Solicitors who offer financial services and plan to become alternative business structures (ABSs) could be forced out of the market by plans to plug a gap in consumer protection created by the Legal Services Act, the Financial Services Authority (FSA) has admitted.
The changes, outlined in an FSA consultation paper, could significantly increase the cost and requirements of compliance from October.
The FSA has had to step in after Solicitors Regulation Authority (SRA) discovered that under the Legal Services Act it could no longer give law firms offering retail financial services advice and which convert to become ABSs access to its compensation fund.
Under the present regime, so-called authorised professional firms (APFs) provide legal services regulated by the SRA and financial services by the FSA. This means they enjoy carve-outs from FSA rules on capital adequacy, client accounts, indemnity insurance and the compensation scheme.
Some of this is set to change, most notably in relation to the compensation fund. The consultation said affected firms could have to pay an extra £1,500 a year on average to give clients access to its compensation fund.
Solicitor financial advisers called the estimate “unrealistic”. They fear that if the cost of consumer protection is too high, firms that become ABSs would stop offering financial services work and might have to hive off existing financial services departments.
Ian Cockerill, compliance director of the solicitor financial advisers’ body, SIFA, said the £1,500 estimate “doesn’t look realistic at all to us” given what it knows about the cost of the FSA’s compensation scheme. He said contributions to the scheme were hard to predict or budget for.
In its consultation the FSA conceded that the extra burden of compliance might deter solicitors’ firms: “As a result of the SRA’s decision and the implementation of our proposals, some… firms may have incentives to leave financial services markets due to the net compliance cost increase. Market exit reduces the number of distributors of financial products and could adversely affect competition.”
But it said the small number of firms likely to be affected, plus the large number of non-professional firms offering a market alternative, meant there would be no “material impact on competition”.
Mr Cockerill said the FSA appeared to have accepted that capital adequacy and professional indemnity insurance requirements as they stand were suitable. But he said SIFA was seeking clarification over reporting requirements because the consultation paper was “unclear” on this point.
Under the exemptions, solicitor financial advisers complete a straightforward annual FSA questionnaire. Full FSA compliance would mean six-monthly reporting of a wide range of financial data, with just 30 days to submit them. “Most solicitors’ firms would struggle to complete it to that timetable,” said Mr Cockerill.
He continued: “The FSA has no option and the result has to be that consumers are properly protected. But how they do that is open to question.”