Solicitors' investment business rules

The Council of the Law Society has made some amendments to the Solicitors Investment Business Rules 1995 (SIBR), which will come into force on 1st June 1997.

The main purpose of these amendments is to extend the existing product and commission disclosure rules, to all 'packaged products' and to 'pension fund withdrawals'.

The amendments also take account of an important development in the financial services industry, namely, the introduction of open-ended investment companies.

The main changes are set out below together with the full text of the amendment rules.Main Changes1.

Open-ended investment companiesAn open-ended investment company (OEIC) is an investment fund in corporate form with a variable share capital and has often been described as a hybrid of the authorised unit trust and the investment trust.

HM Treasury's Open-Ended Investment Companies (Investment Companies with Variable Capital) Regulations 1996, which came into force on 6 January 1997, enable the setting up and operation of OEICs in Great Britain so it has been necessary to amend the SIBR to accommodate the introduction of such com panies.

Accordingly, an OEIC has been added to the definitions in rule 32 of the SIBR.

The definition of 'regulated collective investment scheme' has also been amended to include an OEIC which has the effect of bringing a share in an OEIC within the definition of a 'packaged product'.2.

Pension fund withdrawalsAs a result of changes introduced by the Finance Act 1995, holders of personal pension funds are now able to withdraw cash from their personal pension funds as an alternative to purchasing an annuity at retirement.

The withdrawals may continue until either the policy holder decides to purchase a retirement annuity or reaches the age of 75.

The SIBR have been amended to include a definition of 'pension fund withdrawals' and to extend the rules in relation to commission disclosure, key features documents and reason-why letters, to 'pension fund withdrawals'.3.

Product and commission disclosure for non-life productsFirms have been required to comply with rules in relation to product and commission disclosure for life policies since 1 January 1995.

Following on from the life assurance disclosure regime, the Personal Investment Authority (PIA) has amended its rules to extend such disclosure to non-life 'packaged products' which means that product providers will now also be required to provide commission statements and key features documents for unit trusts, investment trust saving schemes and open-ended investment companies.

Consequently, Appendix 7 to the SIBR has been replaced with a revised version which extends the existing requirements in relation to product and commission disclosure, to all 'packaged products' and 'pension fund withdrawals'.4.

Appendix 7The main changes to Appendix 7 are set out below:-- Commission disclosure (rule 1) -- This extends the existing requirements in relation to commission disclosure to all 'packaged products' and 'pension fund withdrawals'.

The rules no longer contain the words that the disclosure should be made 'in a manner which is fair, clear and not misleading'.

However, this does not signify any change to the firm's duty when making this disclosure as the duty to act in the best interests of the client requires all information to be given in such a manner.-- Key features documents (rule 2) -- This extends the existing rule in relation to providing clients with a key features document, to all 'packaged products' and 'pension fund withdrawals'.

The rules provide limited circumstances in which delivery of the key features document prior to the transaction being effected is not required.-- Reason-why letters (rule 3) -- The requirements in relation to reason-why letters and confirmation of execution-only business have been extended to 'pension fund withdrawals' but do not apply to non-life 'packaged products'.-- Provision of information (rule 4(2)) -- This sub-rule has been amended to include 'pension fund withdrawals'.

References to providing the client with written information about the key features of the product have been removed as this requirement is now covered by rule 2 of Appendix 7.SOLICITORS' INVESTMENT BUSINESS (AMENDMENT) RULES 1997Rules dated 28 April 1997 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, Schedule 15, paragraph 6 of the Financial Services Act 1986 and section 9 of the Administration of Justice Act 1985.

With effect from 1st June 1997, the Solicitors' Investment Business Rules 1995 shall be amended as follows:1.

In rule 18:(a) in the heading replace "AND" with "," and after "PRODUCTS" add "AND PENSION FUND WITHDRAWALS"(b) in paragraph (2) after "products" delete "." and add "and pension fund withdrawals"2.

