Change tracker – Solicitors' Financial Services (Conduct of Business) Rules 2001

2007-07-01
 

The Solicitors' Financial Services (Conduct of Business) Rules 2001 remain in force after the 6 October 2011, but this page will no longer be updated. Please use the new SRA Handbook.

Go to SRA Handbook

These rules were amended on 6 October 2010 by the Solicitors' Financial Services (Conduct of Business) Amendment Rule 2010 to reflect responsibility for complaints handling passing from the Legal Complaints Service to the Legal Ombudsman on 6 October 2010 and the requirements of the Legal Services Board in relation to the information to be given to clients about their right to complain.

 

These rules, dated 18 July 2001, are made by the Council of the Law Society with the concurrence of the Master of the Rolls under section 31 of the Solicitors Act 1974 and section 9 of the Administration of Justice Act 1985, regulating the practices of:

  • solicitors and recognised bodies in any part of the world,
  • registered European lawyers in any part of the United Kingdom, and
  • registered foreign lawyers in England and Wales,

in carrying out "regulated activities" in, into or from the United Kingdom.

1. Purpose

  • (1)

    The Law Society is a designated professional body under Part XX of the Act, and firms may therefore carry on certain regulated activities without being regulated by the FSA.

  • (2)

    The Solicitors Financial Services (Scope) Rules 2001 set out the scope of the regulated activities which may be undertaken by firms which are not regulated by the FSA. These rules regulate the way in which firms carry on such exempt regulated activities.

2. Application

Apart from rule 3 (status disclosure), these rules apply to:

  • (a)

    firms which are not regulated by the FSA; and

  • (b)

    firms which are regulated by the FSA but these rules only apply to such firms in respect of their non-mainstream regulated activities.

3. Status disclosure

  • (1)

    This rule applies only to firmswhich are not regulated by the FSA.

  • (2)

    A firm shall give the client the following information in writing in a manner that is clear, fair and not misleading before the firm provides a service which includes the carrying on of a regulated activity

    • (a)

      a statement that the firm is not authorised by the FSA;

    • (aa)

      the name and address of the firm;

    • (b)

      the nature of the regulated activities carried on by the firm, and the fact that they are limited in scope;

    • (c)

      a statement that the firm is regulated by the Solicitors Regulation Authority; and

    • (d)

      a statement explaining that complaints and redress mechanisms are provided through the Solicitors Regulation Authority and the Legal Ombudsman Complaints Service;

  • (3)

    Before a firm provides a service which includes the carrying on of an insurance mediation activity with or for a client, it must make the following statement in writing to the client in a way that is clear, fair and not misleading

    "[This firm is]/[We are] not authorised by the Financial Services Authority. However, we are included on the register maintained by the Financial Services Authority so that we can carry on insurance mediation 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 Solicitors Regulation Authority. The register can be accessed via the Financial Services Authority website at www.fsa.gov.uk/register."

Guidance notes

  • 1.

    Where the status disclosure relates to insurance mediation activities then the statement in rule 3(3) must be used. The status disclosure need not be tailored to the needs of the individual client.The disclosures may be provided alongside or integrated with other material provided to the client. These disclosures may be made in the firm's client care letter or in a separate letter.

  • 2.

    Rule 7.07(1) of the Solicitors' Code of Conduct 2007 states that the letterhead of a firm must bear the words "regulated by the Solicitors Regulation Authority" which will assist in meeting the requirements of rule 3(2).

  • 3.

    The provisions of rule 3(2)(d) and rule 3(3) reflect the requirements of rule 2.05 of the Solicitors Code of Conduct 2007 in respect of complaints handling. Rule 2.05 states that a firm must have a written complaints handling procedure and that complaints are handled promptly, fairly and effectively in accordance with it. It also requires firms to tell clients about their right to complain, including their right to refer their complaint to the Legal Ombudsman. If a client makes a complaint about an exempt regulated activity, the firm will need to be able to demonstrate that there has been an investigation in accordance with rule 2.05. If the client is not satisfied with the results of the investigation the client should must be told that they can refer their complaint to the Legal Ombudsman, the timescale for doing so and full contact details of the Ombudsman. (See www.legalombudsman.org.uk) given details of the Legal Complaints Service with the post and web addresses of that organisation, if this information has not been given already. The client should be advised that there is a time limit for making a complaint to the Legal Complaints Service, which is generally 6 months from the end of the firm's procedure and can be checked by looking at the Legal Complaints Service website or by telephoning the Legal Complaints Service. The Legal Complaints service will investigate and consider whether redress is appropriate and/or whether the complaint raises conduct issues which will be considered by the Solicitors Regulation Authority.

