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IFAs forced to review how they solicit business

Do any of you attract business from solicitors as introducers? If the answer is yes or, even if you are thinking of trying to establish a solicitor connection, read on.

Changes are proposed which mean that any arrangement for remuneration between an IFA and solicitor will almost certainly need to be reviewed.

The Financial Services and Markets Act has now been enacted and debate is taking place on the secondary legislation which will define exactly what activities will be covered by the Act and regulated by the FSA.

Section 327 (3) states that a person “must not receive from a person other than his client any pecuniary reward or other advantage, for which he does not account to his client, arising out of his carrying on of any of the activities”.

The debate is therefore of particular interest to all those firms of solicitors which do not have a qualified financial services person on their staff and will need to ensure that, when their legal work involves money matters, they avoid getting involved in any regulated activity.

Broadly, there are likely to be four conditions which unauthorised law firms will need to satisfy if they are to stay on the right side of the law. First, that they do not hold themselves out as offering financial advice. Second, that any advice given is strictly incidental to their legal advice. Third, that the advice does not involve packaged products. Fourth (the condition which affects IFAs receiving referrals from solicitors) that they are not paid except by the client.

On the face of it, this last condition would prevent solicitors from receiving a share of commission from IFAs and might cause solicitor referrals to dry up. However, on investigation, it appears this is not the intention.

What the Treasury is doing is taking a leaf out of the Law Society&#39s rulebook, which says all commission received by solicitors belongs to their clients. What solicitors tend to do in practice is to charge their clients a fee and suggest they use the commission received by the solicitor to pay the bill.

The net result is not to put a stop to solicitor remuneration but to prevent “backhanders”. In future, solicitors rec-eiving commission from IFAs will not only need to disclose commission to their clients but also to justify why they should be permitted to retain any of it by reference to work actually done.

This means a solicitor needs to be seen to be working with the IFA rather than just making an introduction and disappearing.

There is another good reason for playing it this way. As we learnt from the case of Cheshire Trafford last year, commission paid for a mere introduction is subject to VAT. However, if it can be demonstrated that the person receiving the commission share has participated in the VAT-exempt activity of arranging a policy or investment, the commission share is also VAT-exempt.

The draft Regulated Act-ivities Order, which should clarify all this, is due to see the light of day in the next month or two but, of course, it will not come into effect until the FSA gains its full powers next summer.

I already detect certain changes in the way some solicitor firms wish to become involved in the financial services arena. Like insurance companies, banks and IFAs, some solicitor firms are merging to try and make economies of scale.

This means there may be fewer firms of solicitors in total but many of these will be big enough to have their own financial services arm with registered individuals under the Financial Services Act.

Others may opt for striking formal arrangements with IFA firms to venture into financial services. These are the types of solicitor firms which would have to account for commission received as outlined. To be frank, many do adopt this approach already so there will, in effect, be little change.

In any event, I still maintain, and have always done so, that the client who is best advised is the one who has his solicitor, his accountant and his IFA all working in agreement with him to the same financial goals.

This can only really be achieved if proper commercial arrangements are made between the parties involved. Any new law must not stand in the way of this.


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