Guidance on financial services regime

The new financial services regime has been in place since 1 December 2001 and has had an impact on various areas of solicitors' work.

In an attempt to ensure that probate and trust practitioners understand the effect of the new regime, the Law Society's wills and equity committee answers some commonly asked questionsQ We intend to use the authorised third party (ATP) route.

Is it true we no longer need to keep a central record of all instructions to ATPs with the date and time received and the nature of the instructions?A If the activity is excluded by the Regulated Activities Order (RAO), for example, where a member of the firm is a trustee or personal representative, then you will not be required to keep a record.

If the activity in question is an exempt regulated activity then you will be required to keep a record under rule 5 of the Solicitors' Financial Services (Conduct of Business) Rules 2001.

This rule requires you to keep a record of the name of the client, the terms of the instructions, the date when the instructions were given and the name of the other person instructed.

This is similar to the information which was required under the Solicitors' Investment Business Rules (SIBR). However, it is no longer necessary for the firm to make a separate record, as normal file notes or letters on the file will meet the requirements of this rule provided that they include the appropriate information.

As under the SIBR, it is not necessary for this information to be held centrally and so it may remain on the individual file.

Q Under the SIBR, it was necessary for the permitted third party (PTP) to have agreed with the firm or confirmed in writing that the client would be treated by the PTP as its customer.

Will we still be required to enter into these agreements?A The SIBR required firms to enter into such agreements because the rules of the Investment Management Regulatory Organisation and the Securities and Futures Authority required such agreements to be in place.

Firms are no longer required to enter into such agreements but the ATP may still wish (or be required) to confirm in writing the terms of any arrangements between the firm and the ATP.

Q Are we under any obligation to give the ATP the information it needs to satisfy its obligations in respect of matters such as know your client, suitability, etcetera?A You are not obliged to provide this information, but it seems unlikely that an ATP would give advice without it.

Q What monitoring of firms will be carried out, and by whom?A The Law Society has the power under practice rule 16(c) to visit firms for the purpose of ascertaining whether the solicitor is complying with rules, codes or guidance made or issued by the Council of the Law Society.

If your firm is visited then the records, which your firm is required to keep under the Solicitors' Financial Services (Conduct of Business) Rules 2001, may be inspected.

You may also be asked to show any records which you were required to keep under the SIBR, as such records must continue to be kept for six years from the date on which the record was made.

The Society will no longer undertake routine monitoring visits in connection with investment business.

Q Rule 3 of the Solicitors' Financial Services (Conduct of Business) Rules 2001 requires certain information to be disclosed in writing to clients before carrying out an exempt regulated activity.

Clearly, for new clients this wording can be included in a practice rule 15 letter but what must be done for continuing clients where it is not necessary to send out new rule 15 letters?A It is important that certain information is given to clients before undertaking any exempt regulated activities, so this information must be given to continuing clients by means of a separate letter or in whatever form the firm wishes to provide the information.

The rules do not prescribe the way in which this information is given to clients other than that it must be in writing.

It is not necessary for all clients to have been sent this information by 1 December 2001, but it must be given to the client before carrying on an exempt regulated activity.

Q If we send out advertising material which refers to exempt regulated activities, I understand that specific wording must be included in the advertisement.

Where will I find this wording and are there any transitional provisions which will allow me to use up existing stock?A The wording appears in article 55A of the Financial Promotions Order (FPO) but has been reproduced in section 7, paragraph 3.5 of the Law Society's information pack Financial Services and Solicitors.

Unfortunately, there are no transitional provisions in relation to the inclusion of this wording as this is governed by the Financial Promotions Order 2001, which came into force on 1 December 2001 and does not contain any transitional provisions.

Q Many firms send out practice notes to clients and non-clients which give details of changes in the law or new legislation.

Is it correct to assume that such notes are promotional materials which must show the required wording?A The wording in article 55A of the Financial Promotions Order is only required to be included in material which is itself a financial promotion.

Therefore, provided the practice notes do not amount to 'an invitation or inducement to engage in investment activity' it will not be necessary for them to include the required wording.

However, if the practice notes relate to investment business matters and promote services offered by a law firm which would amount to exempt regulated activities, then the wording would be required.

Once again, there are no concessions for existing stock but it may be possible to include the prescribed wording on a sticker.

Q What wording must now be put on stationery?A Firms which are not authorised by the Financial Services Authority (FSA) must remove any statement on letterheads that the firm is 'authorised by the Law Society to conduct investment business'.

