Guidance related to Rule C2: Incidental Financial Business Generally
1. Regulatory Framework
The Financial Services Authority (FSA) is the principal
regulator for investment business in the United Kingdom. Its powers
are set out in the Financial Services and Markets Act 2000 ("the
Act").
The Act provides that no individual or firm may carry on a
regulated activity unless that individual/firm is authorised by the
FSA.
Regulated activities are defined in the Financial Services and
Markets Act 2000 (Regulated Activities) Order 2001 which has been
amended by various Orders including the Financial Services and
Markets Act 2000 (Regulated Activities) (Amendment No.1) Order 2003
to include mortgage business and by the Financial Services &
Markets Act 2000 (Regulated Activities) (Amendment No.2) Order 2003
to include insurance business.
An individual solicitor or firm of solicitors can undertake
certain regulated activities and thereby be exempt from the
requirement to be authorised by the FSA if that solicitor/firm is
licensed by the Society under Part XX of the Financial Services and
Markets Act 2000. The Part XX regime allows the establishment of
exempt professional firms (exempt from the FSA's regime) to
undertake exempt regulated activities provided such activities are
an integral part of a solicitor's professional services. For the
purposes of the Part XX regime, the Society is a Designated
Professional Body and licenses firms to conduct exempt regulated
activities.
The Society's regime is known as the "Incidental Financial
Business (IFB) Regime" effective from 31s October 2004 and this
regime replaces the Incidental Investment Business Regime which has
been in operation since 1st December 2001. The IFB regime allows
firms to conduct certain activities which would otherwise require
FSA authorisation. The essence of these incidental financial
business activities is that they are integral to the professional
services provided to clients and are not conducted on a stand-alone
basis. Furthermore, such activities must not be marketed on a
stand-alone basis.
As the FSA's regime has been expanded to include mortgage and
insurance business, there has been a similar expansion to the
Society's IFB regime so that it incorporates investment, mortgage
and general insurance business.
There are four options open to firms of Scottish solicitors
under the UK's investment business regulatory regime and these
are -
- FSA authorisation.
- An IFB Licence from the Society.
- Acting as an introducer to an independent financial adviser -
this option can be undertaken in connection with either of the
first two options.
- None of the above.
It is important to recognise the wide definition of a regulated
activity which includes -
- advising on investments, mortgages and general insurance.
- making arrangements in investment, mortgages and general
insurance.
- selling investments, mortgages and general insurance.
The definition of regulated activities is therefore very wide
and is not confined only to the giving of advice but includes
making arrangements in the following product areas - .
Insurance products includes after the event
legal expenses insurance, Bonds of Caution, building insurance,
defective title indemnity insurance, household contents insurance,
missing beneficial indemnity insurance, term assurance, unoccupied
property insurance and warranty insurance.
Investment products includes shares, fixed
interest stock, individual savings accounts, pension and collective
investment schemes, unit trusts and open-ended investment
companies.
Regulated mortgage contract is one which is secured by a first
legal mortgage on land which is in the United Kingdom and where at
least 40% of the land is, or is to be used, as a dwelling by the
borrower.
2. Direct Authorisation by the FSA
There are currently just around 80 firms of Scottish
solicitors authorised for investment business by the FSA. The FSA
has its own rules and procedures for those firms which it
authorises.
An application for authorisation should be made direct to the
FSA whose contact details are:
The Financial Services Authority,
25 The North Colonnade,
Canary Wharf,
London.
E14 5HS
FSA switchboard number - 020.7066.1000
Website address - www.fsa.gov.uk
A firm which is authorised by the FSA will be able to give its
own specific advice on individual investment products and
investment companies. Furthermore an FSA authorised firm will also
be able to give specific advice on mortgage lenders and mortgage
products.
A firm which is authorised by the FSA for investment business
cannot also be authorised for incidental financial business by the
Society. A firm's FSA authorisation also covers such a firm for
incidental financial business as the Society's "incidental regime"
does not cover any incidental financial business conducted by FSA
authorised firms . The relevant FSA rules cover the incidental
financial business of FSA authorised firms.
3. Incidental Financial Business Regime
The IFB regime incorporates four types of incidental business as
follows -
- Incidental insurance business
- Incidental investment business
- Incidental long-term care insurance business
- Incidental mortgage business
The Scottish Legal Complaints Commission will have
responsibility for handling any complaints arising from any of the
above four types of incidental financial business, at least
initially.
