Financial Services Regulatory Framework
The primary Regulator for Financial Services in the United Kingdom is the Financial Conduct Authority (FCA). The legislative framework for the conduct of Financial Services is set out in the Financial Services and Markets Act 2000. Part XX of this Act allows the licensing by professional bodies of “exempt professional firms” (exempt from the FCA’s direct authorisation) to undertake exempt regulated activities. Such exempt work is limited in its scope and must be provided as an incidental part of a solicitor’s other professional services. The Society is a designated professional body under Part XX and licenses firms to conduct exempt regulatory activities.
The Society’s Financial Services regime is the “Incidental Financial Business (IFB) regime” which came into effect on 31 October 2004.
The IFB regime allows firms to conduct certain activities which would otherwise require FCA authorisation.
The IFB regime has been extended to include more types of Incidental Financial Business as follows –
- 14 January 2005 – the IFB regime was extended to include general insurance business as a result of the Insurance Mediation Directive.
- 1 April 2015 – the IFB regime was extended to include Incidental Consumer Credit work when the regulation of Consumer Credit was transferred from the Office of Fair Trading to the FCA.
- 1 October 2018 – the IFB regime was extended when the Insurance Distribution Directive (IDD) replaced the Insurance Mediation Directive.
The current version of the IFB Rules introduce enhanced information provision and conduct of business requirements for general insurance work as required by the IDD and have been most recently amended to make changes required due to Brexit.
Principal Financial Services Regulatory Options
There are two principal options open to firms if they wish to conduct any form of Financial Services business. These options are –
- Direct authorisation by the FCA – either as an authorised professional firm or the establishment of a separate Financial Services company which has full FCA authorisation.
- An IFB licence from the Society.
Criteria for carrying on Incidental Financial Business
(a) The seven criteria for a firm to conduct IFB are set out in Rule C2.4. The criteria are –
(b) The firm is not subject to an order from the FCA prohibiting it from any Financial Services work.
(c) The IFB work does not relate to a Financial Services product/service/company which has been prohibited by the Treasury.
(d) Any pecuniary reward or other advantage (commission, financial or other type of benefit) received by the firm from third parties due to the conduct of IFB belongs to the client. This means any commission arising from the IFB work must be given to the client or the client must agree to the commission being offset against their fees.
(e) A firm’s IFB work must be incidental to the provision of other professional services. A firm cannot have stand-alone IFB work.
(f) The IFB work conducted must be linked to the provision of a particular professional service to a particular client.
(g) Where insurance distribution work is conducted under the IFB licence, the firm conducts this work as an ancillary insurance intermediary. This means that the principal professional activity of the firm cannot be insurance distribution. Also a firm cannot give advice or on sell insurance-based investment products.
(h) The firm must be controlled or managed by solicitors.
Categories of Incidental Financial Business
The IFB regime incorporates five types of Incidental Financial Business which are –
- Incidental Consumer Credit Business – typical consumer credit work such as debt administration or debt collecting. There is separate guidance on the conduct of consumer credit work under Rule C2.
- Incidental Insurance Distribution Business – advice on or the sale of general insurance products.
- Incidental Investment Business – for example arranging the sale of shares in an Executry.
- Incidental Long-term Care Insurance Business – advice on or the sale of long-term care insurance products.
- Incidental Mortgage Business – the arrangement of the mortgage on the instructions of the client.
Summary of the principal IFB Rules under C2
The rest of this Guidance summarises the main IFB Practice Rules.
(a) IFB Licence – Rule 2.5 – a firm shall apply for an IFB licence through the form available on the Society’s website. The licence lasts for a year and is renewed automatically in the annual renewal of Practising Certificates. There is no fee for an IFB licence. An IFB licence should be displayed at a firm’s places of business (Rule C2.22).
(b) Insurance Distribution Rules in Part IV of C2 – the main changes to the IFB Rules from 1 October 2018 are in Part IV. The principal aim of the new Part IV Rules is to provide enhanced product information and conduct of business requirements when a firm is involved in the administration, advice or sale of contracts of insurance.
- Rule C2.10 – Registration requirements for Insurance Distribution work – A firm if it wishes to conduct general insurance work must tick the “insurance distribution” option on the IFB licence application form. The firm shall identify the solicitor within their practice who will be the insurance distribution officer who will oversee how the firm conducts its general insurance business. A firm’s insurance distribution officer is recorded on the Society’s database. The Society then passes that detail to the FCA. The FCA then enters that information on its Financial Services Register. A firm may only conduct general insurance work if it first appears on the FCA Financial Services Register.
- Rule C2.11 – Requirement of good repute – no individual within a firm who has a criminal record disclosing a serious criminal offence or who is subject to bankruptcy proceedings may be involved any general insurance work.
