1. Regulatory Framework
The Financial Conduct Authority (FCA) 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 FCA.
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 FCA 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 FCA'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. The IFB regime from 1 April 2014 incorporates consumer credit activities.
There are four options open to firms of Scottish solicitors under the UK's investment business regulatory regime and these are -
- FCA 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.
- consumer credit activities
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 beneficiary 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.
Consumer Credit activities include credit broking, debt adjusting, debt counselling, debt collecting, debt administration and regulated credit agreements.
2. Direct Authorisation by the FSA
There are currently just around 35 firms of Scottish solicitors authorised for investment business by the FCA. The FCA has its own rules and procedures for those firms which it authorises.
An application for authorisation should be made direct to the FCA whose contact details are:
The Financial Conduct Authority,
25 The North Colonnade,
FCA switchboard number - 020.7066.1000
Website address - www.fca.org.uk
A firm which is authorised by the FCA will be able to give its own specific advice on individual investment products and investment companies. Furthermore an FCA authorised firm will also be able to give specific advice on mortgage lenders and mortgage products.
A firm which is authorised by the FCA for investment business cannot also be authorised for incidental financial business by the Society. A firm's FCA 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 FCA authorised firms . The relevant FCA rules cover the incidental financial business of FCA authorised firms.
3. Incidental Financial Business Regime
The IFB regime incorporates five types of incidental business as follows -
- Incidental insurance business
- Incidental investment business
- Incidental long-term care insurance business
- Incidental mortgage business
- Incidental consumer credit activities
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 FCA 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 five types of incidental financial business which may be conducted. Each of these five 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.
Incidental Consumer Credit Activities
There is separate guidance on the conduct of consumer credit work under an IFB licence. This guidance can be accessed here.
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 which can be downloaded from the Society's website.
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 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) 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.
(e) Specific Rule requirements for insurance mediation activity (general insurance and
- 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 FCA'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 FCA'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 FCA. The Society will update the information on the FCA'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.
(f) Incidental Financial Business Compliance Certificate
A practice unit is required to submit an Incidental Financial Business Compliance Certificate for each twelve 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 cycle of Accounts Rules inspection.
(g) 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
(h) 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.
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.
(j) 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.
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 Conduct Authority website.
- The information provided in parts 1 and 2 above may be checked on the FCA's Register by visiting the FCA's website at or by contacting the FCA on 0845 606 9966.
- 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 201 2130
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.
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 Conduct 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 201 2130