The effect of the Financial Services and Markets Act 2000 (FSMA) is that the regime for the regulation of investment business is scheduled to change at N2, probably in November (see [2001] Gazette, 20 April, 40).What has not changed is the fact that the statutory definition of 'regulated activities' is still wide enough to catch some activities of solicitors, particularly in the fields of work set out above.In November, firms of solicitors who provide any form of mainstream investment business -- that is, by and large what is now discrete investment business (DIB) -- will need to be authorised directly by the Financial Services Authority (FSA).Firms that wish to restrict their activities to non-mainstream work -- by and large what is now non-discrete investment business -- may avoid FSA authorisation by staying within the ambit of the new designated professional body (DPB) regime.WHAT IS A DPB?The Law Society is a DPB.

This means that all firms regulated by the Law Society can benefit from the DPB regime.This will allow sol icitors to provide non-mainstream investment activities which arise out of or are complementary to the legal services they provide.WHAT ARE THESE NEW RULES FOR?The DPB regime is a statutory scheme with a number of statutory conditions attached.

In particular, all DPBs will be supervised by the FSA.In addition, DPBs must have rules which are designed to secure that 'in providing a particular professional service to a particular client, the member carries on only regulated activities which arise out of, or are complementary to, the provision by him of that service to that client'.

The Treasury and the FSA have indicated that these rules must, therefore, limit and define the scope of what solicitors can and cannot do as members of DPBs.

Acting in breach of the DPB rules will amount to a criminal offence (and may make any contract unenforceable).Because of this, all firms should ensure that someone in the firm (or in larger firms a number of people with responsibility for relevant departments) takes note of the details of the regime and of the draft rules and then ensures that there are appropriate systems (including training) introduced into the firm to ensure compliance.AREN'T THERE ENOUGH RULES ALREADY?There is a trade-off.

At N2, the current Solicitors' Investment Business Rules (SIBR) will cease to exist, as will the need for a firm (provided it does not opt into FSA regulation), to have an investment business certificate issued by the Law Society.

No separate fees will be payable to the Law Society in relation to the DPB regime.

These draft rules are limited to defining scope.

It may be that some existing practice rules will also need to be amended, or guidance given on their application to exempt regulated activities.

The Law Society is still discussing this with the FSA.WHAT ARE THE RULES INTENDED TO ACHIEVE?The main policy drive of the Law Society has been to allow solicitors to provide what are now non-discrete investment business services and still avoid FSA regulation.

That is because the current training and regulation of solicitors provides sufficient consumer protection in relation to these limited services, particularly where the investment business arises out of, or is complementary to, the legal service provided.The Society wants to ensure that solicitors can continue to provide normal solicitor services without authorisation.

Firms of solicitors who want to provide specialist investment business services in competition with others such as IFAs, banks and investment management houses, will have to be FSA authorised.WHY DO THE RULES LOOK SO DIFFERENT AND TECHNICAL?The rules have had to take into account the new statutory regime.

Not only are there conditions in the FSMA which relate to the DPB regime (and these are reproduced in the rules for clarity), there are also two key statutory instruments -- the regulated activities order and the non-exempt activities order, which have a direct impact on the way the DPB rules are framed and drafted.

There will be guidance on the new regime which will try and provide clearer advice to firms aimed at particular areas of work -- that is to say, it will show what compliance with the rules looks like in practice.HOW ARE THE RULES DIFFERENT TO THE RULES APPLYING TO NON-DISCRETE INVESTMENT BUSINESS?The layout of the new rules is as follows:-- Rule 1 -- sets out the purpose of the rules.-- Rule 2 -- makes it clear that the rules do not apply to firms which are regulated by the FSA.-- Rule 3 -- Lists the activities which firms may not carry on under the DPB rules.

Many of these activities mirror the activities which are currently prohibited in the SIBR.

The remainder are included because they are prohibited by the non-exempt activities order.-- Rule 4 -- sets out the basic conditions which must be satisfied before a firm can benefit from the DPB regime.

These conditions appear in the Act and include the overriding condition that the activities must 'arise out of or be complementary to' the provision by the firm of that service to that client.-- Rule 5 -- sets out the restrictions on regulated activities carried on under the rules.

Wherever possible these rules allow firms to undertake the activities which would currently be treated as non-discrete investment business and in some cases allow firms to do more than under the current regime.-- Rule 5(1) -- this rule, subject to certain exceptions, prevents firms from recommending and/or arranging for clients to buy packaged products (for example, life policies, unit trusts, and investment trust savings schemes).

