Are you compliance confident?

The acronyms of regulation would be an entertaining pub quiz round for lawyers. Hopefully, OFR, RBR, COLP, COFA and SRA would be easy to identify, but what about IMO, EPF and FCA?

Most law firms will need an insurance mediation officer (IMO) because they carry on insurance mediation activities, and the officer and the firm must be recorded on the exempt professional firms (EPF) register maintained by the Financial Conduct Authority (FCA).

In this way, law firms are entering a world where financial and legal regulation overlap and where legislation dictates what can and can't be done, as well as how it can be done.

Law firms ignore financial services compliance at their peril both because the legislation carries criminal sanctions and because the Solicitors Regulation Authority (SRA) requires achievement of Outcome (7.5) of the SRA Code that you must "comply with legislation applicable to your business".

However, in recent times and with the diversion of compliance resources to SRA requirements, some firms have been distracted and turned their attention away from this topic. It is very risky not to have an understanding of financial services compliance within your firm.

So what do you need to know? There are almost 11,000 law firms in England and Wales and the majority carry on financial services activities for their clients which are subject to regulatory requirements. Activities include arranging various types of insurance cover, dealing in shares and carrying on credit-related regulated activities. No more than 50 firms are directly authorised by the FCA and this niche group need not read further with this article: you know who you are, will have developed ways of working with two regulators, and understand what controls should be in place.

Statutory exemption

For the majority, read on. You can provide financial services to your clients because of a statutory exemption, known as the Part XX exemption, in the Financial Services and Markets Act 2000.

This exemption means that you do not need to be authorised by the FCA but you are subject to compliance with regulatory rules designed to ensure that you do not stray into mainstream financial services activities. These rules are the SRA Financial Services (Scope) Rules 2011 which are in the specialist services section of the SRA Handbook. Together with their sister rules, the SRA Financial Services (Conduct of Business) Rules 2011, they steer solicitors and employees in SRA-authorised law firms along the correct regulatory path.

The Scope Rules are essential reading. They list prohibited activities which cannot be undertaken in reliance of the Part XX exemption, basic conditions which must be satisfied, and other restrictions which apply to certain products

and activities (including the need to appoint an IMO and be on the EPF Register).

Breach of these rules can result in both legal liability and a disciplinary offence. The Conduct of Business Rules contains provisions about how financial services should be performed, record-keeping requirements and disciplinary issues for the defaulter if there are breaches.

Safely working business

The bottom line is that every law firm must ensure that compliance procedures, systems and controls, record-keeping and risk management tactics reflect the activities which are subject to these sets of rules and ensure that the business works safely within the Part XX exemption.

The SRA has responsibilities to oversee compliance with the Part XX exemption. This includes the obligation to share information about its regulated community with the FCA, in accordance with a memorandum of understanding.

This communication currently includes an annual report about the financial services activities which are undertaken, disciplinary issues, supervisory exercises, etc. It is therefore not beyond the bounds of probability that the SRA could turn its attention to a review of how financial services are performed. Would you be ready for this?

Key questions to improve compliance knowledge should be incorporated into housekeeping regimes. For example:

• Have we catalogued all the financial services activities which are undertaken in the business?

• Are we satisfied we have the competence and resources to deliver a proper standard of service and ensure that we are acting in each client's best interests?

• What training would improve the standard of service and to whom should this be provided?

• Are we complying with mandatory record keeping duties in the SRA Financial Services (Conduct of Business) Rules?

• Does our IMO understand their duties and are they communicating with our COLP on areas of mutual interest and concern?

• What audit trails will ensure that we could prove all of the above?

Tracey Calvert is a regulatory compliance specialist and the director of Oakalls Consultancy Limited. She is the author of Conflicts and Confidentiality for Law Firms and Ethics in Law Firms: A Practical Guide and co-author of OFR: Compliance in Practice and COLP & COFA: Compliance in Practice, all published by the Ark Group

Tracey Calvert

tcalvert@oakallsconsultancy.co.uk

www.oakallsconsultancy.co.uk

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