Money matters

The last few years have not been easy times for solicitors advising in financial services. Reeling from the double blow of sharply reduced remuneration – typically down by around 30% – due to market turmoil, and a greatly increased regulatory burden since the Financial Services Authority assumed jurisdiction in December 2001, many smaller financial services units have closed down. Solicitors not authorised by the FSA are now confined to providing advice which is generic and integral to their legal work, in terms of the exemption provided by Part XX of the Financial Services and Markets Act 2000. In marked contrast to the situation which prevailed under Law Society regulation, solicitors will commit a criminal offence if they step outside this exemption.

Ironically, this regulatory discouragement has coincided with a need for greater involvement in matters such as pensions and divorce, equity release, long term care and trust investment. Solicitors in England have been censured by the courts on a number of occasions for failure to take account of the financial dimension to their legal work.

Faced with this dilemma, a pioneering movement has developed to provide a network of financial advisory centres, run by solicitors but detached from solicitors’ firms, the first Scottish examples of which are about to open their doors.

Behind the movement is Ian Muirhead, formerly a practising English solicitor. After his specialism in financial services attracted referrals from other firms, Muirhead left his partnership to set up his own company, Solicitors for Independent Financial Advice Ltd (SIFA), which he describes as “the affinity group and trade association for solicitor financial advisers”. Currently representing 170 law firms, one third of them Scottish, SIFA’s membership now stretches from Shetland to Penzance.

Without FSA authorisation, solicitors are obliged to refer financial services business to authorised third parties such as independent financial advisers (IFAs). If remuneration is received in return, the FSA requires that that remuneration should be rendered to the client, and if the solicitor wants to keep any of it, that must be justified by reference to the work done. Moreover, according to Muirhead, “The IFAs outside the profession tend to prey on the profession. They are looking speculatively for clients to whom they can sell whatever might be required – or may not be required. The solicitors are coming from a different angle, with specific types of legal business that give rise to financial advice … It’s a specific requirement in order to assist solicitors working in these areas that you need to understand where they’re coming from.” Nor, he points out, can referring solicitors control the quality of the advice given to their clients.

Hiving off broadens its appeal

To meet this need the concept of the solicitors’ financial centre was born. SIFA assists firms to hive off their financial services departments into separate units, which then, under licence from SIFA’s sister company Solicitors Financial Centres Ltd, adopt the common brand name Solicitors Financial Centre and undertake only financial services work. The first one opened in Teesside two years ago; now there are five in different parts of England. Subject to final FSA approval, hoped for this month, January 2004 will see the first three centres in Scotland open for business.

SIFA is “particularly keen to pull in firms where we can do a bit of marriage broking to stop them going out of business”, as Muirhead puts it. “So the one adviser firms, if there are two or three of those in a particular area, put their heads together, join forces, set up a joint centre and then everyone benefits. And the investment that they’ve made in the past in developing that expertise isn’t wasted – they can hang onto it, they can derive the benefit from selling it to a wider audience within the profession.”

However the principle of hiving off is now commending itself to a growing number of authorised firms, which are concerned to ring-fence their exposure to the FSA to the partners directly involved, and to reduce authorisation costs by forming a body that does not hold client money. Considerations of professional indemnity insurance and increased capital adequacy requirements (pending changes will see this determined by reference to the turnover of the whole firm) are likely to accelerate this trend.

Each centre is run by a limited company owned by the originating firm, but accepting referred business from other firms within its territory (as determined by agreement with SIFA). SIFA insists, in order to demonstrate to referring firms that their clients’ loyalty will not be endangered, that the centre is set up in premises separate from the office of the parent firm. On the contrary, the solicitor-client bond can be strengthened as the relationship moves from the purely transactional to a more continuing one. “If the client is being kept in the frame via the financial services activity, the client is being reminded continually that he belongs to that solicitor”, explains Muirhead.

“Client money is another example of the way in which you can involve the referring firm, because the referring firm will hold client money, and to the extent that you are pointing the client back to the referring firm for the purposes of client accounts etc, that again is reminding the client of the relationship”.

When the centre has given advice it will write to the firm with a copy to the client explaining what it is arranging, and also asking for comment and whether the advice is consistent with the arrangements made on the legal front – all of which also serves to justify to the FSA any fee the referring firm receives.

Benefits to referring firms

With these considerations in mind, the centres provide referring firms with an audit trail of client-facing material, which explains the three-way relationship between referring firm, client and centre, with the firm providing initial information and maintaining a watching brief on behalf of the client. Referring firms are also provided by SIFA with free training in financial services matters, which is eligible for Law Society CPD points.