It is important to note that the rule only restricts activities in relation to the purchase of packaged products and not the disposals of packaged products.-- Rule 5(2) -- prevents firms from recommending a client to buy or dispose of any rights or interest in a personal pension scheme.

It also prevents firms from making arrangements for a client to buy any rights or interests in a personal pension scheme except where the transaction is on an execution-only basis.-- Rule 5(3) -- prevents firms from recommending a client to buy or subscribe for a security or a contractually based investment (for example, shares, debentures, options futures and contracts for differences).

This restriction does not apply in certain circumstances set out in the rule.-- Rule 5(4) -- prevents firms from undertaking discretionary management except where a member of the firm is a trustee, personal representative, donee of a power of attorney or receiver appointed by the Court of Protection and decisions are either taken by, or on the advice of, an authorised or exempt person.

This is similar to the current restriction on discretionary management in the SIBR.-- Rule 5(5) -- prohibits firms from acting as sponsors to the Stock Exchange, nominated advisers to the Alternative Investment Market or corporate advisers to the 'off exchange' (OFEX).-- Rule 6 -- sets out the effect of a breach of the rules, in particular, it states that a firm which breaches these rules may be committing a criminal offence under section 23 of the Act.Unfortunately, owing to the length, the definitions and defined terms are not included here.

The full text of the rules is available on the Law Society web site at www.lawsociety.org.uk or from the office (telephone 0870 606 2577).

The Society would appreciate comments on the following questions in particular.-- Does your firm undertake any of the activities which would be prohibited by rule 3? If so, does your firm intend to be regulated by the FSA?-- If your firm currently undertakes only non-discrete investment business activities, do you think that you will be able to continue to provide the same services under the draft rules?-- If you act as a sponsor to the Stock Exchange, nominated adviser to the Alternative Investments Market or corporate adviser to OFEX, does your firm intend to be regulated by the FSA?FINANCIAL PROMOTIONSThe draft rules only deal with 'regulated activities' and do not cover the issue or approval of financial promotions.

Guidance on the effect of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2001 will be issued in due course.

It should be noted that the definition of financial promotion is wider than 'investment advertisement' under the current regime.

This order may therefore impact on the corporate activities of firms of solicitors.WHAT HAPPENS NEXT?The Law Society Council must make these rules in July to fit in with the FSA timetable.

This means the Society must have comments from practitioners by 29 June at the latest.The FSA proposes to write to all professional firms at least three months before N2 (currently November) with an opt-in pack.

This will require firms who want to be FSA authorised to opt-in.

Firms who do not want to be authorised will not have to respond to the FSA but must be happy that they have internal procedures to ensure that they do not provide any investment activities which go beyond what is allowed by the law and the DPB regime.

The Law Society will try to ensure that by the time the FSA sends out the opt-in packs, the Society's full information and guidance pack is available.

Please send responses to: Jackie Corcoran, e-mail: jackie.corcoran@lawsociety.org.uk; tel: 020 7242 1222; address: The Law Society, Ipsley Court, Redditch, Worcs B98 OTD; DX 19114 Redditch.DRAFT -- SOLICITORS' FINANCIAL SERVICES (SCOPE) RULES [2001]These rules, dated [2001], are 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, the Administration of Justice Act 1985, section 9, and section 332 of the Financial Services and Markets Act 2000, regulating:-- The practices of solicitors and recognised bodies in any part of the world;-- The practices of registered European lawyers in any part of the United Kingdom, and;-- The practices of registered foreign lawyers in England and Wales in carrying out 'regulated activities' in or into the UK.1.

Purpose(1) The Law Society is a designated professional body under Part 20 of the Act, and firms may therefore carry on certain regulated activities without being regulated by the FSA.

As a designated professional body the Law Society is required to make rules governing the carrying on by firms of regulated activities.

The purpose of these rules is to set out the scope of the regulated activities which may be undertaken by firms which are not regulated by the FSA.2.

ApplicationThese rules:-- Prohibit firms which are not regulated by the FSA from carrying on certain regulated activities;-- Set out the basic conditions which those firms must satisfy when carrying on any regulated activities, and;-- Set out other restrictions on regulated activities carried on by ply only to firms which are not regulated by the FSA.3.