- Rule C2.12 – General Business Principles – a firm shall ensure that all information on general insurance work provided to a client (including marketing communications) is fair, clear and not misleading. A firm shall ensure that their remuneration or performance systems for its employees do not conflict with the general duty to act in the client’s best interest in relation to general insurance business.
- Rule C2.13 – Provision of Information – a firm in good time before the conclusion of a contract of insurance shall provide a client with the information set out in Schedule A to the Rules. The previous provision (which has been rescinded) allowed this information to be provided to a client immediately after the conclusion of the contract of insurance. The Rule now introduces very specific provisions regarding the disclosure by the firm of how it is remunerated for any general insurance work. The firm is required to disclose the nature of the remuneration in relation to contracts of insurance; whether any commission payable to the firm is included as part of the insurance premium; whether a fee is payable by the client for the general insurance work and this shall be disclosed before the conclusion of a contract of insurance; or whether the remuneration is a combination of these options. A style information letter is provided at Part 6 to this guidance and style terms of business at Part 7.
Also prior to the conclusion of the contract of insurance, a firm, based on the information obtained from the client shall provide the client with a “statement of demands and needs”. This statement will be provided to the client for the conclusion of the contract of insurance. Where the firm is giving a personal recommendation on an insurance product, in addition to the statement, the client is to be provided with a personalised explanation as to why a particular general insurance produce best meets the client’s demands and needs. A firm must ensure that when it gives a personal recommendation that this recommendation is based on a sufficiently large analysis of the insurance market. A style statement of demands and needs is provided at Schedule 8 to this guidance.
This Rule also requires the information on the recommended insurance product to take account of the complexity of that product and the type of client.
Typically the detailed information on an insurance product will be provided from the insurance company in the form of an “insurance product information document”. The firm shall provide this particular document from the insurance company to the client before the conclusion of the insurance contract. If a firm introduces the clients to another insurance intermediary to conduct the general insurance business, the firm shall ensure that insurance intermediary is on the FCA Register.
Where a firm itself distributes contracts of insurance it shall ensure that it obtains from the insurance company all appropriate information on the contract of insurance; the intended target market for the contract of insurance; and understands the characteristics of that market for that particular product.
- Rule C2.14 – Means of Communication – All of the information provided to a client on a contract of insurance can be provided on paper or electronically or through a website. The client shall be given the choice of communication and agreeto that choice in advance. The firm shall communicate this information in a clear and accurate manner and in a form which the client can understand. The provision of all client information on contracts of insurance is to be free of charge. A client can request the provision of this information by paper copy which is also to be free of charge.
- Rule C2.15 – Cross Selling Requirements – this Rule covers those situations where a client is offered an insurance product together with an ancillary product or service which is not insurance. The client shall be informed whether it is possible to buy the different products/services separately. The client must also be advised whether there is any risk or difference in insurance coverage if the products/services are sold separately. Where the firm offers an insurance product together with a non-insurance product or service, the client again will be given the option of buying the non-insurance product or service separately.
- Part V – Compliance Certificate – a firm is required under Rule C2.17 to submit an IFB Compliance Certificate to the Society at the end of each twelve month period. The IFB Compliance Certificate is available on the Society’s website. Rule C2.20 allows the Society’s Financial Compliance Team to inspect the firm in relation to its IFB work.
- Part VI – Disclosure, Training and Records – a firm as previously stated must display its IFB Certificate at each of its places of business (Rule C2.22). A firm does not have to disclose that it is licensed by the Society for IFB on any of its stationery or other material.
The general training provisions for IFB work are contained in Rule C2.23. These Rules are very broad in their terms and require all individuals within a IFB licensed firm who conduct IFB work, to be competent; to maintain that competence; to be adequately supervised; and that their training be regularly reviewed. There is a specific requirement that those who are involved in general insurance work demonstrate the knowledge and ability necessary for the performance of their duties in this area.
The record keeping requirements under the IFB Rules are set out in C2.24. There is a specific provision that in relation to general insurance work that records of the recommendations made are kept for at least three years from the date on which the personal recommendation was made. Clients’ instructions should be kept for up to six years after the end of the financial year in which the instructions were given by the client. Records of any pecuniary reward or other advantage received by the firm from its IFB work should be kept for a further six years from the end of the accounting period in which that pecuniary award or other advantage arose.
Style of information letter to be disclosed to a client before the conclusion of the contract of insurance
A style of information letter as required under Rule C2.13.1 is set out below –
(a) Firm ABC Solicitors, ABC address is an ancillary insurance intermediary as defined under the Law Society of Scotland Practice Rule C2: Incidental Financial Business.
