It is a testing time for the small but determined group of law firms that have made the leap of faith and embraced financial services, as they await final word on what life will be like under the Financial Services Authority (FSA).Two weeks ago it was announced that the 7,000 law firms providing 'incidental' investment advice would be spared regulation under the FSA.

However, almost 300 firms which do mainstream investment work - known as discrete investment business - will come under the new super regulator's ambit.This week, solicitor financial advisers are digesting the latest 70-page consultation paper from the FSA which puts more flesh on government plans for a level regulatory playing field for all firms - solicitors, accountants and actuaries - carrying on investment business.

The implementation date for the Financial Services & Market Bill, which brings the FSA regime into effect, is expected to be in the second half of next year.The paper makes sober reading for those firms wanting to carry on offering mainstream investment advice within law firms.

According to David Lough, managing director of financial investment services at south east law firm Cripps Harries Hall, it represents a revolution in the regulation of professional firms.

He has been in discussion with the FSA and the Treasury on behalf of the Association of Solicitor Investment Managers (ASIM), and describes the proposed regulatory model as 'mono-disciplinary'.

He says it is both a bad fit for the profession and is against consumer interests.

The model revolves around a particular area - such as the law, electricity or the rail system - but not around consumers, he contends.In particular, the proposed regime is expected to impose a liability on all partners, not just those working in investment advice, and also heavy capital requirements on firms which could force legal practices to hive-off their financial services departments into separate businesses.Mr Lough says that the government is going in one direction but the market-place and consumers are going in the other, favouring multi-disciplinary professional services which offer all financial advice under one roof.He says: 'Something is going to have to give and the authorities believe that at the moment it is the market that will have to and we'll have to split ourselves into little units that suit the policy and regulatory framework.

But I question whether that will be the solution because the consumers and the market place are eventually more powerful.'According to ASIM chairman John Morton, a partner at the Maidstone-based firm Brachers, the prospect of hiving-off is 'wholly and fundamentally wrong' and 'a disservice to clients'.

He says the 'worst nightmare' is that the FSA will insist on capital adequacy rules - stipulating a minimum level of cash required to be held by businesses - being applied across the whole firm.

He maintains this would stifle growth in investment management and ultimately break up what he says is a unique service.For financial services solicitors to be forced to go it alone would be 'extremely retrograde and help absolutely nobody', says John Eaton, a partner at Leeds firm Lupton Fawcett.

In particular, it would restrict consumer choice.

He argues that there are two routes for financial services departments that have been forced out from firms, either as law firm niche practic es ('bearable, but a shame') or as non-solicitor independent financial advisers ('very bad news').

'The system operates very well as it is, why change a winning formula?' he asks.However, Ian Muirhead, managing director of Solicitors for Independent Financial Advice (SIFA), is more optimistic about the future.

He takes heart from the Law Society Council's recent decision to accept multi-disciplinary partnerships (MDPs) and says this, in conjunction with arrival of the FSA, could 'light the touch paper' leading to a sudden expansion in the numbers of solicitors operating in this area.

He argues that under the FSA regime, law firms will be able to practise for the first time solely in financial services but also, with the introduction of MDPs, they could attract non-lawyer specialists into their practices.

'If I was looking at the FSA changes in isolation I would be apprehensive,' he says.

'But in conjunction with the MDP proposals, it becomes extremely positive.'Concerns about future regulation aside, solicitors have traditionally shied away from investment work and even now only 3% of the profession is registered with the Law Society to conduct mainstream investment work.

However, solicitors working in this area say that there is a synergy between legal work and financial services advice.

'Consumers are voting for it with their feet and their money,' David Lough says.

He argues that solicitors are well-placed to offer clients advice as they are frequently on-hand when large amounts of money come to people, for example, through inheritances, house sales, or matrimonial settlements.

Clients are bound to turn to their solicitors, he says, and are delighted when they can help.

'A look of relief comes over their face,' he says.Ian Muirhead agrees, adding that the bottom line is that clients still trust solicitors.

'It's that comfort factor that the client buys,' he says.

'Time and time again, the client seeks re-assurance.

They are still benefiting from the comfort of Law Society indemnity, dealing with qualified solicitors, the same quality standards and client care.' What they do not want is to be farmed-off to some sharp practice down the road, he says.He argues that the profession's reluctance to tap into this market dates back to 1986 when the Law Society became the recognised professional body, regulating financial services for the profession.

At that point he says the Society, with the conveyancing and probate monopolies intact, was not interested in diversifying.

Financial services only started to become respectable, he says, when the Society introduced a training and competence regime in 1993, requiring qualifications for practitioners, and a financial services module on the professional skills course.

In particular the introduction of qualifications 'flushed out' those who were not prepared to do the job properly, he says.During the last few years, the number of firms practising in financial services has remained fairly static, but SIFA is now reporting that departments are building up.

In particular during the eight-month period from December to August this year, the number of solicitors who qualified in financial services leapt from 109 to 152, and non-solicitor advisers increased from 415 to 504.

According to Ian Muirhead, this is evidence of departments 'reaping the benefits of economies of scale', and taking work from other law firms.David Lough says investment departments need to reach a 'critical mass' before becoming viable.

In particular, they have to bear the costs of hiring investment experts, implementing the right systems, and monitoring compliance issues.

The financial services department at Cripps Harries Hall has 40 staff and more than £250 million of clients' funds under management.

'You need to be a good-sized firm with a good history in private client work so that you have the trust, allegiance and following of a good body of clients,' says Mr Lough.

However, according to SIFA figures, the average law firm engaging in discrete investment business (DIB) is considerably smaller with only two to three qualified persons in each authorised firm.Last May, West Midlands firm Armstrong Neal made a splash by becoming the first practice to specialise solely in financial services and tax.

It was formed by the two partners, Alan Neal and Gareth Fatchett, from Worcestershire firm Morton Fisher, who set up the practice together with chartered accountant Jane Armstrong.

According to Mr Fatchett, they left their old firm because they considered its adherence to typical high street areas of practice, such as conveyancing and legal aid, to be 'backwards'.

With such work being squeezed, he says financial services may be a lifeline for practitioners.'We think it is going to be a very bright future for those that embrace it,' he says.

However, in a recent article (see [1999] Gazette, 19 May, 44) he argued that the profession was also facing a crisis in this area and needed an injection of young blood.

Out of 95,000 qualified solicitors, he wrote that only one solicitor under 30 years of age was qualified to give advice on corporate pensions and advanced schemes and only one was qualified to give securities and portfolio management advice.He welcomes the FSA's regime because it offers consumers a 'uniform level of protection' which, he says, has got to be good thing.

It also means that financial advisers will pick up the work of those who drop out of the market.

But solicitors should rise to the opportunity, he insists.

'It is like the Indians are going around us,' he says.

'We've got our wagons in a circle.

We may have good weapons but they have more numbers than we have.'Another new entrant is the five-strong financial planning group at Newcastle firm Dickinson Dees, which was recruited from Big Five accountants Arthur Andersen three months ago.

Head of the group David Dale says he is 'not unduly concerned' about the new regime.

In his career as a financial adviser he has worked under a number of regulatory authorities.

He says: 'To offer better-than-best advice you have to conform to the most stringent set of rules.' He is aware of firms preparing to hive-off their departments, but he says it is a peculiar way to second guess the FSA.SIFA's Ian Muirhead agrees, and advises solicitors not to act too hastily.

In particular, he recommends not to hive-off now because if they do they can not operate as law firm until the FSA regime comes into force.

'Keep your head, keep your options open,' he says.