Prohibited activitiesA firm must not carry on, or agree to carry on, any of the following activities as part of its practice:(a) market making in investments;(b) buying, selling, subscribing for or underwriting investments as principal where the firm holds itself out as engaging in the business of buying such investments with a view to selling them;(c) buying or selling investments with a view to stabilising or maintaining the market price of the investments;(d) acting as a stakeholder pension scheme manager(e) entering into a broker funds arrangement;(f) effecting and carrying out contracts of insurance as principal;(g) establishing, operating or winding up a collective investment scheme;(h) establishing, operating or winding up a stakeholder pension scheme;(i) managing the underwriting capacity of a Lloyds syndicate as a managing agent at Lloyds;(j) advising a person to become a member of a particular Lloyd's syndicate;(k) entering as provider into a funeral plan contract, or;(l) entering into a regulated mortgage contract as lender or administering a regulated mortgage contract.4.

Basic conditionsA firm which carries on any regulated activities must ensure that:(a) the activities arise out of, or are complementary to, the provision of a particular professional service to a particular client;(b) the manner of the provision by the firm of any service in the course of carrying on the activities is incidental to the provision by the firm of professional services;(c) the firm accounts to the client for any pecuniary reward or other advantage which the firm receives from a third party;(d) the activities are not of a description, nor do they relate to an investment of a description, specified in an order made by the Treasury under section 327(6) of the Act;(e) the firm does not carry on, or hold itself out as carrying on, a regulated activity other than one which is allowed by these rules or one in relation to which the firm is an exempt person;(f) the FSA has not made an order or direction under sections 328 or 329 of the Act which prevents the firm from carrying on the activities, and;(g) the activities are not otherwise prohibited by these rules.5.

Other restrictions(1) Packaged products (Except Personal Pension Schemes).A firm must not recommend, or make arrangements for, a client to buy a packaged product except where:(a) recommending, or arranging, for a client to buy a packaged product by means of an assignment;(b) the arrangements are made as a result of a firm managing assets within the exception to rule 5(4) below, or;(c) arranging a transaction for a client where the firm assumes on reasonable grounds that the client is not relying on the firm as to the merits or suitability of that transaction.(2) Personal Pension Schemes(a) A firm must not recommend a client to buy or dispose of any rights or interests in a personal pension scheme.(b) A firm must not make arrangements for a client to buy any rights or interests in a personal pension scheme except where the firm assumes on reasonable grounds that the client is not relying on the firm as to the merits or suitability of that transaction but this exception does not apply where the transaction involves:(i) a pension transfer; or(ii) an opt-out.(3) Securities and Contractually Based Investments (Except Packaged Products)(a) A firm must not recommend a client to buy or subscribe for a security or a contractually based investment where the transaction would be made:(i) with a person acting in the course of carrying on the business of buying, selling, subscribing for or underwriting the investment, whether as principal or agent;(ii) on an investment exchange or any other market to which that in-vestment is admitted for dealing; or(iii) in response to an invitation to subscribe for an investment which is, or is to be, admitted for dealing on an investment exchange or any other market.(b) This rule does not apply where the client is:(i) not an individual;(ii) an individual who acts in connection with the carrying on of a business of any kind by himself or by an undertaking of which the client is, or would become as a result of the transaction to which the recommendation relates, a controller; or(iii) acting in his capacity as a trustee of an occupational pension scheme.(4) Discretionary ManagementA firm must not manage ass ets belonging to another person in circumstances which involve the exercise of discretion except where the firm or a partner or employee of the firm or an officer or employee (in the case of a company), or a member or employee (in the case of a limited liability partnership) is a trustee, personal representative, donee of a power of attorney or receiver appointed by the Court of Protection, and either:(a) all routine or day to day decisions, so far as relating to that activity, are taken by an authorised person or an exempt person; or(b) any decision to enter into a transaction, which involves buying or subscribing for an investment, is undertaken in accordance with the advice of an authorised person or an exempt person.(5) Corporate FinanceA firm must not act as any of the following:(a) Sponsor to an issue in respect of securities to be admitted for dealing on the London Stock Exchange;(b) Nominated adviser to an issue in respect of securities to be admitted for dealing on the Alternative Investment Market of the London Stock Exchange; or(c) Corporate adviser to an application on behalf of a company to join OFEX.6.

Effect of breach of rules(1) The Law Society may exercise its statutory powers in respect of any firm which breaches these rules.(2) In determining whether or not there has been a breach of these rules the Law Society will take account of whether the firm has given due regard to the guidance issued by the Law Society on how to determine whether regulated activities are carried on in accordance with these rules.(3) A firm which breaches these rules may:(a) be committing a criminal offence under section 23 of the Act;(b) be made subject to an order by the FSA under section 329 of the Act which could prevent the firm from carrying on any regulated activities.