Joint ventures are superseding the in-house financial services model.
The Legal Services Board recently admonished the Solicitors Regulation Authority for being insufficiently supportive of multi-disciplinary applications for alternative business structure status, noting that only 40% of applications from accountants and independent financial advisers (IFAs) had been accepted.
The LSB noted with regret that ‘many of the ABS licences have been granted to firms that only provide legal services and not “one-stop shops” envisaged by the Legal Services Act’.
As if in support of the LSB, the Legal Ombudsman noted an ‘increased tendency of the private sector to provide joined-up and overlapping services’, saying that ‘professional services are being increasingly bundled together and there are overlaps between, for example, legal, financial, property and claims management companies’.
Solicitors have been disinclined to think outside the box of their traditional business model, preferring to approach things in terms of consolidation, rather than follow the example of the non-lawyer entrants to the legal services market, many of which are regarding such services as a complementary addition to an existing business activity. This is understandable, given the newcomers’ advantage over solicitors of possessing comprehensive information about their customers, and sophisticated databases which enable them to cross-sell their products or services.
For many solicitors, the requirement to ‘know your client’ arises mainly in the context of money laundering, and their reluctance to look beyond the transactional business model and investigate clients’ wider needs represents a major vulnerability. Indeed, there are two recent instances of solicitors facing class actions for allegedly failing to address tangential issues arising out of their legal advice: one in relation to the treatment of pensions on divorce, where firms are alleged to have failed to address all the available options and to question the proposed transfer values; and the other in relation to ‘right to buy’, where it is alleged that issues of finance and insurance have been neglected.
By contrast, IFAs are required by their regulator to gain a comprehensive knowledge of clients before formulating advice, and keep their recommendations under review. Their ability to take a holistic overview of clients’ needs could represent a bonus for the growing number of law firms which are establishing formal associations with IFAs, in the form of joint ventures (JVs). However, a more immediate attraction is the additional revenue potential.
JVs are superseding the solicitors’ in-house financial services model, the demise of which was hastened by the SRA’s 2012 announcement that it was minded to cease authorising firms which were also regulated by the Financial Conduct Authority (FCA): the ‘authorised professional firms’ (APFs). This provided an early indication of the SRA’s stance on multi-disciplinary practices, and prompted most APFs to hive off their financial services unit, while retaining a shareholding. This model has worked well, not least because it enables the IFAs to avoid the problem of being managed by people with limited knowledge of their work.
However, the term ‘joint venture’ refers not to hive-offs, but to companies owned 50/50 by law firms and IFA firms. These provide the dual benefit to solicitors of enabling them to be remunerated by dividend for the business transacted, while delegating FCA compliance to the IFAs. The regulatory requirements are simply that the solicitors must make clear to clients that the SRA client protections do not apply, and disclose formally the fact that they have a financial interest in the JV.
Due diligence is clearly vital before entering into any formal relationship, and this can only be completed after a satisfactory period of working together on an arm’s-length basis. The critical factors are a personal rapport between the individuals principally involved; a clear commitment by all the partners in the law firm; and complementary business specialisations, for example in relation to trusts and estates, matrimonial work, advice to later-life clients, or the investment of personal injury awards.
In addition, the due diligence requirement in outcome 6.3 of the SRA Code of Conduct, which obliges solicitors to ensure that their clients are in a position to make informed decisions as to the suitability of the IFAs to whom they are being referred, is likely to entail the recording of data as to the qualifications and experience of both firms and individual advisers, including any relevant IFA accreditations.
Ideally, firms would also adopt a formal procedure for referrals, setting out the ‘beauty parade’ process and the arrangements for ongoing review. In addition, Lexcel suggests that if more than one referee is to be used, a panel should be created, perhaps based on business specialisations.
Interestingly, whereas the relaxation by the SRA of the prohibition against solicitors referring clients to IFAs who are not independent has opened the door to tied and multi-tied salespeople (with, as yet, unknown consequences for the Solicitors Compensation Fund), outcome 12.6 of the SRA Code of Conduct states that, if a solicitors’ separate business such as a JV is an appointed representative of a financial adviser firm (this being the standard model), that firm must be independent.
Ian Muirhead is director of Solicitors’ Independent Financial Advice
- This article was first published in Managing for Success, the magazine of The Law Society’s Law Management Section. The section is dedicated to providing members with the best available advice, information and support on topical leadership and management issues, enabling them to create stable, profitable businesses. Members receive four free webinars, the quarterly magazine, a regular e-newsletter, and free access to the expert-led Financial Stability seminars currently taking place. Members also benefit from discounts on other Law Society events and products. To find out more see the website.