further exception has been added so a recommendation made by a trustee or attorney to a co-trustee or co-attorney will not be discrete investment business if no remuneration is received in addition to sums received for acting as a trust or an attorney.
Compliance for non-discrete investment business
The following compliance rules apply to all firms authorised by the Law Society.
It is still permissible to make such calls in accordance with the Solicitors' Publicity Code 1990.
Execution of transactions
Firms must effect transactions as soon as possible unless it thinks it is in the client's best interest not to do so. This is a new requirement in the rules for non-discrete investment business, but adds nothing to the practice rules.
A new requirement is that every firm authorised by the Law Society must appoint a compliance officer responsible for the firm's compliance systems. The officer must be a sole practitioner or a partner.
In most cases the need to maintain records in a central register has disappeared in the SIBR 1995. Most records under the new rules can be kept on the client file. But there are three exceptions. A further general change now means records kept under the rules must be maintained for six years.
(a) Advertisements – copies must be kept of investment advertisements issued or approved by a firm.
(b) Commissions – a record must be kept of the total commission received arising from investment business together with a record of such commission retained by the firm.
(c) Transactions – a record of client instructions and orders to third parties must be kept. Under the old rules, this record was only kept where non-discrete investment business was carried on with or through a permitted third party. The new regulations apply to a far wider set of circumstances. A record must be kept in all circumstances unless the activity is “incidental”. But, “incidental” transactions for packaged products still require a record unless the transaction is a disposal by or for a personal representative.
(d) Complaints – a record of complaints received and action taken must be kept if the complaint relates to the firm's investment business. This must be kept separate from client files.
(e) Documents of title – a record must be kept of documents of title held and the investments to which they relate unless the documents are held as a result of incidental activities. This is an extra requirement which under SIBR 1995 applied to the conduct of discrete investment business only.
(f) Long-term commitments – if a firm passes on a permitted third party's “reason why” letter after a recommendation to a client to enter into a long-term commitment, a copy of the letter must be kept. If it arranges the acquisition or relinquishment of a long-term commitment on an execution-only basis, it must confirm the transaction is execution only and keep a record of confirmation.
Additional rules for packaged products
The SIBR 1995 contain extra rules where the investment is a life policy relating to commission disclosure, the provision of a key features document, a reason why letter and confirmation of execution only business.
Compliance for discrete investment business-only statement of authorisation
The standard statement on stationery that the firm is authorised by the Law Society remains obligatory.
Client information and agreements
A major change in SIBR 1995 is that written client agreements are no longer required for many discrete investment business activities. But a new requirement provides that written information must be given to clients before discrete investment business is undertaken. Information to be given includes a requirement to provide clients with the name of the qualified person and the name of the person to whom complaints should be addressed. Although the “buyers' guide” is no longer required for packaged products, the written information must contain a statement confirming the independent nature of the services to be provided.
Know your client and investment advice
The requirement for a client fact-find and the obligation to ensure recommendations are suitable remain the same. But references to “advisory” and “sophisticated” clients have disappeared.
Contracts notes containing the essential details of any transaction must be sent to clients.
Where a firm acts as portfolio manager (discretionary or non-discretionary) and carries on discrete investment business, statements containing specified information must be sent to clients at agreed intervals.
Bills of cost
The requirement to show costs relating to discrete investment business separately from other costs still exists. Further, such bills must be recorded separately from other bills.
In addition to the record keeping noted before, the following records must be maintained.
(a) Client names – the names of discrete investment business clients must be maintained by the firm and kept separate from the client files. This is a new provision.
(b) Know your client – a record of the fact-find must be kept.
(c) Client agreements – a record of client agreements entered must be kept.
(d) Standards of advice – a record must be kept of steps taken to satisfy the appropriate standards of advice.
The new rules should make life easier for compliance officers and enable firms to see at a glance the areas of practice which give rise to compliance.
However, there are some important changes. Some, like the requirements for client agreements, reduce the burden of compliance; others, like the increased record keeping for non-discrete investment business, increase the burden. When the new rules are published by the Law Society, firms must scrutinise the changes and ensure any amendments necessary to their compliance procedures are in place by the 1 June deadline.
Peter Camp is a member of the Law Society's financial services sub-committee and the author of Solicitors and Financial Services: A Compliance Handbook.
Peter Camp unveils the details of the new SIBR rules and analyses the important changes for practising solicitors
“One of the reasons for the new rules is to make it easier for users to pick a path through a fairly complex set of regulations”
“Firms must scrutinise the changes and ensure any amendments necessary are in place by the 1 June deadline”