Threats and opportunities

General Douglas MacArthur once commented: “There is no security on this earth; only opportunities.”

Two perceived threats to solicitors’ security are looming at the present time: the assumption of regulatory power by the Financial Services Authority and the likely introduction of Multi- Disciplinary Practices.

FSA regulation will bring opportunity in the form of a level playing field for all financial advisers and an end to the 49.9% limit on law firms’ revenue from financial services work.

The day of the 100% financial services law firm may be about to dawn.  The Law Society of Scotland, however, is likely to retain its monitoring responsibility, on a delegated basis.

MDPs, which the Government has indicated its intention to force the Law Societies to accept if they do not voluntarily change their current allegedly restrictive rules, would provide the means whereby the law firm could become the platform for the one-stop professional shop of the future, combining legal, accountancy, financial advisory, surveying and other services.

The opportunity is thus presented to stem the recent erosion of solicitors’ traditional business preserve and to re-establish solicitors in their historic role as men and women of affairs.

In this respect Scottish solicitors have already given the lead to their English counterparts by successfully establishing the mixed solicitors/estate agency practice.  In so doing they have demonstrated resourcefulness and enterprise of an order unknown among solicitors south of the border.  Financial services is a necessary complement to this business and the majority of Scottish firms have registered under the Financial Services Act in order to be able to arrange mortgages.

However, the new order balances opportunities with obligations, and one area in which the demands will in future be increased is that of qualifications.  The FSA has stated that it has no present intention of exercising its power to make persons who are already authorised requalify, unless there are reasons for doubting that they satisfy the “fit and proper” criterion.  So members of law firms whose authorisation was based on grand-fathering are unlikely to be obliged for the time being to sit the Financial Planning Certificate or other appropriate exam.  Nevertheless, the Society is rightly encouraging them to do so in order to ensure that they are competent to advise; and it seems likely that an acknowledgment of the need for formal professional standards will lead to a reduction in the number of financial services authorised firms in Scotland in the same way as it did in England when formal Training and Competence was introduced over three years ago.

Qualification is one thing, but compliance is another: and what is sometimes overlooked is that keeping up-to-date in financial services and fulfilling the onerous record-keeping requirements are likely to take up to a third of any financial adviser’s time.  This militates against the smaller firm; and in this respect it is important to appreciate that one and two partner firms represent twice as great a proportion of the population of Scottish law firms as they do of English firms.

A sensible minimum revenue target for a financial adviser working in a law firm might be of the order of £l00k pa (though some individuals are producing up to £350k pa).  If financial services were regarded as a stand-alone activity, failure to achieve this level of earnings might pose a question as to the viability of maintaining an in-house service.  However, the essence of financial services work is that it complements legal work and enhances the firm’s overall service, and consequently it should not be regarded in isolation, particularly if the firm also operates an estate agency.

A more important consideration than revenue per se, therefore, is synergy.  Is there a legitimate connection between the firm’s legal work and its financial services; and does there exist a co-operative team spirit between legal fee-earners and financial advisers?  Despite all that is written about success depending on effective client marketing, the reality is that with financial services the only marketing which really matters is internal: do the firm’s fee earners understand when financial advice is required, and are they confident enough of their financial adviser colleague to refer their clients?

If so, then the case for having an in-house adviser is the stronger.  However, regardless of whether referrals are internal or external, solicitors are increasingly being reminded by the courts of their responsibility to be aware of the tax and financial factors which impact on their legal advice.  In Hurlingham v Wilde, a solicitor was sued successfully by an aggrieved client for failing to structure a commercial conveyance tax-efficiently; while the firm which advised the ex-wife of the erstwhile Tory Minister Eldon Griffiths on her divorce was obliged to compensate her for failing to take account of her husband’s pension rights.  The message is clear: the law firm of the future will be multi-faceted, and its structure will be dictated by the needs and expectations of clients.

Ian Muirhead is managing director of Solicitors for Independent Financial Advice