4. Execution of transactions

A firm shall ensure that where it has agreed or decided in its discretion to effect a transaction, it shall do so as soon as possible, unless it reasonably believes that it is in the client's best interests not to do so.

Guidance notes

  • 1.

    Rule 1.04 of the Solicitors' Code of Conduct 2007 emphasises a solicitor's duty to act in the best interests of the client. Accordingly, in cases where there is any doubt on the point, firms should ensure that transactions are effected on the best terms reasonably available.

  • 2.

    Rule 2.02 of the Solicitors' Code of Conduct 2007 provides that clients should be kept fully informed of transactions effected on their behalf, unless clients have indicated to the contrary.

5. Records of transactions

  • (1)

    Where a firmreceives instructions from a client to effect a transaction, or makes a decision to effect a transaction in its discretion, it shall keep a record of:

    • (a)

      the name of the client;

    • (b)

      the terms of the instructions or decision; and

    • (c)

      in the case of instructions, the date when they were received.

  • (2)

    Where a firm gives instructions to another person to effect a transaction, it shall keep a record of:

    • (a)

      the name of the client;

    • (b)

      the terms of the instructions;

    • (c)

      the date when the instructions were given; and

    • (d)

      the name of the other person instructed.

Guidance note

It is not necessary for the firm to make a separate record. Normal file notes or letters on the file will meet the requirements of this rule provided that they include the appropriate information. If instructions are given or received over the telephone, an appropriate attendance note would satisfy this rule.

6. Record of commissions

Where a firm receives commission which is attributable to regulated activitiescarried on by the firm, it shall keep a record of:

  • (a)

    the amount of the commission; and

  • (b)

    how the firm has accounted to the client.

Guidance notes

  • 1.

    Any commission received by the firm has to be dealt with in accordance with rule 2.06 of the Solicitors' Code of Conduct 2007. However, firms should bear in mind that in the case of commissions attributable to regulated activities, the exception for commissions received of £20 or less, does not apply because it is overridden by the condition in section 327(3) of the Act.

  • 2.

    The record could be a letter or bill of costs provided the information is clear.

7. Safekeeping of clients' investments

  • (1)

    Where a firmundertakes the regulated activity of safeguarding and administering investments, the firm must operate appropriate systems, including the keeping of appropriate records, which provide for the safekeeping of assets entrusted to the firm by clients and others.

  • (2)

    Where such assets are passed to a third party:

    • (a)

      an acknowledgement of receipt of the property should be obtained; and

    • (b)

      if they have been passed to a third party on the client'sinstructions, such instructions should be obtained in writing.

8. Packaged products – execution-only business

If a firmarranges for a client on an execution-only basis any transaction involving a packaged product, the firm shall send the client written confirmation to the effect that:

  • (a)

    the client had not sought and was not given any advice from the firm in connection with the transaction; or

  • (b)

    the client was given advice from the firm in connection with that transaction but nevertheless persisted in wishing the transaction to be effected;

and in either case the transaction is effected on the client's explicit instructions.

8A. Insurance mediation activities

Where a firmundertakes insurance mediation activities for a client, it must comply with appendix 1 to these rules.

9. Retention of records

Each record made under these rules shall be kept for at least six years.

Guidance note

The six years shall run from the date on which the relevant record has been made.

10. Waivers

  • (1)

    In any particular case or cases the Council shall have power to waive in writing any of the provisions of these rules, but shall not do so unless it appears that:

    • (a)

      compliance with them would be unduly burdensome having regard to the benefit which compliance would confer on investors; and

    • (b)

      the exercise of the power would not result in any undue risk to investors.

