Understanding Financial Services Matters


On one level, outcome (7.5) of the current SRA Code seems easily manageable; you must comply with all legislation relevant to your business. Of course you must! Of course we do, no need to be overly concerned about monitoring achievement of this professional duty. The truth is different. This outcome is labour intensive and requires us to be vigilant about new legislation which must be accommodated in compliance and risk management strategies.

Since 2011 there have been several new laws including this year’s Money Laundering Regulations and the Criminal Finances Act in 2017. And of course, we should all be planning for the GDPR which will be implemented without any honeymoon period next year.


In the midst of constant change, what about the legislation which has always been there and always a concern. What about, for example, financial services law? My message about this is simple: understanding financial services matters, ignore at your peril.


The Financial Services and Markets Act 2000 (FSMA), stipulates that no one may carry on financial services regulated activities without being authorised (by the Prudential Regulation Authority or the Financial Conduct Authority) or being able to rely on an exemption. Breach of this requirement can result in criminal offences being committed. The double-whammy for solicitors, or anyone working in an authorised law firm, is the impact that breaking the law will have on their relationship with the SRA.


It is a fact that all but a handful of law firms, which are directly authorised by the FCA, rely on a legislative concession to carry on exempt regulated activities for their clients. This creates a minefield of risk considerations for the compliance team which starts with the need to ensure compliance with the SRA Financial Services (Scope) Rules 2001. Don’t be fooled into thinking this is light touch regulation. The SRA has responsibilities to ensure that their supervision of this area is adequate to manage the risks inherent in our ability to provide such services without FCA authorisation.


In my experience, these Rules, and the consequences of providing financial services, are often overlooked when managing and mitigating risks. Many law firm employees fail to realise the significance of providing such services or even, in some cases, fail to appreciate the fact that the services, which they are delivering to clients, come within this definition.


The Scope Rules create a rigorous framework through which limits are imposed on all firms which are not directly authorised by the FCA. This includes a list of activities which must not be performed, together with basic conditions which must be satisfied in other circumstances, and restrictions related to certain types of financial services activities. For example, this is where the requirement to be on the FCA’s Exempt Professional Firms Register and appoint an insurance mediation officer (IMO) is prescribed. Do colleagues understand the significance of this restriction and the designated IMO understand his or her compliance oversight role? More basically, is the term insurance mediation understood?


Running alongside the Scope Rules, we must also comply with the SRA Financial Services (Conduct of Business) Rules which tell us how such services must be provided, the records which must be maintained and the information which must be provided to clients. Are these being monitored for compliance? The SRA needs to be satisfied that we are acting in a client’s best interests, delivering proper standards of service, acting with integrity and independence, and not detracting from our roles as trusted advisers. We can demonstrate this with effective auditing tools.


It is not unimaginable that the regulator may decide to take a greater interest in how safely firms undertake these activities. Remember the financial services survey which the SRA published earlier in the year? This was part of the SRA’s education programme, i.e. educating themselves about the risks of facilitating these services by authorised firms. What’s to stop further reviews and research?


Does this make you feel uncomfortable? Would it be an appropriate use of resources to undertake an internal assessment of the risks posed by the firm’s activities so that any conversation with the SRA will be fuss-free and supported by an audit trail?


As a starting point, I would suggest that the following questions are asked:

  • Can we list what financial services we offer to our clients and are we clear about the limits of this type of activity?
  • Do colleagues understand the SRA requirements and the legal backdrop?
  • Would tailored training to relevant colleagues be a sensible precaution?
  • Do we have appropriate systems and policies to satisfy the SRA that we comply with Handbook requirements and we monitor for compliance?
  • Are the risks associated with the provision of financial services factored into our risk register and breaches being recorded by the compliance officers?


Tracey’s latest book, ‘Financial Services for Lawyers’, is available in paperback and kindle versions from Amazon, www.amazon.co.uk


Tracey Calvert

Oakalls Consultancy Limited



29 October 2017

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