Clients of ABSs providing financial services advice exposed by Legal Services Act hole


Financial advice: ABSs will have to hive off businesses

Clients of law firms that provide retail financial services advice and convert to become alternative business structures (ABSs) could find themselves without access to a compensation fund or the firm’s professional indemnity insurance because of a hole in the Legal Services Act, it has emerged.

The Solicitors Regulation Authority (SRA) recently reversed advice it gave last year that so-called authorised professional firms (APFs) would be unaffected by the changes taking place this October.

It could instead mean firms having to take on Financial Services Authority (FSA) regulation, which solicitor financial advisers’ trade body SIFA warned could deter some APFs from maintaining in-house financial services departments.

It has branded the move as against the spirit of the Legal Services Act.

APFs are authorised by the SRA to provide legal services and by the FSA in respect of financial services activities. This gives them carve-outs from the FSA’s regime, meaning they are not subject to capital adequacy rules and do not have to contribute to the Financial Services Compensation Scheme among other benefits.

However, the SRA has now realised that its jurisdiction under the Legal Services Act extend only to legal services provided by an ABS, and not FSA-authorised work.

This means the protection of the SRA’s accounts, indemnity and compensation fund rules will not apply to their financial services work.

In a letter to firms, the SRA said: “This clearly exposes clients of such firms to the risk that, as an example, they will be protected by neither the SRA’s Compensation Fund nor the Financial Services Compensation Scheme in relation to such financial services regulated activities.”

The SRA is in “urgent dialogue” with the FSA over the issue.

The letter also revealed that the SRA plans to review the APF regime as it applies to traditional law firms.

SIFA has warned that if the FSA fails to come up with an “APF-friendly” scheme, law firms may be deterred from continuing to offer financial advice services.

Ian Muirhead, SIFA’s managing director, pointed out that along with having to begin “unbudgeted contributions” to the FSA’s compensation scheme, and to consider their approach to client money and professional indemnity insurance, APFs would also have to report twice a year on their capital position. He predicted this was “likely to prove impossible for most law firms”.

Firms with in-house financial services departments could continue to operate under tougher FSA regulatory requirements, said Mr Muirhead. Others might choose to hive them off into separate entities or to merge them into joint ventures with external independent financial advisers.

But he added: “The case for solicitors maintaining an involvement of whatever sort in financial services is stronger than ever, given the impetus to provide a more comprehensive and cohesive client service in response to the competition which the Act will unleash.”

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