One early outcome of the demanding regulatory requirements to be placed on solicitors' practices -- regulated by the Financial Services Authority (FSA) for their investment business from 1 December 2001 (N2) -- is already apparent.Several firms have decided that the future costs of compliance will outweigh the benefits to be gained from staying in the investment management arena.The most obvious move to resolve this problem is to hive off investment management divisions into separate companies, so that only those services that need to be regulated by the FSA are so regulated.

However, at least half a dozen firms have so far decided against offering investment management services themselves, and have handed over this business under the permitted third party rules, or through sales or joint ventures.The beneficiaries of these arrangements are often the larger solicitor investment managers, which have the resources and depth of management necessary to acquire and assimilate large amounts of new business while keeping standards of client service constant.The current structural changes in the industry come against a backdrop of dissatisfaction with the professional standards of certain solicitor investment managers.

Senior representatives of the Association of Solicitor Investment Managers (ASIM) have recently questioned whether all solicitor investment management firms have the necessary resources to offer the quality of service expected of the profession.

They have hinted that, in the circumstances, it is unsurprising that the number in the industry is dropping.It is reasonable to expect that, once these firms are FSA regulated, the expectations of the regulator will be higher than those of the Law Society, reflecting the introduction, after N2, of the 'approved persons' regime for certain 'controlled functions' within firms as well as training and competence requirements.

In the medium term, this can be expected to have the effect of driving up standards.It is clear that prerequisites for fully-fledged investment operations are a powerful investment in capital, systems, a depth of back office support and a breadth of investment professionals, fully qualified through the acquisition of the Investment Management Certificate, Securities Institute Diploma or another relevant qualification.Those firms that go it alone will have to face a range of more stringent requirements, such as stricter financial re gulation (including capital adequacy requirements), mandatory participation in the Financial Services Ombudsman scheme, and a significant upgrade to the requirements for administrative/back office functions.Despite the availability of a transition period until 30 November 2002, the implementation of these requirements seems certain to create some onerous workloads for some firms, with a full project management operation seeming to be the only feasible approach.Thesis Asset Management has, in the past year, acquired the investment management portfolios of three smaller solicitor investment managers.

The successful integration of these firms' business has demanded a considerable amount of Thesis' management time, and business and compliance resource, but ultimately it is seen by all parties as a worthwhile method, as it maintains clients within a local solicitor-led holistic service.It is expected that other smaller firms may eventually follow suit and transfer their investment business to larger yet similarly minded co-professionals.What then does the future hold for this sector of the private client investment management market? Certainly, it can be expected that smaller firms may experience difficulty in going it alone, and may join up with others.The hardening regulatory environment will thus lead to a concentration in the market, with fewer managers to choose from.

On the other hand, standards seen as too low may well be pushed upwards.