Before looking at the specific types of business which may be
conducted under this regime it is necessary to highlight the
conditions which must be followed if a practice unit is to be
licenced for IFB.
Conditions for conducting Incidental Financial
Business
- A practice unit's incidental financial business services must
be an integral part of its professional services. A practice unit
cannot have stand-alone incidental financial business.
- The incidental financial business conducted must be linked to
the provision of a particular professional service to a particular
client.
- A practice unit licensed for incidental financial business
cannot also be authorised by the FSA and must not hold itself out
as being so authorised.
- Any commission, financial or other pecuniary benefit received
from third parties due to the conduct of incidental financial
business belongs to the client. This means that any commission
arising from the incidental financial business must either be given
to the client or the client can agree to the commission being
offset against his/her fees. However, the client must agree to this
offsetting in writing in advance. Typically, this can be arranged
by a pro forma letter signed by the client agreeing to this
offsetting. Such a letter can be sent to the client for signing
along with the terms of business letter.
- The practice unit's income from incidental financial business
cannot account for more than 50% of the practice unit's total
income.
The above conditions must be met in relation to the four types
of incidental financial business which may be conducted. Each of
these four categories of incidental financial business are
explained below -
Incidental Insurance Business
The regulation of insurance business as a category of incidental
financial business has brought more practice units into this
regulatory regime than under the previous regime. This is because
of the wide definition of insurance business within the
legislation.
The legislation refers to insurance business as "insurance
mediation". The insurance business which falls into the incidental
financial business regime consists of the following activities
-
- introducing, proposing or carrying out other work preparatory
to the conclusion of contracts of insurance.
- concluding contracts of insurance.
- assisting in the administration and performance of contracts of
insurance, in particular in the event of a claim.
A practice unit will be conducting insurance business under the
IFB Licence when, in connection with its professional services it
introduces, sells, arranges and advises on general insurance, such
as after the event legal expenses insurance, buildings insurance,
contaminated land insurance, defective title indemnity insurance,
household contents insurance, missing beneficiary indemnity
insurance, trustees indemnity insurance and unoccupied property
insurance. Significantly, as the definition of insurance mediation
includes "assisting in the administration and performance of
contracts of insurance, in particular in the event of a claim"
where a practice unit acts for an insured in bringing a claim
against his/her own insurer, this activity when undertaken in
conjunction with professional services will fall into the new
regime. Where a practice unit acts for an insurance company in the
defence of a claim, this activity will not fall under
the new regime if the activity is covered by the exemption in
Article 39B of the Regulated Activities Order 2001. This Article
provides an exemption where a practice unit "manages claims on
behalf of an insurer" as part of the practice unit's professional
services. It should be noted that where a practice unit acts for a
third party in an insurance claim such an activity will
not fall under the definition of insurance mediation
as the third party is not making a claim under his/her own
insurance policy. An example of such a third party claim is where a
pedestrian is injured in a road traffic accident and then he/she
wishes to bring a personal injury claim against the car driver who
caused the accident.
The insurance element of the incidental financial business
regime does allow a practice unit to give its own advice and
recommendations to a client on a specific contract of insurance. A
practice unit therefore can give its own advice on insurance
contracts or insurance companies under the IFB regime.
Incidental Investment Business
The following activities are examples of what may constitute
investment incidental financial business -
- arranging for the purchase or sale of shares on the
instructions of clients without providing advice on those shares.
Such arrangements may arise within an executry or trust work.
- discussing with a client investment advice which has been
provided by an independent financial adviser. The practice unit may
comment upon such advice and, acting on the client's instructions,
carry out investment arrangements based on the advice.
- a practice unit undertaking matrimonial work can obtain the
advice of an independent financial adviser regarding the
matrimonial investment assets. The practice unit can comment upon
the advice in negotiating a financial settlement in the matrimonial
work on the client's instruction.
- a practice unit at its own initiative can advise a client that
the investment advice or investment arrangements provided by
another person do not appear to be in the client's best interest
and that the client should seek further independent financial
advice.
A practice unit under this section of the IFB regime may not
give its own specific advice on investment products or investment
companies. A practice unit may, however, give generic advice on the
range of investment products and investment companies.
Incidental Long-Term Care Insurance Financial
Business
This section of the IFB regime allows a practice unit to
introduce, arrange or advise on long-term care insurance polices,
products and providers.
Incidental Mortgage Financial Business
The IFB regime for incidental mortgage financial business came
into force on 31st October 2004.
