Individual savings accounts

LAW SOCIETY COUNCIL STATEMENT ON MANAGED CASH DEPOSIT ISAsIndividual Savings Accounts (ISAs) are the new form of tax efficient savings product, which will come into effect from 6 April 1999.

These products allow investors to invest in equity, insurance or cash components within a tax efficient wrapper.

An ISA may be a maxi-ISA (where one manager looks after all the money invested) or a mini-ISA (where the manager looks after only one component).Solicitors who wish to manage ISAs which include equity or insurance components will require the Council's permission under the Solicitors' Investment Business Rules 1995 (as amended).

Solicitors who manage maxi-ISAs or who manage mini-ISAs which consist of an equity or insurance component will be involved in investment business as defined by the Financial Services Act 1986 and as such will be subject to the Solicitors' Investment Business Rules.Although cash is not an investment as defined by the Financial Services Act 1986, the management of cash with other investments within an ISA will be regulated by the Act since management is defined in paragraph 14 of schedule 1 as 'Managing or offering or agreeing to manage assets belonging to another person if - (a) those assets consist of or include investments'.Solicitors who chose to be managers of a mini-ISA looking after a client's cash deposit only will not be undertaking investment business.

Consequently no permission will be required from the Council although the Individual Savings Account Regulations 1998 require such solicitors to be approved by the Inland Revenue to act as ISA managers.

However, solicitors are reminded that the provisions of the Solicitors' Accounts Rules will apply to the cash received and held by the firm and that the provisions of rule 1 of the Solicitors' Practice Rules 1990 will apply.

Further, certain specified, minimum information should be given to clients before solicitors enter into an agreement for a cash-only mini-ISA.-- If the ISA is stated as satisfying the CAT Standards (the Cost, Access and Term Standards for ISAs prescribed from time to time by HM Treasury), a comparison of the account against the CAT standards; or-- If the ISA is not stated as satisfying the CAT standards, a statement making this clear, together with, if desired, any relevant information; and-- minimum amount to open an account;-- minimum yearly deposit;-- the interest rate earned, and if and how it might vary;-- the calculation of interest;-- how to make withdrawals and any limits;-- the amount of any commission or remuneration;-- details of the arrangements for application of the cooling-off period;-- the arrangements for handling complaints;-- that the favourable tax treatment may not be maintained;-- that the arrangements for managing the cash deposit of the ISA may not be covered in the scope of any consumer compensation scheme;-- where applicable, that the firm acts as agent in ar ranging the cash deposit, identifying the principal, and explaining that the principal has accepted responsibility for the activities of the firm in relation to the cash deposit;-- that a client in doubt whether an ISA is suitable should seek advice.Solicitors should also note that rule 10 Solicitors' Practice Rules 1990 will apply to any commission received from managing a cash ISA.

Further, although a solicitor's indemnity cover will normally include management of a client's cash ISA, it is possible that where the firm acts as agent in arranging the cash deposit, the principal will not be covered in the scope of any consumer compensation scheme.

Therefore, the warning noted above should be given.The Individual Savings Account (ISA) is a new form of tax-efficient savings product that will be introduced with effect from 6 April 1999.

Similar to a Personal Equity Plan (PEP), the ISA provides a vehicle for investment in stocks and shares, insurance products and cash.There are three main ways in which firms of solicitors may be involved in investment in ISAs:-- Advising clients on ISAs;-- Acting as an ISA manager where the ISA wrapper contains 'investments' as defined by the Financial Services Act 1996 (FS Act), as amended;-- Acting as an ISA manager in respect of a cash deposit only.It should be noted that both the first and second constitute discrete investment business under the Solicitors' Investment Business Rules 1995 (SIBR), as amended.

However, as cash is not an investment for the purposes of the FS Act, the third activity will not constitute investment business.Advising clients on ISAsFirms conducting discrete investment business in advising clients on ISAs will need to comply with the SIBR which, subject to the concurrence of the Master of the Rolls, have been amended to bring ISAs within their remit (see page 37).

