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Alien notion

Investment regulation in the professional markets has been turned on its

head with the FSA rejecting the Law Society&#39s bid to keep its regulatory

role on investment business.

The brave new world which lawyers involved in investment business must now

face is an alien one. The style of monitoring by the FSA will be radically

different to that of the Law Society, presenting a great opportunity for

IFAs and proactive law firms.

The standard “Regulated in the Conduct of Investment Business by the Law

Society” strapline on law firms&#39 stationery does not reveal the full extent

of their investment business authorisation.

The 250 or so firms that do full mainstream investment business hold

category-two investment business certificates. The remainder hold

category-one certificates, which entitle them to undertake various

prescribed activities. A law firm dealing with retail and branded packaged

products, namely IFA-style work, needs category two.

The vast majority of firms hold category-one certificates so they can

protect their position under the Financial Services Act1986. The

precautionary nature of the category- one certificate means the new regime

will have a fundamental impact on the workflow processes of many law firms.

The vast majority of firms will not want to apply for full FSA

authorisation so they will be reliant on any exceptions and prescribed

activities under the final version of the regulated activities order. One

thing is for sure – the RAO will not widen the scope for firms which

currently hold a category-one IBC.

The area which the FSA has identified as high risk is that involving life

policies. This indication suggests law firms which deal with life

policiesare going to have to be very careful to ensure compliance.

The area of law where this will have a heavy impact is matrimonial law.

The need for advice on pensions and endowments means law firms will have

to examine very closely how they achieve their workflow. One thing is for

sure, if they do not have full authorisation with the FSA they will have to

look for a suitable permitted third-party IFA.

A further complication which needs to be factored in surrounds the FSA&#39s

indications on commission-sharing. The FSA wants to see added value where a

law firm refers to an IFA if the law firm is to receive a commission split.

Merely passing the client will not be enough.

This will lead many IFAs to the conclusion they need to re-visit their

arrangements with law firms where the primary method of remuneration forthe

law firms was the share of the commission.

The other concern for law firms is they will have to find a suitable IFA

to undertake the regulated activity. The simple fact is that lawyers in

specialist fields do not have an accredited panel of IFAs to turn to.

Many lawyers do not refer work at all as they are unsure about the

competence of the IFA to take on the specialist work. Pension sharing will

be upon us very soon and the standard law firm will need to consider how it

approaches the thorny problem of the regulated advice.

From August, the website will be launched to

provide IFAs and lawyers with the technical resource they need to undertake

matrimonial work

in a compliant manner.

The website will be run and promoted to specialist family law

practitioners, allowing them to undertake the referral of investment

business activities to suitably qualified IFAs.

The growth of these sites into trust investment, long-term care planning

and personal financial planning will create panel arrangements which

clearly guide the IFA and the lawyer.

The upside for the lawyer is the solution to the workflow management

problem. The downside is the acceptance that referral is going to be the

only way.

The upside for the IFA is the movement away from being a generalist to a

specialist. The downside is the extra study and training to be able to

understand the legal processes and where the IFA fits in.

All in all, the investment business is a very exciting place for those who

can see the opportunity for the IFA who wishes to specialise. Bear in mind

the level playing field of FSA regulation is one which the vast majority of

lawyers want to avoid. What the proactive IFA will do is look for the

opportunity to place themselves as a buffer between the law firm and the


The whole market is waiting for the final accepted draft of the RAO before

decidingto what extent precautionary authorisation may become crucial. My

view is that the vast majority of firms will not authorise and will seek

the assistance of an IFA.


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