The Financial Services and Markets Act 2000 (FSMA) is about to change the regulatory regime for the financial services industry.

It makes the Financial Services Authority (FSA) the single regulator for all financial services including banks, insurance companies and investment advisers.

The regime comes into effect on a date referred to as 'N2'.

This is not yet set in stone, but the minister responsible has said that it will be no later than 30 November 2001.HOW DOES THIS AFFECT SOLICITORS FIRMS?Most solicitors are currently regulated by the Law Society in respect of any investment business services they provide, as the Law Society is a recognised professional body (RPB) under the current Financial Services Act.

At N2:-- The Society will cease to be an RPB, but will become a designated professional body (DPB) under the FSMA.-- Solicitors' firms wishing to continue to provide mainstream investment business services must opt into direct regulation by the FSA.-- Solicitors' firms wishing to limit their activities to non-mainstream investment business will be able to continue to do so automatically as members of a designated professional body.IS THAT A GOOD RESULT?This situation meets with the Society's clear policy line since the original announcement that the FSA will become a single regulator.

The definition of investment business in the legislation is (and always has been) wide, complex and often lacking in clarity.

Solicitors' legal work, by its very nature, can often involve practitioners in incidental or peripheral investment activity.

Dual regulation by both the Law Society and the FSA of solicitors who are only providing these non-mainstream services, would be neither cost effective nor in the interests of consumers.Eventually these arguments were accepted by the Treasury which developed the DPB exemption as a way of avoiding unnecessary over-regulation while ensuring protection of the public.

The Society is content with this result as it allows solicitors to continue to provide a full legal service to clients, even where the case involves investments.

On the other hand, the Society is happy that solicitors who want to provide mainstream investment advice, such as investment management services, are authorised by the FSA.WHAT IS THE DIFFERENCE BETWEEN MAINSTREAM AND NON-MAINSTREAM?Broadly speaking, mainstream work is what is defined as discrete investment business (DIB) under the current regime.

(Firms that currently provide DIB services will have a category 2 investment business certificate from the Law Society at the moment.) Therefore, non-mainstream work is broadly what would be treated as non-discrete investment business (non-DIB) under the current regime.WHAT HAPPENS TO THE SOLICITORS' INVESTMENT BUSINESS RULES AND THE INVESTMENT BUSINESS CERTIFICATE?At N2 the Solicitors' Investment Business Rules will be repealed.

The FSA rule books will replace the the rules for firms authorised by the FSA.

If your firm is thinking about providing mainstream investment business post N2 the 'final' form of most of the FSA rule books are now available and should be studied carefully.Investment business certificates (and the fee that goes with them) will also cease to exist.

The benefits of the DPB regime will be available to all firms.

Current investment business certificates are scheduled to end on 31 October 2001.

If N2 is 30 November 2001, the Society will decide whether to allow for current investment business certificates to run until N2.The Society as a DPB is required by the FSMA to have rules which are 'designed to secure that in providing a particular service to a particular client, the member carries on only regulated activities which arise out of, or are complementary to, the provision by him of that service to that client' (section 332(4)).

The rules have been drafted and they are in the process of being agreed, in principle, with the FSA.

Once agreed there will be a short consultation as the rules must be in place by mid-July to meet the N2 deadline.

These rules, together with the FSMA and orders made under the FSMA will together define the scope of the financial services that solicitors can provide while not being authorised by the FSA.The rules are subject to approval by the FSA which has the duty to keep informed about the way DPBs supervise and regulate non-mainstream activities and about the way in which solicitors carry on such activities.

This is because the FSA has the power, by direction or order, to disapply the exemption provided by the DPB regime -- either in relation to individual firms, particular activities or, in relation to any profession as a whole.THE DPB EXEMPTION SOUNDS GOOD -- WHAT IS THE CATCH?The 'catch' is that providing an investment business activity as defined without authorisation by the FSA is a criminal activity and it can make contracts unenforcable.

The DPB exemption only applies if all the statutory conditions and the DPB scope rules are followed.

Stepping outside the scope rules will also be a criminal offence.

Therefore, it is all the more important for firms an d individual solicitors to know what they can and can't do to stay safely within the DPB regime.

While the Society has sought to replicate what is currently non-DIB, the relevant legislation has changed and the DPB rules are brand new.The main problem, as with the current system, is that the DPB rules require an understanding of the underlying legislation which is complex.The FSMA has set out the framework for the new regime but with little detail.The regulated activities order (RAO) defines both the 'investments' and 'activities' which require authorisation under the Act.

The RAO has more than 90 articles.

The order also includes a number of key exclusions to the definitions of the different investment activities.

Some of these are important for solicitors.

Ensuring that your activities are covered by an exclusion in the RAO is the safest route as it does not even require a firm to rely on the DPB exemption.The non-exempt regulated activities order defines certain activities which members of DPBs can never provide, even if otherwise they would appear to fit within the DPB regime.The financial promotions order is a separate regime under the FSMA.

Financial promotions are very widely defined, and again it is a criminal offence to be involved in a financial promotion without authorisation.

The DPB exemption does not give an exemption in relation to financial promotion.Because of this legislative framework the DPB rules have had to adapt to the language of the legislation.All this means that guidance, from both the FSA and the Law Society, will be required to explain what the regime means in practice.

The Society will provide guidance that is relevant to solicitors' work.

For example, it will look at the effect in conveyancing, trust and probate, family and corporate work.

However, it will be for all firms to decide how they wish to institute systems (including training) to ensure that the firm stays within the DPB regime.WHAT HAPPENS NEXT?Three months before N2, the FSA will send to all firms of solicitors an 'opt-in' pack.

This should include guidance for professional firms and will refer to a rule book (referred to as a sourcebook) specifically written by the FSA for professional firms.

It should also include 'perimeter' guidance from the FSA.

It is possible that the pack will also include the Law Society's DPB rules.

The pack will be aimed at helping firms to decide whether to opt into FSA regulation or not.No further action is required by those solicitors deciding not to opt in.

Their firms will automatically fall out of FSA regulation and will automatically be entitled to use the DPB exemption.Any firms which make the decision to opt in will have to let the FSA know, probably, one month prior to N2 -- in which case solicitors at those firms will have to confirm with the FSA details of what type of work they do (and so what 'permissions' are required) and who in the firm are 'approved persons' exercising 'controlled functions'.

Those practitioners will then automatically be grandfathered into FSA regulation without having to make a separate and new application.There may be some benefits to being grandfathered into authorisation by the FSA.

For those solicitors who are unsure as to whether they want to be regulated by the FSA in the future, it may be better to opt-in and then opt-out.

To move the other way round will require any firm to apply anew to the FSA.DOES THIS HAVE ANY EFFECT ON LAW FIRM NOTEPAPER?For firms which will not be authorised by FSA post N2, the current statement that many firms have on t heir notepaper -- that they are authorised in the conduct of investment business by the Law Society -- will be inappropriate and misleading.

Firms should, therefore, think carefully about their stationery requirements as N2 approaches.The FSA has indicated that it may encourage DPBs to require firms to have some other form of notification on their notepaper.

Discussions on this have not been concluded, but the Law Society's view is that printing the phrase 'regulated by the Law Society' on notepaper should be sufficient.