Of all of the areas of solicitor regulation, that dealing with the provision of financial advice to clients, and then in relation to whether clients might wish to purchase insurance to cover a risk that has been identified in the course of a current matter, are surely the most complex. Understanding the regulatory requirements that do apply and how to deal with them is important so as to be compliant with the law and the regulatory requirements and so also to avoid the risk of fines and censure from the SRA.
The starting point is the “general prohibition” that appears at section 19 of the Financial Services and Markets Act 2000 which states that nobody may carry out what are termed regulated activities under the Act unless they are authorised to do so or are in some way exempt. In this regard solicitors have a partial exemption through the possibility of being an “exempt professional firm”, or EPF, if not providing mainstream financial services. This is made possible through the Law Society – and so for these purposes the SRA – being termed a “designated professional body” which may confer EPF status on its members. This will result in law firms being listed as such on the FCA website.
This issue often features as one of the points that the SRA will consider as part of its monitoring inspections and penalties for non-compliance may well then follow. On the other hand if making an application to become registered when the firm has been non-compliant beforehand does not seem to result in the same. The sorts of activities that would mean that firms will need to be accredited would be the family law department advising clients on ancillary offers and payments to be made or agreed, or to the advice provided by commercial lawyers on how their clients should consider varying any shareholdings in any form of corporate restructuring.
The linked issue of insurance distribution is, if anything, more complex again. Known as “insurance mediation” until 2018 this arises when advising clients on the need for some form of insurance and then arranging any such policy to be obtained or assisting in its “administration and performance”. The change from “mediation” to “distribution” reflected the fact that insurance companies were merely developing their policies for sale in 2000 but by 2018 were more likely to be selling their own policies to the public direct.
Law firms are again likely to be involved in insurance distribution if advising clients to take out missing beneficiaries insurance in probate work or after the event insurance in various forms of litigation. In all such cases a failure to be authorised to do so could again result in a disciplinary response from the SRA. Law firms will also have to state that they do not hold shares in the insurance company and act for the client only rather than the insurer, and so as an “ancillary insurance intermediary”.
The rather uneasy mix of financial and insurance advice came about as the two topics arose at the same time within the then European Community at the turn of the century. The net result remains that if the firm will ever become involved in one or the other, or more commonly both, it will need to be duly authorised and regulated to do so.
In order to address either or both of these concerns we would suggest that firms should do the following:
- 1. Check your current status.
- This can be done by searching for your firm’s status on the EPF register at https://register.fca.org.uk/s/. If doing so it is best just to put in the firm’s name in the first search box but then not your location as this seems to cause confusion in the checking system.
- 2. Apply for Listing
- If your firm is not listed then it probably should be, but if you would like to check what the SRA says about this and whether you need to do so then go to their guidance note on this at https://www.sra.org.uk/solicitors/resources/accounts-finance/financial-services/. You may then also need to complete SRA form FA8 which you will find is linked to that part of the website as you will need to register with the FCA via the SRA. See https://www.sra.org.uk/solicitors/firm-based-authorisation/existing-firms-applications/financial-services/
- 3. Check your Terms of Business
- Once registered you are required to provide the wording in your TOB as set out in the SRA Financial Services (Conduct of Business) Rules 2019 at rule 2 on “status disclosure”. This specifies what must be disclosed on financial services but the wording on insurance distribution needs to be as set out in rule 2.2. If already showing this wording make sure that you refer to insurance distribution and not mediation which is quite commonly a point that we have found needs be corrected when checking members’ TOB documents.
- 4. Draft your Demands and Needs Statement
- You will then need to consider the need to provide your clients with a “demands and needs” statement in relation to any insurance that you are arranging for your client, but if instead you refer your client on to their insurance brokers or other advisers that you recommend to do so they should instead provide the client with this. Infolegal subscribers will find a short form demands and needs form for this purpose if you need to do so in the Financial Services and Insurance Advice by Law Firms factsheet (number 6). They will also find further information on this topic including our recommended precedent wording for financial services to appear in your Terms and Conditions of Service.