A practice unit which wishes to arrange a mortgage on the
instructions of a client will be able to undertake such
arrangements through this element of the IFB regime. However, a
practice unit will not be able to give its own advice
on a specific mortgage product, or mortgage lenders to a client and
such specific advice will have to come from an independent mortgage
adviser. On receipt of such third-party advice a practice unit will
be able to discuss the advice with a client and acting on the
client's instructions arrange a mortgage.
4. Introductions
A practice unit either with or without an IFB Licence may
undertake introductory business where a client is referred to an
independent financial adviser. There are different rules depending
on the type of financial business which is introduced. The types of
financial business which may be introduced can be categorised as
follows:-
Introductory Insurance Business - either general
insurance or long-term care insurance - if a practice unit
wishes to introduce clients to an independent insurance broker for
any contract of insurance a practice unit will require an IFB
Licence. This is because the general statutory provisions on
introductions under Article 33 of the Regulated Activities Order
are disapplied for insurance mediation.
Introductory Investment Business - a practice unit
may introduce a client to an independent financial adviser. The
practice unit making the introduction must do no more than bring
together the client and the independent financial adviser to whom
the introduction is made. Any commission arising from the
introduction can be retained by the practice unit.
Introductory Mortgage Business - a practice unit may
introduce a client to an independent mortgage broker. There are two
principal conditions which apply to such introductions which are
-
- a practice unit must not receive any money paid by the borrower
in connection with the introduction; and
- before making the introduction the practice unit must disclose
to the borrower details of any payment or any other reward which
may arise out of the introduction.
5. Incidental Financial Business Practice Rules
(a) Application for an Incidental Financial Business
Licence
An application for an IFB Licence must be made by a practice
unit to the Society by submitting an application form in a form
specified by the Council.
The application form requires details of the manager within the
practice unit who will have overall responsibility for the conduct
of insurance mediation where a practice unit wishes to undertake
incidental insurance or incidental long-term care insurance. No
person having a criminal record disclosing a serious criminal
conviction, involving any crime against property or related to
financial services can fulfil this role. No person who is subject
to bankruptcy proceedings can fulfil this role. These prohibitions
are requirements of the Insurance Mediation Directive from which
the Society's IFB Rules are derived.
The application form also seeks notification to the Society of
those persons within the practice unit (solicitors and
non-solicitors) who are to be individually licensed for each
incidental financial business activity. Each person identified must
indicate which incidental financial business activities will be
undertaken by ticking one or more of the appropriate boxes. The
options are - incidental investment business (IB); incidental
insurance business (IM); incidental long-term care insurance (LTC)
and incidental mortgage business (MMA).
No person who wishes to conduct incidental insurance or
long-term care insurance work can undertake such work where they
have a criminal record (as defined above) or where they have been
subject to bankruptcy proceedings.
The application form asks the practice unit to provide the
date from which the new Incidental Financial Business Licence is
required.
(b) Duration of an Incidental Financial Business Licence
The Licence runs for the normal twelve month term of the
Society's practice year, from 1st November to 31st October.
(c) Renewal of an Incidental Financial Business Licence
A practice unit's IFB Licence will be renewed annually. If a
practice unit does not wish to renew its IFB Licence, notice of
this intention and the date from when the Licence is to be revoked
must be sent to the Society.
(d) Annual fee for an Incidental Financial Business
Licence
The annual fee for an IFB Licence will be set at the Society's
Special General Meeting in September each year.
(e) Display of the Incidental Financial Business
Certificate
A practice unit must display at its place of business its
Incidental Financial Business Certificate (or a copy). A practice
unit will be issued with an Incidental Financial Business
Certificate after it first applies to be licensed for such work
from the Society.
(f) Notification to the Society in changes of personnel who
undertake Incidental Financial Business
A practice unit must notify the Society in writing of any
changes to the list of personnel originally provided to the Society
of those who conduct incidental financial business within a
practice unit. This notification must be made to the Society within
one month of any change to the original list of licensed
individuals
(g) Specific Rule requirements for insurance mediation activity
(general insurance and long-term care insurance)
- every practice unit which undertakes incidental general
insurance or incidental long-term care insurance must appoint a
manager who has overall responsibility for the conduct of such work
within the practice unit. This person will be referred to as the
Insurance Mediation Officer. It is this person who will be
identified on the FSA's website as being responsible for insurance
mediation within a practice unit.