In addition, the firm must have a 'qualified person' who is qualified to advise on the corresponding investment within the ISA wrapper.Investment componentAny firm wishing to manage such an ISA will, under the amended SIBR, need to obtain the Law Society's permission to do so.

In order for such approval to be granted, the firm must satisfy certain conditions.

These include giving an undertaking to comply with the relevant provisions of the Adopted FIMBRA rules of the Personal Investment Authority and having a 'qualified person' with the appropriate discrete investment business module (that is, one who is qualified to advise on the underlying investment).

The firm must also confirm that approval to act as an account manager is being sought from the Commissioners of the Inland Revenue, and must notify the Law Society as soon as such approval has been obtained.Where the ISA contains cash and investments, the management of the cash element will be regulated by the FS Act since management is defined in paragraph 14 of schedule 1 as 'Managing, or offering or agreeing to manage, assets belonging to another person if - (a) those assets consist of or include investments'.Cash component onlyThis activity does not constitute investment business as defined by the FS Act.

Consequently, it is not necessary to obtain the permission of the Law Society in order to act in this capacity, although Inland Revenue approval is still required under the Individual Savings Account Regulations 1998.

However, the newly-introduced Law Society Council statement on managed cash deposit ISAs requires specified, minimum information to be given to clients, and reminds solicitors that the provisions of the Solicitors' Acc ounts Rules apply to the cash received and held by the firm and that rules 1 and 10 of the Solicitors' Practice Rules 1990 (as amended) also apply.

Firms that would like additional guidance or those which are seeking approval to act as ISA managers should contact the Law Society's Professional Ethics Division, Ipsley Court, Berrington Close, Redditch, Worcestershire B98 0TD; tel: 0870 606 2577; or Steve Barrow, Head of Investment Business; or Ian Cockerill, Principal Investment Business Officer, of the Monitoring and Investigation Unit, Office for the Supervision of Solicitors, Victoria Court, 8 Dormer Place, Leamington Spa, Warwickshire CV32 5AE; tel: 01926 822 115.

Please note that those firms that have already sought the necessary approval need not apply again.Solicitors' Investment Business (ISAs) Amendment Rules 1999Rules dated .

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1999 made by the Council of the Law Society with the concurrence of the Master of the Rolls under section 31 of the Solicitors' Act 1974, Schedule 15, paragraph 6 of the Financial Services Act 1986 and section 9 of the Administration of Justice Act 1985.With effect from .

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1999 the Solicitors' Investment Business Rules 1995 shall be amended as follows:(1) After rule 2(4) add the following:'(5) A firm may not act as an ISA manager unless the Council has granted permission to the firm under rule 7'(2) After rule 7(1)(b) insert the following:'or (c) grant permission to a firm to act as an ISA manager.'(3) After rule 7(3) add the following guidance note:'Guidance NoteThe Council will only grant permission under rule 7(1)(c) if the firm fulfils the conditions of the Individual Savings Account Regulations 1998 and is seeking approval from the Commissioners of the Inland Revenue for the purposes of the Regulations as an account manager.

Firms granted permission to act as an ISA manager will be required to confirm to the Law Society that the Commissioners of the Inland Revenue have granted approval.

Further, such firms will have to undertake to comply with the Adopted FIMBRA rules of PIA applicable to such business as specified in Part II of Appendix A to Part 2 of the Financial Services (Conduct of Business) (ISAs) Rules 1999.Individual Savings Accounts (ISAs) allow investors to invest in equity, insurance or cash components.

An ISA may be a maxi-ISA (where one manager looks after all the money invested) or a mini-ISA (where the manager looks after only one component).

Solicitors who, with the Council's permission, manage maxi ISAs will be involved in investment business as defined by the Financial Services Act 1986 and as such will be subject to these rules.

Although cash is not an investment as defined by the Financial Services Act 1986, the management of cash with other investments will be regulated by the Act since management is defined in paragraph 14 Schedule 1 as lManaging, or offering or agreeing to manage, assets belonging to another person if - (a) those assets consist of or include investments'.'Solicitors who choose to be managers of a mini-ISA looking after a client's cash deposit only will not be undertaking investment business.

