The day, known as N2, is finally upon us.

This is the date -- 1 December 2001, which was shrouded in secrecy for such a long time -- when the Financial Services Authority (FSA) becomes the sole regulator of all financial services activity in the UK.On that day, the Law Society will cease to be a 'recognised professional body' under the Financial Services Act 1986, and the FSA will take over regulation of law firms currently authorised for discrete investment business (DIB firms), of which there are around 250.These firms have thus been faced with a decision of whether to continue conducting discrete investment business and comply with the FSA regulation -- which may prove costly -- or opt out and take alternative action.Alison Crawley, the Society's head of professional ethics, says the majority of firms have chosen to accept FSA regulation.

'The cost of compliance will be high, but out of the 250 or so DIB firms, around 170 have so far decided to be governed by the FSA.

The other firms will, therefore, either give up advising on financial matters or hive off their financial services departments,' she says.In reaching their decision, DIB firms should weigh up the pros and cons of FSA regulation, says Ian Muirhead, director of the Solicitors for Independent Financial Advice (SIFA).'The motivating factor of the new regulation is demonstrating to the client and the FSA that you can justify your recommendation of policy and provider,' he says.

'The old regime was more about paying lip service to process -- filling in forms and preparing for inspection -- although saying that, there are five times more guidelines to adhere to now.'He continues: 'There is more flexibility under the FSA regulation, but it requires a more demanding, businesslike approach.'Ms Crawley adds: 'At the end of the day, each firm will have to face slightly different issues and deal with them in their own way.

If it is a firm's decision that for commercial reasons it is best for them to hive off, then so be it.'However, hiving off the financial department of a law firm could be just as costly, as it may include moving to a new building and would involve administration costs associated with establishing a separate identity from the law firm.

But uncertainties about what exactly FSA regulation would entail for a legal practice means that some firms have jumped the gun.Heather Martin is chief executive of the Association of Solicitor Investment Managers (ASIM).

Its 42 member firms handle securities for clients as in-house stockbrokers and are to be regulated by the FSA after N2.'A large number of our member firms have hived off their investment activities rather than fall under the regulation,' she says.

'Momentum built up among the industry because people anticipated a large number of problems with the new regime that have not come to fruition.

I would say that there are now a number of advantages to be had by keeping an investment practice integrated into a firm.'Ms Martin says the regulatory reasons for hiving off have all but disappeared.

'There was a fear that the FSA would require firms to have £100,000 plus a sum equivalent to the firms' turnover during a 13-week period readily available [as a solvency guarantee] as it requires for investment firms,' she says.'However, we managed to argue an exception for solicitors and now firms with integrated investment departments must just certify that they are solvent.'She also points out that a hived-off investment department has to meet FSA compliance standards in six months, whereas a one-year transition period is allowed for a firm with an in-house department.

'The cost of compliance will be high,' she says.

'But I think it's a great opportunity for the bigger firms, who can afford it, to expand their in-house capability.'The 250 DIB firms that face these decisions represent less than 3% of all firms in England & Wales, however, leaving some 8,000-plus firms operating outside FSA regulation at a time when legal and financial matters are inextricably linked.For example, Mr Muirhead says that the Trustee Act 2000 places new responsibilities on trustees to review their investments regularly, while pension sharing on divorce and the treatment of joint life policies are other issues that cannot be avoided.The situation has thus arisen that these de-authorised (non-DIB) firms must operate within tight restrictions to ensure their involvement in financial services is no more than incidental to their legal work.

'The precautionary authorisation that protected the firms under the old regime has been lost,' says Mr Muirhead.

'If they overstep the mark in the future, the firms would be committing a crime.'In the past, non-DIB firms would simply have referred any financial services work to a permitted third party, but Ms Crawley says the new regulations mean a greater degree of caution must now be shown.'Firms must now be careful when introducing clients to authorised perso ns such as independent financial advisers (IFA), so they do not inadvertently carry out a non-regulated activity,' she says.

'There is also a danger when introducing a client to an IFA that this can amount to a financial promotion, which would require FSA authorisation.'Those firms that continue to be unauthorised now have to operate within the confines of a number of exemptions from the Regulated Activities Order, which ensures financial services involvement remains purely incidental to their legal work.Ms Crawley says the task of having to ask themselves 'Am I doing a regulated activity?' and 'Am I communicating to any party a financial promotion?' has made some firms so paranoid that they have chosen to comply and opt in to the FSA regulation.

At a recent meeting of City firms, Clifford Chance decided to buck the trend, becoming the only magic circle firm so farknown to opt for FSA regulation.Non-DIB firms will be governed by the designated professional body regime, which for solicitors is the Society.

This means operating within a number of statutory conditions explained in the Society information pack called 'Financial Services and Solicitors'.'We hope the scheme will sort itself out and allow firms to carry on pretty much as before,' says Ms Crawley.

'But we would like better guidance from the FSA on financial promotions.'The best solution for both DIB and non-DIB firms may just be Solicitor Financial Centres (SFC) -- a chain of solicitor-owned centres where firms can refer their clients for financial advice without fear of having the client poached from under their noses.These centres, the brainchild of Mr Muirhead, allow the financial services departments of SIFA firms to join forces to handle the financial work of non-DIB firms.

They are regulated by both the Society and FSA, and overlooked by SFC Ltd -- a service company that will help with the set-up, running, training and IT systems of the centre and its staff.

Firms that refer work will share the commission with the firms running the centre.'Each centre can choose which firms they deal with and the kind of work they take in, but will conduct only financial services business to avoid testing the loyalty of referring firms' clients,' says Mr Muirhead.

'The whole market is moving in the direction of professionalism and trust, and the solicitor is the perfect brand name to try and market.'He adds: 'SFCs offer a chance for firms to outsource work to people on the same cultural wavelength and to promote the role of solicitors at the same time.

We are confident that over the next couple of years "SFC" will become a national brand.'Currently, there is a centre in Teesside scheduled to open on 30 November -- the day before 'N2' -- and centres in Exeter and Reading expected to open early next year.Stephen Gibbens, director of the Teesside centre, says the feedback he has received from law firms prior to opening is encouraging.'We are currently in the process of inviting local firms on a selective basis to become involved in the centre,' he says.

'We feel that it is important to ensure a relationship is developed and feel this can be done more easily with a small group of initial members.

The interaction between firms and the centre is crucial to its success.'Mr Gibbens says he expects further firms to become involved, because it is in the nature of the profession to 'watch and see' before taking action.While deciding what action to take, though, firms must be careful that after 1 December, they do not fall foul of the new regulations.Whether law firms that carry out some financial services hive their departments off, join SFCs or go for full authorisation, the jury will be out on how these different responses to N2 bed down in the next six months.