- A practice unit will not be able to undertake any form of
insurance mediation work (general insurance or long-term care
insurance) until that practice unit is registered on the FSA's
Register for this work. It is the Society which has responsibility
for transmitting this information on practice units and their
insurance mediation officer to the FSA. The Society will update the
information on the FSA's Register on a weekly basis.
- Provision of information - certain information requires to be
provided to a client where a practice unit concludes a contract of
insurance for a client. The information which requires to be
provided is set out in pro forma style in Schedule 1 to this
guidance to Rule C2. The information can be provided orally if the
client requests this or if the client requires immediate cover.
Furthermore, where the contract is concluded by telephone and the
client agrees to receiving limited information after the conclusion
of the contract, the general information to be provided in writing
need not be given.
- Scope of services - where a practice unit acts as an insurance
intermediary providing advice on particular types of insurance a
practice unit must have undertaken an appropriate analysis of the
insurance market to show that the advice given on a particular
contact of insurance is adequate to meet a client's needs. A record
should be made of how a practice unit has undertaken an appropriate
analysis of the insurance market.
- Statement of demands and needs - where a practice unit makes a
personal recommendation to a client of a specific contract of
insurance or arranges for a client to enter into a specific
contract of insurance, before the conclusion of that contract the
client must be provided with a statement of his demands and needs
in respect of that insurance contract. This statement is in essence
a "reason why letter" explaining to the client why a particular
contract of insurance has been recommended by the practice unit.
The letter should also clearly state the demands and needs of the
client. A pro forma style of this statement is provided in Schedule
2 to this guidance on rule C2.
(h) Incidental Financial Business Compliance Certificate
A practice unit is required to submit an Incidental Financial
Business Compliance Certificate for each six-month period within a
practice unit's financial year. The form of Compliance Certificate
which must be submitted to the Society is specified by the Council.
The Compliance Certificate requires the following information:-
- The accounting period to which the Certificate relates.
- Confirmation that the practice unit fulfils the criteria for
carrying out IFB in terms of the rules and has complied with the
rules.
- Date and signing of the Certificate by a manager.
The Society's team of inspecting accountants will monitor a
practice unit's compliance with the rules as part of the Society's
[two-yearly] cycle of Accounts Rules inspection.
(i) Terms of business
- Whenever a practice unit undertakes incidental financial
business a terms of business letter must be issued to a client. A
pro forma style of terms of business letter form incidental
financial business is provided in Schedule 3 to this guidance
(j) Disclosure on a practice unit's
notepaper
A practice unit is not required to state on its notepaper that
it is licensed by the Society for incidental financial business. No
such disclosure on a practice unit's notepaper is required due to
the requirement to issue terms of business letters.
(k) Training
There is no requirement to undertake an investment business exam
or any specified level of investment business CPD for those
individuals who are licensed to conduct incidental financial
business. The training obligations for individuals who undertake
incidental financial business are set out in general terms in rule
C2.23. The responsibility is on practice units and those licensed
individuals to ensure that they keep themselves up to date on
incidental financial business matters.
(l) Record keeping requirements
The record keeping requirements are set out in rule C2.24. The
general obligations are as follows:-
- Best execution - instructions from clients to carry out
specific incidental financial business should be arranged with due
timeliness.
- Records of statements of demands and needs - these must be kept
for a minimum of three years from the date on which a practice
unit's personal recommendation on a specific contract of insurance
or the arrangements to enter into a specific contract of insurance
have been made.
- Records of a client's instructions - a practice unit must
retain records of instructions from clients to carry out specific
incidental financial business and instructions from the practice
unit to any third party to effect or arrange such incidental
financial business. These records must be retained for at least six
years from the date of the instruction.
- Records of accounting to clients for commission etc - a
practice unit must retain records of how it has accounted to its
clients for any IFB commission or other pecuniary reward from third
parties. Such records must be kept for at least six years from the
date of accounting. This record keeping can be achieved by
retaining copies of the letter and payment details where commission
is paid direct to the client. Alternatively, where the commission
is deducted from a practice unit's fee note, a copy of the fee note
detailing this deduction is sufficient.
- Safe-keeping of assets - where a practice unit holds for
safe-keeping purposes documents of title i.e. share certificates, a
practice unit should ensure that at all times such documents are
readily accessible and are separately identifiable form any of the
practice unit's own investments. A practice unit should also ensure
that storage facilities are appropriate to the value and risk of
loss of the investments to be safe-guarded and provide protection
from damage, misappropriation or other losses. Where a practice
unit uses a third party custodian to safe-keep such documents a
practice unit must be satisfied that such a third party is suitable
to act as a custodian.