(b) This firm is not authorised by the Financial Conduct Authority. However, this firm is included on the Register maintained by the Financial Conduct Authority so that we can carry on insurance distribution activity, 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 FCA Register can be accessed via the Financial Conduct Authority website at www.fca.gov.uk/firms/financial-services-register
(c) This firm’s status as an ancillary insurance intermediary as listed on the FCA’s Register can be checked by visiting the FCA’s website at http://www.fca.org.uk or by contacting the FCA on 08466069966.
(d) This firm has no holding, direct or indirect, representing 10% or more of the voting rights or the capital in any Financial Services or Insurance company.
(e) No Financial Services or Insurance company or parent of a Financial Services or Insurance company has a holding, direct or indirect, representing 10% or more of the voting rights or of the capital in this firm.
(f) The contract of insurance provided by this firm has been selected –
- On the basis of a fair and personal analysis of the market (delete if does not apply);
- From a limited number of insurance companies (delete if does not apply);
- From a single insurance company (delete if does not apply).
(If the second or third “dotted” points above apply for this particular contract of insurance then the firm shall state that it is not contractually obliged to conduct insurance distribution in this way).
(g) As the contract of insurance provided has not been selected on the basis of a fair and personal analysis of the market, you shall be provided with a list of the insurance companies, the firm has selected from, with respect to the selected insurance contract. (Delete if this does not apply).
(h) This firm has Professional Indemnity Insurance under the Law Society of Scotland’s Master Policy. The current level of indemnity under the Master Policy is £2m per claim. This firm is also covered by the Scottish Solicitors’ Guarantee Fund which is a fund established under Section 43 of the Solicitors (Scotland) Act 1980 for the purposes of making grants in order to compensate persons who, in the opinion of the Council of the Law Society of Scotland have suffered pecuniary loss by reason of dishonesty on the part of a Scottish Solicitor in connection with the practice of the solicitor.
(i) Any complaint which you may have about the service provided by this firm should be directed to the Client Relations Partner (insert name) within the firm. You also have a right to complain to the Scottish Legal Complaints Commission, the Stamp Office – 10-14 Waterloo Place, Edinburgh EH1 3EG, Telephone 0131 201 2130 www.scottishlegalcomplaints.org.uk/
Style of Terms of Business letter required under Rule C2.21
A style of Terms of Business Letter required under the IFB Rules is set out below –
(a) The specific Incidental Financial Business undertaken by this firm will be the sale of ABC shares in DE PLC through stockbrokers FG on your instructions. The firm has limited its Incidental Financial Business activities to arranging the sale of these shares given the limited scope of activities allowed under the Law Society of Scotland’s Incidental Financial Business regime.
(b) The firm of AB is licensed by the Law Society of Scotland to carry on Incidental Financial Business under the Society’s Practice Rule C2: Incidental Financial Business.
(c) The firm of AB is not authorised by the Financial Conduct Authority under the Financial Services and Markets Act 2000.
(d) The firm of AB has Professional Indemnity Insurance under the Law Society of Scotland’s Master Policy. The current level of indemnity under the Master Policy is £2m per claim. The firm of AB is also covered by the Scottish Solicitor’s Guarantee Fund which is a fund established under Section 43 of the Solicitors (Scotland) Act 1980 for the purposes of making grants in order to compensate persons who, in the opinion of the Council of the Law Society of Scotland have suffered pecuniary loss by reason of dishonesty on the part of a Scottish solicitor in connection with the practice of a solicitor.
(e) Any complaint which you may have about any service provided by this firm should be directed to the Client Relations Partner (insert name) please note that you also have a right to complain to the Scottish Legal Complaints Commission, the Stamp Office, 10-14 Waterloo Place, Edinburgh EH3 3EG, telephone 0131 201 2130 www.scottishlegalcomplaints.org.uk/
Style of statement of demands and needs when advising on or arranging a specific contract of insurance
The following is a style of statement of demands and needs which can be used when advising on or arranging a specific contract of insurance –
(a) The firm of AB has recommended that you (insert name of client) take out a contract of insurance for household contents with CD insurance company of (insert name and address of insurance company).
(b) The demands and needs of (insert clients name) in respect of this insurance contract are that you wish insurance cover of £ (insert level of cover) for the lowest available annual premium for your household contents for your newly purchased property of (insert address of new property).
(c) The firm has made this personal recommendation on the basis of a fair and personal analysis of the market (delete if appropriate) or from a limited number of insurance companies (delete if not appropriate) or from a single insurance company as you wish to secure the lowest premium with the widest cover (or insert other reasons for recommendation).
Please note that as this recommendation is based on a limited number of insurance companies you may request a list of these limited companies. (Delete if this is not applicable).
(d) The firm is remunerated for this insurance advice/arrangements/sale in the following manner – list the remuneration arrangement and fee