Consequently no permission will be required from the Council, although the Individual Savings Account Regulations 1998 require such solicitors to be approved by the Inland Revenue to act as ISA managers.

However, solicitors are reminded that the provisions of the Solicitors' Accounts Rules will apply to the cash received and held by the firm and that the provisions of rule 1 of the Solicitors' Practice Rules 1990 will apply.

Further, certain specified minimum information should be given to clients before solicitors enter into an agreement for a cash only mini-ISA:-- if the ISA is stated as satisfying the CAT Standards (the Cost, Access and Terms Standards for ISAs prescribed from time to time by HM Treasury), a comparison of the account against the CAT standards; or;-- if the ISA is not stated as satisfying the CAT standards, a statement making this clear, together with, if desired, any relevant information; and-- minimum amount to open an account;-- minimum yearly deposit;-- the interest rate earned, and if and how it might vary;-- the calculation of interest;-- how to make withdrawals and any limits;-- the amount of any commission or remuneration;-- details of the arrangements for application of the cooling-off period;-- the arrangements for handling complaints;-- that the favourable tax treatment may not be maintained;-- that the arrangements for managing the cash deposit of the ISA may not be covered in the scope of any consumer compensation scheme;-- where applicable, that the firm acts as agent in arranging the cash deposit, identifying the principal, and explaining that the principal has accepted responsibility for the activities of the firm in relation to the cash deposit;-- that a client in doubt whether an ISA is suitable should seek advice.Solicitors should also note that rule 10 Solicitors' Practice Rules 1990 will apply to any commission received from managing a cash ISA.

Further, although a solicitor's indemnity cover will normally include management of a client's cash ISA, it is possible that where the firm acts as agent in arranging the cash deposit, the principal will not be covered in the scope of any consumer compensation scheme.

Therefore, the warning noted above should be given.(4) In the guidance note to rule 22(2) (Understanding of risk) add the following new paragraph:'Where the recommendation relates to an ISA the firm should ensure that the client receives information about the product which is adequate to enable the client to make an informed investment decision.

This information must include whether the ISA is a mini- or maxi-ISA and the firm should explain the difference between the two.

Further if the ISA (or a component of the ISA) is stated as satisfying the CAT Standards (the Cost, Access and Terms Standards for ISAs prescribed from time to time by HM Treasury), the firm must explain the CAT Standards and warn the client that the CAT Standards do not necessarily mean that the investment is appropriate for the investor, or that there is any guarantee of investment performance.

If the ISA is not stated as satisfying the CAT Standards, the firm must make this clear to the client.(5) In rule 32 add the following definitions:(a) after the definition of 'individual pension contract' insert:'Individual Savings Account means an account which is a scheme of investment satisfying the conditions prescribed in the individual conditions prescribed in the Individual Savings Account Regulations 1998 (SI 998/1870);-- ISA means an Individual Savings Account;-- ISA manager in relation to an Individual Savings Account means a person who fulfils the conditions of the Individual Savings Account Regulations 1998 and is approved by the Commissioners of Inland Revenue for the purposes of the Regulations as an account manager;'(6) In rule 32 replace the definition of 'life policy' with the following:'life policy means an investment within paragraph 10 of schedule 1 to the Act (long term insurance contracts) whether o r not held within an ISA;'(7) In rule 32 replace the definition of 'packaged product' with the following:'packaged product' means a life policy, a unit or share in a regulated collective investment scheme, or an investment trust savings scheme whether or not held within an ISA or PEP;'(8) In rule 32 replace the definition of 'scheme' with the following:'scheme' means:(a) a regulated collective investment scheme, whether or not held within an ISA or a PEP; or(b) an investment trust where the relevant shares have been or are to be acquired through an investment trust savings scheme; or(c) an investment trust where the relevant shares are to be held within an ISA or PEP which promotes one or more specific investment trusts;'(9) In Appendix 7 Part 2 replace paragraph 4(1)(b) with the following:'In assessing the merits of a packaged product to be held as the plan investment of a PEP or ISA, a firm shall take into account the characteristics (including charging arrangements) of the PEP or ISA, as well as those of the product.'