The coming of the FSA will radically change the nature of the regulatory regime.
For many in the professions the ability to opt out to the designated professional body (DPB) regime allows avoidance of the issue altogether.
If only life were so simple. The nature of the Financial Services & Markets Act means that the whole regulated arena is dictated by two sets of rules – the first adopted by all the regulated firms and the second created by the DPB for its new constituency.
The Solicitors (Financial Services) Scope Rules are the Law Society guideline rules that law firms must abide by.
My concern relates to the monitoring of the perimeter fence between the two regimes. It has been a long-standing complaint and cause of concern that category-one law firms operate in the grey areas of the Solicitors Investment Business Rules 1995.
The “necessary” exemptions has allowed a multitude of actions which if viewed by an IFA would be deemed to be full regulated advice.
The perimeter of the two regimes relies on the cross cooperation of the DPB and the FSA. At the end of the DPB regime's borders lies a criminal offence.
The DPB would, in effect, have to report its members to the FSA and allow it to bring proceedings under S23 FSMA 2000. I cannot see the DPB throwing its members to the mercy of the criminal courts. It is for this reason that the new regime will need to be policed proactively and fairly by all DPB monitors.
The scope of the new DPB is more restrictive than the RPB overseen by the Law Society. The need for DPB firms to be well educated is paramount.
The Law Society has published its guidance document, Professional Ethics – information pack on the new scheme for the regulation of fin-ancial services.
This publication is remarkable in that it actually gives the solicitors the story in a much more direct way than before. It mentions negligence. It suggests referral.
The document does not go as far as mentioning the “IFA” but does refer to an “authorised person”. Progress!
The booklet splits into various areas of legal work and clearly points out to a lawyer how FSA authorisation is best be avoided. This is breath-taking stuff – a clear steer not to authorise with the FSA. The key areas the guide concentrates on relate to:
Key areas of opportunity for IFAs will only be productive if they take time out to understand the Solicitors Practice Rules 1990. Try looking at commission retention (r10), fee sharing (r7) and the Introduction and Referral Code.
The guide can be found on the Law Society website (www.lawsociety.org.uk). To look at each area in turn:
The Financial Promotions Order is a very difficult piece of secondary legislation to apply. The corporate law firm needs to be very careful as the nature of the order means that “financial promotions” need to be approved by an auth-orised person.
The average corporate firm will not be authorised. The majority under RPB status hold category-one status. Be warned, though, the average firm has sat back on the protection given under the Financial Services Act 1986 via exemptions.
This is a very dangerous path for a firm to take. Tell them, provide a copy of the FPO and see the colour drain.
Sensibly dealing with pension rights will always be a regulated act. The wafer-thin exemptions that still exist are not capable of holding the weight of a “this is incidental” excuse.
The assignment of endowments still appears to be an old favourite. This will be allowed under the new regime.
Advice on other investments will almost always be regulated under the new regime. The argument that a firm can dispose of investments is dangerous. Somewhere along the line they will have to comment on one investment against another.
The matrimonial lawyer, in the main still, battles on under the impression that offsetting will solve everything. The guide gives the warning and uses the “negligence” word.
Trust, probate and attorneyships
The Trustee Act imposes very much higher duties on professional trustees. The lawyer who is not authorised and still refuses to comply with the Act is going to end up on the receiving end of problems.
The average trust lawyer has seen the new Trustee Act as sufficiently scary to ensure that changes in practice occur. What is going to strengthen this will be the FSA taking action against individuals for acting beyond the scope of the DPB regime.
The new regime is designed to tighten up the decisions lawyers will have to make. The opportunities for IFAs will not come by persuading them that they can do a good job. The opportunity will come from showing the lawyer why they can no longer hide in the grey area of the old regime.
Gareth Fatchett is a partner of ProAct Legal