The FSA has indicated that firms may use up old stock of pre-printed stationery provided that the statement is crossed through.

Firms may wish to replace this statement with the statement 'regulated by the Law Society' and all firms will be required to include this statement on stationery from 31 December 2002.

Q How do the FPO, the RAO and the exclusions link?A Section 21 of the Financial Services and Markets Act 2000 contains a restriction on financial promotions in that unauthorised persons cannot, in the course of business, communicate an invitation or inducement to engage in investment activity, unless it has been approved by an authorised person.

An investment activity is similar but not the same as a regulated activity.

For example, an investment activity does not take account of the exclusions in the RAO.

This means that the fact that a particular activity is excluded by the RAO does not necessarily mean that a communication relating to that activity will be exempt under the FPO.

Therefore, when carrying on activities involving investments it is necessary to consider these questions:

Is the activity capable of being a regulated activity?Are there any exclusions in the RAO which will help?Does the activity fall within the scope rules?Having established whether you can carry on the activity you should then consider the FPO separately and ask:Is the communication caught by the FPO?Do any of the exemptions in the FPO apply?

Q If a client has an ATP and wishes a solicitor to be present at a meeting, would this come within the scope rules and does it make any difference whether the solicitor makes the initial introduction or the client has an existing relationship with the ATP?A A solicitor can be present at a meeting with an ATP and still fall within the scope rules.

It would not make any difference whether the solicitor made the initial introduction or the client has an existing relationship with the ATP.

However, the scope rules will only apply where the firm is able to satisfy the basic conditions in the rules, in particular the activity, which in this case would be arranging and/or advising, must arise out of or be complementary to, other professional services provided to the particular client.

If these conditions are satisfied, the solicitor would be able to attend the meeting with the client.

If the client asks the solicitor to comment on the advice which has been given by the ATP, then the solicitor, while operating under the scope rules, would be able to give negative advice or endorse a recommendation by the ATP but would not be able to vary the advice given by the ATP or offer alternative recommendations.

The scope rules would also allow the solicitor to explain the recommendation from the ATP.

Q Is it correct that if an ATP is introduced to a client, the solicitor must not act in any way as a post box for information to pass to the client?A A solicitor would be able to act as a post box under the 'arranging' exclusion in article 29 of the RAO or under the scope rules, but would need to be careful about making any comments on the advice which is given.

If the solicitor is acting under the exclusion, then no comments should be made other than comments which do not amount to advice on the merits of the client following the authorised person recommendation (for example, a mere explanation of the meaning of certain terms in a proposed contract).

However, if the solicitor is acting under the scope rules, then it would be possible for the solicitor to give negative advice, endorse the recommendation given by the ATP, or merely explain the terms of the recommendation.Q I find the FPO extremely difficult to follow.

Where should I look for guidance?A It would be unwise at this time to give guidance over and above that which appears in the FSA's perimeter guidance (see section 1.26) as the FSA is in the process of revising its guidance on the FPO.

When the revised version is available, the wills and equity committee will give further consideration to the way it applies to particular areas of work.

Q It is understood that the Law Society believed that trustees might have problems in relation to the new provisions concerning regulated mortgage contracts which are scheduled to come into force in September 2002.

Have these problems been resolved?A Yes, the Society made representations to the Treasury and, as a result, the Non-exempt Activities Order has been amended to enable trustees and personal representatives to make loans to beneficiaries which are secured by a first legal charge.

The amendment means that this activity can be undertaken under the scope rules provided that the firm is able to satisfy the basic conditions of those rules.

However, it should be noted that the provisions concerning regulated mortgage contracts are now not expected to come into force until the second quarter of 2004.

Q Safeguarding and administering investments is allowed under the scope rules.

Are there any requirements concerning records, storage or notification to the client?A Rule 7 of the Solicitors' Financial Services (Conduct of Business) Rules 2001 requires firms to operate appropriate systems, including the keeping of appropriate records, which provide for the safe keeping of assets entrusted to the firm by clients and others.

The rule also provides that where such assets are passed to a third party the firm must obtain an acknowledgement of receipt and any instructions from the client to pass them to a third party must be in writing.

Q Where the law firm is acting for trustees but no member of the firm is a trustee, should all letters from the ATP be addressed to the client and only a copy sent to the firm?A If the firm is able to satisfy the basic conditions in the scope rules then it is not necessary for all letters from the ATP to be addressed to the client rather than the firm.Additional guidance on the new financial services regime can be obtained from the Law Society's professional ethics department, tel: 0870 606 2577.