The Financial Services Authority (FSA) will commence regulation of general insurance contracts on 14 January 2005.

From this date, firms that undertake regulated activities ('insurance mediation activities') in respect of general insurance contracts will either need to be authorised by the FSA, or be able to rely on the part XX exemption in the Financial Services and Markets Act 2000 and operate from within the designated professional body regime.

The Law Society is currently in discussion with the FSA to amend the scope rules and the conduct of business rules to reflect the widening of regulation.

Detailed guidance will follow shortly.

There has been speculation in the legal press that firms that undertake litigation are likely to need to be authorised by the FSA where they are involved in the regulated activity of assisting in the administration and performance of a contract of insurance (article 39A of the Regulated Activities Order).

The circumstances in which solicitors are likely to be providing services that fall within the scope of this regulated activity are:

- In the course of a personal injury matter, for example, proceedings may be brought against a defendant who may be indemnified by an insurer in respect of any damages that are ultimately adjudged to be payable, and;

- Solicitors may be involved in helping an insured bring a claim against his own insurer.

The defendant in the example above may utilise the services of a solicitor in this instance, or in other circumstances a claimant in proceedings may seek the assistance of a solicitor in making a claim under his legal expenses policy.

However, even where a firm is undertaking article 39A-regulated activities it will still be able to use the part XX exemption provided that it meets all the relevant requirements.

It is the Law Society's view that most firms will be able to comply with such requirements.

However, there is some concern that professional firms whose practices involve a material element of acting for claimants in litigation against insurance undertakings will be unable to take advantage of the part XX exemption.

This is because the part XX exemption requires the firm to demonstrate that the manner of the provision of any regulated activity is incidental to the provision by the firm of professional service activities.

The FSA's perimeter guidance states at paragraph 5.14.2G: 'Professional firms with practices that involve acting for claimants in litigation against insurance undertakings are likely to be carrying on the regulated activity of assisting in the administration and performance of a contract of insurance.

Exempt professional firms whose practices contain a material element of such activity should consider whether they can continue to take advantage of the part XX exemption to avoid any need for authorisation, having regard to the relevant provisions of the Act, in particular section 327 and the guidance in PROF 2.1.4.'

The FSA considers that the following factors are relevant to this condition:

- The scale of regulated activity in proportion to other professional services provided;

- Whether and to what extent activities that are regulated activities are held out as separate services;

- The impression given of how the firm provides regulated activities, for example, through its advertising or other promotion of its services.

The Law Society is not aware of any firms that specialise in litigation services that would not be able to satisfy this incidental require-ment.

However, such firms should consider annex E of the FSA's perimeter guidance at http://www.fsa.gov.uk/handbook/legal_instruments/2004/2004_01.pdf, and can contact the FSA's dedicated contact centre, tel: 0845 605 5525.