Capital rules pose threat to lawyers

Many law firms will be driven out of the investment business by draconian new capital reserve requirements, solicitors are warning.

Investment companies governed by existing financial regulators such as Imro have to keep at least a quarter of their annual turnover liquid to protect clients should they go bust.

The Financial Services Authority (FSA), which is taking over regulation of all financial services firms, is considering imposing the requirements across the board.

Solicitors have been campaigning hard to get the FSA to make an exception for law firms, which already have unlimited liability, professional indemnity insurance and the solicitors compensation fund to protect their clients.

But in a discussion paper published last month looking at how it would supervise the recognised professional bodies – the UK's law societies and accountancy bodies – the FSA did not concede the point, although it did ask for further views.

However, it did accept that the Law Societies of England and Wales, Scotland and Northern Ireland should continue to be responsible for the rules governing solicitors accounts. New FSA accounts rules should be “disapplied” for solicitors, the paper said.

But David Lough, a director of the Association of Solicitor Investment Managers (Asim), said: “The capital adequacy requirement is the big one. We've still got some way to go.”

He said a capital requirement was “not efficient from the client's point of view” as “the money has to sit around in a bank not doing anything but earning the banks' profits and ultimately costing the client money”.

Asim has written to the FSA saying that the capital requirements would deter law firms from entering the business and drive many existing firms out of the investment business.