In rule 32 add the following definitions:(a) after the definition of "firm" insert: "holding means shares, units or any other form of investment in a scheme;"(b) after the definition of "occupational pension scheme" insert: "OEIC means a United Kingdom Open-Ended Investment Company, that is to say an investment company with variable capital as defined in the Open-Ended Investment Companies (Investment Companies with Variable Capital) Regulations 1996;"(c) after the definition of "pension fund management policy" insert: "pension fund withdrawals means in relation to a decision by a client, in respect of a personal pension scheme, to defer the purchase of an annuity and to takea.

income withdrawals within the meaning of section 630 of the Income and Corporation Taxes Act 1988, as amended by section 58 and Schedule 11 of the Finance Act 1995, and any provisions amending or replacing it; orb.

payments made under interim arrangements in accordance with section 28A of the Pension Schemes Act 1993, as inserted by section 143 of the Pensions Act 1995, and any provisions amending or replacing it;"(d) after the definition of "prescribed disclosure" insert: "product provider means in relation to:a.

a life policy, the life office by which that policy is issued;b.

units or shares in a regulated collective investment scheme, the operator of that scheme;c.

an investment trust savings scheme, the manager of that scheme;"(e) after the definition of "regulated collective investment scheme" insert: "scheme means:-a.

a regulated collective investment scheme, whether or not held within a PEP, orb.

an investment trust where the relevant shares have been or are to be acquired through an investment trust savings scheme, orc.

an investment trust where the relevant shares are to be held within a PEP which promotes one or more specific investment trusts;"3 In rule 32:(a) in the definition of "packaged product" after "unit" insert "or share"(b) in the definition of "regulated collective investment scheme" after "Act" add "or an OEIC".4 Appendix 7 shall be replaced by a new Appendix 7 as follows:APPENDIX 7: ADDITIONAL RULES FOR PACKAGED PRODUCTS AND PENSION FUND WITHDRAWALS (rule 18)Part 1 -- Conduct of business rules applicable to all firms1.

Commission disclosure(1) In addition to complying with Rule 10 of the Solicitors' Practice Rules 1990, a firm shall comply with the following requirements in connection with any investment business relating to a packaged product.(2) Where:-a.

a firm or a permitted third party will receive commission in connection with a transaction arranged by the firm; orb.

a client asks a firm to disclose the commission that would be payable in connection with a particular transaction if entered into through the firm; orc.

a firm is providing a client with a key features document within rule 2 of this appendix about a transaction from which the firm or a permitted third party is expected to receive commission;the firm shall disclose the total commission payable in connection with the transaction, including any commission payable to the permitted third party.

If, as a result of a subsequent variation of the proposed transaction, the amount of the commission receivable is increased, this fact must be notified in writing to the client.(3) The disclosure shall be made in cash terms, indicate the timing for payments, and distinguish betwee n initial, renewal and level commission where appropriate.

Disclosure shall be made in writing before the client signs any application or proposal to enter into the transaction, or, if relevant, before the client signs any authority to make pension fund withdrawals.(4) For the purposes of this rule, commission shall be treated as payable in connection with a transaction even if the commission is payable in respect of another matter if the two matters are connected in any way, or if there is an arrangement to pay commission in relation to the two matters jointly.(5) Where the transaction relates to a life policy which was issued on or after 1 January 1995, or where the transaction relates to a scheme and was entered into on or after 1 June 1997, the firm shall comply with the disclosure requirements of this rule in respect of any variation of a recommendation to or proposal made by the client, or any previous transaction into which the client has entered, in the following circumstances:-a.

the variation would cause a fresh notice of the right to cancel to be deliverable; orb.

the increase in the commission which would result from the variation is such that it would not be fair or reasonable not to disclose the increase (including any increased amount payable to a permitted third party) to the client;and in either case the exemptions in sub-rule (6) do not apply.(6) Sub-rule 1(5) above does not apply in relation to a variation in the following circumstances:a.

the variation is effected on the client's own initiative and the firm or a permitted third party has not recommended the variation to the client; orb.

(in the case of an appropriate personal pension wholly paid for by rebates recovered from the State Earnings Related Pension Scheme) the variation results solely from a subsequent change in salary or pensionable benefits.2.