  • (2)

    The Council shall have power to revoke any waiver.

11. Commencement

These rules come into force on 1 December 2001.

12. Interpretation

  • (1)

    The interpretation of these rules is governed by rule 8(1) – (4) of the Solicitors' Financial Services (Scope) Rules 2001.

  • (2)

    In these rules:

    execution-only (transaction)means a transaction which is effected by a firm for a client where the firm assumes on reasonable grounds that the client is not relying on the firm as to the merits or suitability of that transaction;

Guidance notes

  • 1.

    Whether a transaction is "execution-only" will depend on the existing relationship between the client and the firm and the circumstances surrounding that transaction. Generally, a transaction will be "execution-only" if the client instructs the firm to effect it without having received advice from the firm. Even though this is the case, however, the transaction may still not qualify as "execution-only" because, in view of the relationship, the client may reasonably expect the firm to indicate if the transaction is inappropriate. In any event, a firm may be negligent (and possibly in breach of rule 1.04 of the Solicitors' Code of Conduct 2007) if it fails to advise on the appropriateness or otherwise.

  • 2.

    A transaction will also be "execution-only" if the firm has advised the client that the transaction is unsuitable, but the client persists in wishing the transaction to be carried out. In those circumstances it is good practice (and in some cases a requirement) for the firm to confirm in writing that its advice has not been accepted, and that the transaction is being effected on an "execution-only" basis.

  • 3.

    Where the transaction involves a packaged product, there is a specific requirement to confirm in writing the "execution-only" nature of a transaction (see Rule 8 above).

    insurance undertakingmeans an undertaking, whether or not an insurer, which carries on insurance business.

    Insurer means a firm with permission to effect or carry out contracts of insurance (other than a bank)

    non-mainstream regulated activity means a regulated activity of a firm regulated by the FSA in relation to which the conditions in the Professional Firms Sourcebook (5.2.1R) are satisfied.

  • (3)

    These rules are to be interpreted in the light of the guidance notes.

APPENDIX 1: Insurance Mediation Activities

1. Disclosure of information

  • (1)

    Where a firm undertakes insurance mediation activities for a client, it must take reasonable steps to communicate information to the client in a way that is clear, fair and not misleading.

  • (2)

    Where a firm recommends a contract of insurance (other than a life policy) to a client, the firm must inform the client whether the firm has given advice on the basis of a fair analysis of a sufficiently large number of insurance contracts available on the market to enable the firm to make a recommendation in accordance with professional criteria regarding which contract of insurance would be adequate to meet the client's needs.

  • (3)

    If the firm does not conduct a fair analysis of the market, the firm must:

    • (a)

      advise the client whether the firm is contractually obliged to conduct insurance mediation activities only with one or more insurance undertakings;

    • (b)

      advise the client that the client can request details of the insurance undertakings with which the firm conducts business; and

    • (c)

      provide the client with such details on request.

  • (4)

    The information referred to in paragraphs 1(2) and 1(3) above must be provided to the client on paper or on any other durable medium available and accessible to the client.

Guidance notes

  • 1.

    Paragraph 1(1) covers all communications with the client, including oral statements and telephone calls.

  • 2.

    Rule 19.01(1)(b) and (c) of the Solicitors' Code of Conduct 2007 provides that solicitors must not in connection with regulated activities have any arrangement with other persons under which the solicitors could be constrained to recommend to clients or effect for them (or refrain from doing so) transactions in some investments but not others, or with some persons but not others, or through the agency of some persons but not others. However, the provisions of rule 19.01(1)(b) and (c) do not apply to arrangements in connection with regulated mortgage contracts, general insurance contracts or pure protection contracts.

  • 3.

    Paragraphs 1(2) and 1(3) apply to contracts of insurance other than life policies. Solicitors who are not authorised by the FSA are not allowed to recommend the buying of life policies, but they can make recommendations and advise on other contracts of insurance.

  • 4.