The financial return to the referring firm varies from centre to centre. With some, referring firms can be involved as shareholders from the outset, or earn shares relative to business referred. Other centres pay a proportion (SIFA regards 20% as an appropriate maximum) of the client fee to the referring firm; others again some combination of the two.

“The big reservation they had when they set up, the first ones, was that they would open their doors, say okay, send us your clients, and no one would, because they would continue to see them as competitors or because they would be disinterested or whatever. But as it is the firms have been flocking to send their clients to them because we’ve been able to put over the story of the needs, the justification, the benefits of becoming involved in what we like to describe as being a joint external resource”, says Muirhead.

Goodbye to the shop front

Superficially there are close comparisons with solicitors’ property centres, but the latter provide what is basically a marketing service to their member firms, and undertake business that is in effect delegated by the member firms, as opposed to business that the referring firm would be unable to undertake without special authorisation.

Significantly also, while not actually turning it away, solicitors’ financial centres discourage casual business “off the street”. Centres are likely to be located in business parks rather than high streets – with consequent savings in office costs. As Muirhead comments: “The quality of business coming off the street is poor, and solicitors exclusively have the entrée to other solicitors’ business, and therefore it makes absolute sense to concentrate on that. It’s fine if someone does come in, but you’re not actually applying yourself to deriving clientele from other sources. You are existing purely to serve the profession.”

SIFA enjoys good relations with the Law Society of Scotland, which unlike its English and Welsh counterpart does not classify SFCs as law firms. This makes things simpler on the regulatory side, since the centre has only to comply with one set of conditions (the FSA’s) on PI insurance. While many IFAs have experienced increasing difficulty obtaining PI cover – 40% currently do not have it at all, says Muirhead – SIFA has negotiated three schemes which are available to SFCs on favourable terms as soon as they have FSA approval. And because it is the referring firm that continues to hold the client’s money, the stringent FSA regime for those providing client money services, more relevant to high street banks, does not apply.

Making it all happen

Taking the lead in establishing a centre is not for the faint hearted, and SIFA will look closely at a candidate firm’s credentials. “We need to be confident that the person who’s running it has got the necessary get up and go to make it happen”, Muirhead emphasises. “This is a serious business and for a firm that’s setting it up you need to be full time hands on. But any firm is welcome to refer clients in, so there’s no exclusivity there at all.”

Apart from the premises, the necessary investment comes in at around £30,000. One third is to satisfy the FSA’s capital adequacy rule, but this can take the form of office equipment or other realisable assets which would be required anyway. SIFA itself takes £10,000, of which £6,500 provides software, £1,000 goes on help with the FSA application (independent assistance for this alone could cost £10,000), and £2,500 covers general support in setting up. The final £10,000 buys PI cover, though this comes down to about £6,000 for what SIFA considers the “entry level” annual financial services turnover of £200,000.

The complexity of the FSA application is one reason why more centres have not already come into being. “The preparation of the application takes some months”, says Muirhead. “The application itself is about three inches deep – it is enormous, and they want you to go explicitly into your business plans, why you’re setting up, what your USP [unique selling proposition] is, who your personnel are. You need to do in depth analysis of the expertise, qualifications, past experience of all these people. You have to do budgets which have to be approved by accountants. The whole thing is very heavy duty, and so we liaise closely with the potential SFC in setting up the paperwork, and we make a point of ensuring that we are satisfied before the application goes in. Because if it goes in and the FSA throws it back, then big delays ensue. So if we’re happy, then bang it goes in, and it takes a month as opposed to six or eight months that it can take if you’re doing it from scratch.”

Once up and running, the centre is in the hands of its full time financial advisers, of which SIFA say there should be at least two. In some cases the solicitor wants to give up legal work and dedicate themselves to financial services work; in others there will be solicitor directors spending part of their time at the centre. SIFA, while describing itself as a franchisor, does not have an outwardly visible presence but provides support services, charging a royalty based on the business done. Its compliance director Ian Cockerill spends three days every year with each centre, going through their compliance records and giving training.

The two years since the FSA took over have hardly been auspicious times for financial services providers. But each solicitors’ financial centre that has opened so far has survived, and Ian Muirhead is looking to the future with increasing confidence. “The last two or three years have not been a time when we felt it appropriate to push people in this direction with the market, with everyone sort of holding on. But now we’re coming out of that and we’re able to apply a little more accelerator.”