A recent report in the Gazette headed 'Family lawyers breach rules' highlights the need for guidance on the complex issues relating to investments and matrimonial settlements (see [1999] Gazette, 15 September, 4).When preparing for the introduction of the Financial Services Act 1986, the Law Society persuaded the Securities and Investments Board - the forerunner to today's Financial Services Authority (FSA) - that it was not fair to impose onerous compliance requirements on firms with no intention or desire to conduct mainstream investment business.

The result was the category of investment business, now known as non-discrete investment business (non-DIB) which caters for firms which need to be authorised for investment business because of the wording of the legislation.

Firms involved in matrimonial work will find it difficult to avoid the need for authorisation, mainly because of the difficul ty in interpreting the 'necessary' exemption in paragraph 24 of Schedule 1 of the Act.

An exemption for 'incidental' investment business would be more helpful.Non-DIB is essentially where firms use an exception to avoid DIB.

The main exceptions are where the investment business is either 'incidental' to the main purpose for which the legal services are being provided or where a 'permitted third party' (PTP) independent financial adviser (IFA) is involved.

However, the 'incidental' exception to DIB is not available for packaged investment products, for example, life policies, pensions and unit trusts.The problem cited in the Gazette arises from this exclusion, and affects all divorce lawyers whose clients have or need life or pension policies or collective investments.Perhaps the most common problem relates to the treatment of joint endowment policies on divorce.

There is a number of options open to clients who hold such policies; it could be converted to a single-life basis; assigned to one of the policyholders; or sold to a market maker or at auction.

However, clients are often allowed to surrender their policies, without making a comparison of the relative financial attractions of the alternatives; and indeed judges often make orders requiring surrender, thereby excluding the alternatives.

Some solicitors do not realise that by allowing the client to surrender, they are likely to be conducting DIB, nor that the client might be better off by selling the policy.

Indeed, significant sums of money can be at stake in making the right choice.

Other solicitors do not become involved at all because they are worried about doing DIB inadvertently.Although, the 'necessary' exemption may be available for 'advising' on the overall matrimonial settlement, including the endowment policy, that exemption is unlikely to be available for any 'arranging' of a sale or surrender of the policy.

If the policy is either assigned or converted, the 'necessary' exemption is likely to be available.The investor protection issue is key when considering whether to sell or surrender because the financial difference between the options can be significant.

If cash is needed, the safest way of avoiding DIB and protecting the client is to obtain independent investment advice at the outset.

An IFA (including a DIB firm) will normally be able to help although a fee may be payable.

If independent advice is obtained, DIB can be avoided either by using a PTP for the advising and the arranging or under rule 9(2)(b) of the Solicitors' Investment Business Rules 1995, the solicitor can make the arrangements, based on the PTP's advice.The advantage of this approach is that the client receives independent investment advice on the options, the solicitor knows what is happening so that he can give appropriate legal advice and he avoids DIB, although he still needs authorisation under the Act.The next twelve months will see major changes in the way in which solicitors are regulated for financial services.

When the Financial Services and Markets Bill comes into force during 2000, the FSA will become the single regulator for financial services, replacing the Law Society as the regulator of solicitors' investment business.

The treasury wishes to eliminate the need for 'precautionary' authorisation and aims to achieve this by secondary legislation (the Regulated Activities Order), the second draft of which is currently awaited.

If the need for 'precautionary' authorisation is not eliminated or reduced, the FSA will have to regulate most solicitors' firms even though these firms are not conducting mainstream investment business.However, until the second draft is available, it is not known in what circumstances solicitors will need to be authorised.

Matrimonial solicitors may find that they need authorisation and training to advise on and arrange the disposal of endowment policies.

It may be that provided specialist external advice is obtained, authorisation is not required.

Matrimonial solicitors will wish to follow the progress of the regulatory changes so that they are ready to take appropriate action before the Financial Services and Markets Bill comes into force.Whatever the outcome, there is clearly a growing need for training among matrimonial lawyers in financial matters.

One area where progress is being made is in relation to the treatment of pensions in divorce, where the prospect of pension splitting or sharing is focusing minds on clients' rights and solicitors' responsibilities.

The Solicitors' Family Law Association is running case-study based courses, as is Solicitors for Independent Financial Advice; while both Robin Ellison's Divorce Corporation and Chambers Townsend Consultancy offer pension valuation services.However, for many people pensions are only a part of the armoury of financial provision for retirement, and it is, therefore, equally important also to know what types of investments are purely personal and what can be transferred.

There is much to be learnt, and much to be gained, by both solicitors and clients, from developing awareness of the financial dimension to matrimonial advice.