    Reference to a durable medium in paragraph 1(4) is to a form that allows for the storage of information to be reproduced without changes. This includes floppy disks, CD-roms, DVDs and hard drives where emails are stored

2. Suitability

  • (1)

    Before a firm recommends a contract of insurance (other than a life policy) the firm must take reasonable steps to ensure that the recommendation is suitable to the client's demands and needs by:

    • (a)

      considering relevant information already held;

    • (b)

      obtaining details of any relevant existing insurance;

    • (c)

      identifying the client'srequirements and explaining to the client what the client needs to disclose;

    • (d)

      assessing whether the level of cover is sufficient for the risks that the client wishes to insure; and

    • (e)

      considering the relevance of any exclusions, excesses, limitations or conditions.

  • (2)

    Where the firm recommends a contract of insurance that does not meet the needs of the client because there is no such contract available in the market, this should be disclosed to the client.

3. Demands and needs statement

  • (1)

    Where a firm recommends a contract of insurance (other than a life policy) or arranges a contract of insurance, the firm must, before the contract is finalised, provide the client with a written demands and needs statement that:

    • (a)

      sets out the client's demands and needs on the basis of the information provided by the client;

    • (b)

      where a recommendation has been made, explains the reason for recommending that contract of insurance;

    • (c)

      reflects the complexity of the insurance contractbeing proposed; and

    • (d)

      is on paper or on any other durable medium available and accessible to the client.

  • (2)

    Where a firmarranges a contract of insurance on an execution-only basis, the demands and needs statement need only identify the contract of insurance requested by the client, confirm that no advice has been given and state that the firm is undertaking the arrangement at the client's specific request.

  • (3)

    The requirement in paragraph 3(1) to provide the client with a written demands and needs statement before the contract is finalised will not apply in the following circumstances:

    • (a)

      where the firmacts on the renewal or amendment of a contract of insurance other than a life policy if the information given to the client in relation to the initial contract is still accurate and up-to-date. If the information previously disclosed has changed, the firm must draw the attention of the client to the matters which have changed before the renewal or amendment takes place;

    • (b)

      where the information is provided orally at the request of the client;

    • (c)

      where immediate cover is required;

    • (d)

      where the contract is concluded by telephone; or

    • (e)

      where the firm is introducing the client to an authorised person or an exempt person and taking no further part in arranging the contract of insurance.

    save that in (b), (c) and (d) above the information contained in the written demands and needs statement must be provided to the client immediately after the conclusion of the contract of insurance.

Guidance notes

  • 1.

    Reference to a durable medium in paragraph 3(I)(d) is to a form that allows for the storage of information and allows the information to be reproduced without changes. This includes floppy disks, CD-Roms, DVDs and hard drives where emails are stored.

  • 2.

    Paragraph 2 and 3(I) apply to contracts of insurance other than life policies. Solicitors who are not authorised by the FSA are not allowed to recommend the buying of life policies, but they can make recommendations and advise on other contracts of insurance.

4. Exclusion for large risks

Paragraphs 1 – 3 above do not apply where a firm carries on insurance mediation activities for commercial clients in relation to contracts of insurance covering risks within the following categories:

  • (a)

    railway rolling stock, aircraft, ships (sea, lake, river and canal vessels), goods in transit, aircraft liability and liability of ships (sea, lake, river and canal vessels);

  • (b)

    credit and suretyship, where the policyholder is engaged professionally in an industrial or commercial activity or in one of the liberal professions, and the risks relate to such activity;

  • (c)

    land vehicles (other than railway rolling stock), fire and natural forces, other damage to property, motor vehicle liability, general liability, and miscellaneous financial loss, in so far as the policyholder exceeds the limits of at least two of the following three criteria:

    • (i)

      balance sheet total: €6.2 million;

    • (ii)

      net turnover: €12.8 million;

    • (iii)

      average number of employees during the financial year: 250.

5. Notification of establishment and services in other Member States

If a firm wishes to exercise the right conferred by Article 6 of the Insurance Mediation Directive to establish a branch or provide cross-border services in another EEA state an appropriate application must be made directly to the FSA. The Rules under the FSA's Supervision Manual, SUP 13, Exercise of Passport Rights by UK firms, contain details of the applicable process. A firm proposing to provide such services must comply with the applicable provisions of the Act, as laid down in the FSA's Professional Firms' Sourcebook Chapter 7 as amended from time to time.