Schedule 1
Style of information letter to be used before or
immediately after the conclusion of a contract of insurance with a
client.
- The practice unit of AB has its principal place of business
at……….
- The practice unit of AB is not authorised by the Financial
Services Authority. However, the practice unit is included on the
Register maintained by the Financial Services Authority so that
this practice unit can carry on insurance mediation activities,
which is broadly the advising on, selling and administration of
insurance contracts. This part of our business, including
arrangements for complaints or redress if something goes wrong, is
regulated by the Law Society of Scotland. The Register can be
accessed via the Financial Services Authority
website.
- The information provided in parts 1 and 2 above may be checked
on the FSA's Register by visiting the FSA's website at or by contacting
the FSA on 0845 606 1234.
- The practice unit of AB does not have any holding, direct or
indirect, representing more than 10% of the voting rights of, or
the capital in, an insurance undertaking.
- No insurance undertaking or parent of an insurance undertaking
has a holding, direct or indirect, representing more than 10% of
the voting rights of or capital in this practice unit.
- The contract of insurance on which this practice unit has
provided advice or arranged has been selected [on the basis of a
fair analysis of the insurance market. This analysis was undertaken
by reviewing the range of insurance products on the
market] or [from a limited number of insurance
undertakings] or [from a single insurance undertaking]
[Note, if the practice unit adopts either of these last two
approaches then it must also disclose whether it is contractually
obliged to conduct insurance mediation in this way].
- The practice unit of AB has Professional Indemnity Insurance
under the Law Society of Scotland of Scotland's Master Policy. The
current level of indemnity on the Master Policy is £2m per claim.
The practice unit of AB is also covered by the Scottish Solicitors
Guarantee Fund which is a fund established by Section 43 of the
Solicitors (Scotland) Act 1980 for the purpose of making grants in
order to compensate persons who, in the opinion of the Council of
the Law Society of Scotland suffer pecuniary loss by reason of
dishonesty on the part of a Scottish solicitor in connection with
the practice of the solicitor.
- Any complaint which you may have about any service provided by
the practice unit should be directed to the manager within AB.
Furthermore, you have a right to complain to the Scottish Legal Complaints
Commission, The Stamp Office, 10 -14 Waterloo Place,
Edinburgh. EH1 3EG. Tel: 0131 528 5111
Schedule 2
Style of Statement of Demands & Needs when advising
on or arranging a specific contract of insurance.
- The practice unit of AB has recommended that you (name of
client) take out a contract of insurance for household contents
with CD insurance company of (insert address of insurance
company).
- The demands and needs of (client's name) in respect of this
insurance contract are that insurance cover is required for your
household contents for your newly purchased property.
- The practice unit has recommended the household insurance
contract of CD insurance company because …………insert reasons for
recommendation which should relate to the insurance contract
meeting the client's insurance needs.
Schedule 3
Style of Terms of Business letter for incidental
financial business.
- The specific incidental financial business undertaken by this
practice unit will be the sale of a ABC shares in DE through
stockbrokers FG on your instructions. The practice unit has limited
its incidental financial business activities to arranging the sale
of these shares given the limited scope of activities allowed under
the incidental financial business regime.
- The practice unit of AB is licensed by the Law Society of
Scotland to carry on incidental financial business under the
Solicitors (Scotland) (Incidental Financial Business) Practice
Rules 2004.
- The practice unit of AB is not authorised by the Financial
Services Authority under the Financial Services and Markets Act
2000.
- The practice unit of AB has Professional Indemnity Insurance
under the Law Society of Scotland of Scotland's Master Policy. The
current level of indemnity on the Master Policy is £2m per claim.
The practice unit of AB is also covered by the Scottish Solicitors'
Guarantee Fund which is a fund established by Section 43 of the
Solicitors (Scotland) Act 1980 for the purpose of making grants in
order to compensate persons who, in the opinion of the Council of
the Law Society of Scotland suffer pecuniary loss by reason of
dishonesty on the part of a Scottish solicitor in connection with
the practice of the solicitor.
Any complaint which you may have about any service provided by
the practice unit should be directed to the manager within AB.
Furthermore, you have a right to complain to the Scottish Legal Complaints
Commission, The Stamp Office, 10 -14 Waterloo Place,
Edinburgh. EH1 3EG. Tel: 0131 528 5111
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