Key features document(1) For the purposes of this rule:-a.

key features document means a self-contained statement of the key features of a packaged product or pension fund withdrawals which must either:(i) be supplied as a key features document by a product provider regulated by LAUTRO, PIA or SIB; or(ii) if the product provider concerned is not regulated by LAUTRO, PIA or SIB, comply with the adopted LAUTRO Rules which would have applied if the product provider had been a member of PIA issuing a key features document.(b) reference to a life policy does not include a defined benefits pension scheme or a pension fund management policy.(2) A firm shall provide the client with a key features document in the following circumstances:a.

before or when the firm makes a personal recommendation to a client:(i) to buy a life policy; or(ii) to vary a life policy by increasing the premiums payable if that variation would cause a fresh notice of the right to cancel to be deliverable; or(iii) which substantially modifies, in any material respect, an earlier recommendatidn made to the client (whether by the firm or another person) to buy or to vary a life policy; or(iv) to modify, in any material respect, a proposal form already submitted (pursuant to an earlier recommendation by the firm or another person) to a life office to buy or to vary a life policy;except where the life policy was issued before 1 January 1995;b.

before or when arrangements are made for the purchase of a life policy on an execution-only basis;c.

before or when the firm makes a personal recommendation to a client to elect, or arranges an election, to make pension fund withdrawals; ord.

before or when the firm makes a personal recommendation to a client to acquire a holding in a scheme or to change to a holding of different units or shares within a scheme but in the case of such an acquisition or change, a firm need not supply a key features document:(i) where the firm makes a personal recommendation to a client in circumstances in which the qualified person making the recommendation and the client are not physically in the same place at the same time and the client wishes to make the investment without delay;(ii) where the change which is being recommended is from accumulation to income units, or vice versa, in a scheme for which the client has already received the key features;(iii) in the case of an execution-only transaction.(3) In circumstances within sub-rule 2(2)(d)(i) the firm must:a.

explain orally or in writing to the client, before the contract or change is made, the following main points from the key features document:(i) the name of the scheme;(ii) its aims;(iii) the relevant risk factors;(iv) the charges which the client will or may bear or which will or may affect the value of the investment, and their effect;(v) (if it is the case) that commission will be payable to your firm, or to a permitted third party and that the client is entitled to receive information about that commission; andb.

enquire of the client whether or not he has been supplied with a key features document in relation to the scheme and, if it has not been supplied to the client;(i) send the client the key features document; and(ii) record the reasons why it was not sent to the client before the contract or change was made, such record to be kept for 6 years.(4) In circumstances within sub-rule 2(2)(d)(i) or (iii) above, the firm shall send the key features document, or cause it to be sent, to the client within 5 business days after the contract or change is made, and in any event no later than the contract note.3.

Long term commitments and pension fund withdrawals(1) 'Reason why' letterBefore or as soon as practicable after a firm makes a personal recommendation or supplies to a client a recommendation to take on or relinquish a long term commitment or to elect to make pension fund withdrawals, the firm must:-a.

provide the client with a written explanation of the reasons why (on the basis of the facts about the client of which it is aware) it believes the transaction to be suitable for the client; orb.

where the recommendation was made by a permitted third party:(i) obtain and pass on to the client the written explanation received from that party; or(ii) provide the client with a written explanation which is in substance the advice of that party(2) Confirmation of execution-only businessIf a firm arranges on an execution-only basis for a client to take on or relinquish a long term commitment or to elect to make pension fund withdrawals, the firm shall send the client written confirmation to the effect that:-a.

the client had not sought and was not given any advice from the firm in connection with the transaction; orb.

the client was given advice from the firm in connection with the transaction but nevertheless persisted in wishing the transaction to be effected;and in either case the transaction is entered into on the client's explicit instructions.(3) RecordsA firm shall make a record in relation to each client of the written explanation and confirmation referred to in this rule, such record to be kept for 6 years from the performance of any investment services to which the record relates.Guidance note: For other provisions regarding record keeping see rules 16 and 27.Part 2 -- Conduct of business rules applicable only to firms undertaking discrete investment business4.

Packaged products(1) Standards of advice(a) A firm shall not make a personal recommendation to a client to buy a packaged product, or buy a packaged product for a client in the exercise of discretion, unless:(i) it has taken reasonable steps to inform itself about packaged products which are generally available on the market, and(ii) it is not aware of another packaged product to be held as the plan investment of a PEP, a firm shall take into account the characteristics (including charging arrangements) of the PEP, as well as those of the product.(2) Provision of informationBefore or when making a personal recommendation to a client to buy a packaged product or to elect to make pensions fund withdrawals, a firm shall provide information about the product which is adequate to enable the client to make an informed investment decision.(3) RecordsA firm shall make a record in relation to each client of the steps referred to in sub-rule (1)(a)(i), such record to be kept for 6 years from the performance of any investment services to which the record relates.Guidance note: For other provisions for record keeping see rules 16 and 27.