As the second anniversary of the Financial Services and Markets Act 2000 nears, Mark Smulian asks lawyers about its impact.

While fears of the legislation throwing law firms into disarray have not materialised, concerns remain that the guidance on offer needs to be clarified before firms can reap the benefit

Who now remembers the millennium bug? It was, in the last few months of 1999, commonly considered that this would cause power failures, aeroplane crashes and disasters of every kind when it struck.

In the event, nothing happened.

Careful preparation dealt with real problems and imaginary perils stayed imaginary.

Something similar, on its own scale, happened to solicitors affected by the Financial Services and Markets Act 2000 when it took effect two years ago next week.

Lawyers grappling with the most lurid scenarios of Financial Services Authority (FSA) regulators marching into their offices, or being caught out if they chose not to be FSA-authorised.

But since 1 December 2001 - known as N2 - hardly any of it has happened.

'I sat through endless late-night City meetings with solicitors who feared the sky would fall in, and it hasn't,' says CMS Cameron McKenna financial services partner Simon Morris.

'The reason is not because we worked around the problems - in many cases there are none.

It is because of the way the world works and the application of common sense by those involved.'

Almost all of the issues that were thought problematic at the time that the Act came into force 'disappeared in the cold light of day', says Mr Morris.

Now the Act's working is under a two-year review by the Treasury, and the Law Society has made a comprehensive submission.

Mr Morris says: 'The minister has said there will not be any primary legislation and thank God for that, but there will be some tinkering at the edges and that may be helpful.'

Mark Kalderon, a partner in the financial services department of City firm Freshfields Bruckhaus Deringer, takes a similar view.

His firm decided not to apply to be authorised by the FSA because it maintained that it could rely on the exemptions available.

He says: 'We've come to feel quite comfortable with the approach we took.

There's a degree of uncertainty and it could all have been a bit clearer, but we have not run into too many questions.'

City firms' concerns centred on the Financial Promotions Order -- created under the Act - which regulates inducements and invitations to enter financial agreements.

There were fears that the order's wording might catch solicitors' regular corporate activity - such as holding a meeting and then distributing a sale-and-purchase agreement - leading in some cases to lengthy disclaimers in communications.

To avoid sanctions for breaching the order, some firms opted into FSA regulation.

Others had less choice - a minority of law firms was authorised to offer discrete financial advice, rather than just advice that was incidental to their legal work.

Under the old Law Society scheme, around 250 firms were authorised as discrete investment businesses, and some 170 signed up initially to the FSA.

Others hived off this work, abandoned it, or joined solicitor financial centres, where this work was pooled.

It appeared clear at the time that the FSA would be an energetic regulator and there were fears that with many grey areas, firms could unwittingly fall foul of it.

As one solicitor - who prefers not to be named - says: 'It was expected that the FSA would be a regulator with teeth, and it is, but it is not off the leash.'

Carmen Reynolds, financial services partner at City firm Norton Rose, says: 'People were worrying about an over-mighty FSA wielding its enforcement powers to the full.

'We are only now starting to see the enforcement cases coming through, so it is only now that we can assess whether the fears were well founded.' She notes that in cases so far, the FSA has shown a propensity to call senior management figures to account.

However, the Financial Promotions Order is still causing some problems.

Mr Kalderon says: 'Initially, we had some concerns about financial promotions and what might be involved if we were negotiating for clients.'

One example, would be a share acquisition agreement where smaller shareholders ought to be included in meetings and receive information.

'Exemptions for one-off communications were less clearly applicable than they might have been in that situation,' he says.

Freshfields initially devised procedures to make sure such people had consented in advance to receive financial promotions.

'The language used tried to make it clear this was not an invitation,' says Mr Kalderon.

'After the FSA came out with guidance, we could drop all that but it was quite difficult to live with and clearer exemptions in the financial promotions regime - especially relating to clients - would have been helpful.'

Ms Reynolds contends that the guidance has been useful, but is concerned about its status.

'We should not have to rely on non-binding guidance to advise on criminal offences,' she says.

'Under the Act, the financial promotion prohibition was drawn very widely, so it was particularly important that the exemptions cut back the scope of the prohibition to allow ordinary commercial communications to be made without risk of breaking the law.'

So the guidance has assisted but not resolved this problem.

Ms Reynolds says: 'Interpretative gymnastics are required to apply the Financial Promotion Order.

Anyone other than a specialist lawyer is likely to find it baffling.

'There are more than 60 pages of guidance and while that is very helpful it would be better were the order to be drawn more clearly so we did not need guidance at all.'

The Law Society, too, sees this area as in need of reform, though it is in general happy with the way the Act has worked.

It says in its submission: 'We do not believe that there is a case for wholesale reform of the legislation at this stage.

The creation of a single regulator has proved to be the correct approach and the system appears to have bedded down reasonably well.

'The main area of the legislation which we have found to be unnecessarily complex and restrictive has been the financial promotion regime.'

Ian Muirhead, managing director of Solicitors for Independent Financial Advice (SIFA), says that for those firms offering discrete financial advice, 'we generally anticipated, rightly as it turned out, that FSA regulation would lead to pressure on firms to consolidate because of the impact of serious regulation and the bureaucratic costs associated with it'.

He adds: '[We anticipated] it would no longer be possible for solicitors to run financial services as a cottage industry.

The cost of regulation is five times what it was under the Law Society in the old system.'

Consolidation has certainly happened, especially in the investment management field.

For example, Ashcourt Asset Management, formed in 2000 by Maidstone law firm Brachers and Salisbury firm Wilsons, has since taken on the investment business of south-coast firm Blake Lapthorn, City firm Lawrence Graham, DMH in Brighton and Hitchin's Hawkins Russell Jones.

It now has more than 250 million under management.

SIFA is also the driving force behind solicitor financial centres - co-operatives to which firms can send their advice work.

Nonetheless, Mr Muirhead is not looking for any great reforms as part of the Act's review.

He says: 'We have no particular concerns with the Act as it stands and we see a change of emphasis in the FSA to being less dictatorial.'

Heather Martin, who runs the Association of Solicitors Investment Managers, acknowledges that the high cost of regulation has led to members merging or selling out, but she says 'there is always demand from the public for good, independent advice'.

She also calls for a period of regulatory calm, with no changes to the regime.

Back in the City, Mr Kalderon is keeping an eye on UK implemen-tation of the European Insurance Mediation Directive, which, according to the European Commission 'would require that individuals or companies who carry out insurance or reinsurance mediation should be registered' on their knowledge and ability, good repute, professional indemnity insurance, and financial capacity.

'If anything in connection with something we arrange has an insurance contract to be put in place, it becomes a regulated activity,' he says.

The directive's restricted exemptions might require FSA authorisation for this work.

'It is a bit of a pain but there is no other approach.'

Mr Morris sees a major problem in a related area where the FSA is the enforcing body for regulated firms, that of money laundering.

'Because the Proceeds of Crime Act is so badly drafted, City firms feel they need to disclose almost every transaction as a criminal matter,' he says.

Mr Morris points out that the definition used - 'anything that would be a crime if done in this country' - is wide.

'If I buy a French apple that is a reportable matter because the lorry that delivered it drove on the right in France, and that would be a crime were it to do so here,' he says.

'It is quite mad and needs to be sorted out.'

Mark Smulian is a freelance journalist