New Financial Services Rules and the SRA Handbook

Getting to Grips with New Financial Services Requirements

The SRA issued a new version of its Handbook on the 1st October to address the financial services related changes that it had to make as a result of the EU Insurance Distribution Directive which also took effect as of that date. The SRA – through the Law Society – is one of the designated professional bodies under the Financial Services and Markets Act 2000 (“FSMA”) and as such both authorises and regulates law firms in relation to this aspect of the law. Certain changes will need to be made as a result of the new rules, mostly in relation to the information to be provided to clients but extending to the internal compliance regime as well.

Unfortunately this is a highly complex area of solicitor regulation, mostly because of the range of financial products referred to in the regulations which will be unfamiliar to most lawyers. Getting to grips with the new requirements is also made that much more difficult in that the relevant statutory instrument which implements the Directive – The Insurance Distribution (Regulated Activities and Miscellaneous Amendments) Order 2018 – consists mostly of a table of amendments to the earlier regulations that were drawn up in the light of FSMA and so not amounting to a new discrete set of provisions in its own right.

Regulated activities and insurance distribution

By way of background there are two closely related areas of European law which tend always to be dealt with in tandem. First are the requirements in relation to “regulated activities”, or financial advice. Section 19 of FSMA provides that this may only be provided when authorised to do unless an exemption applies. Most law firms will qualify for such an exemption through being “members of a profession” and therefore being able to provide financial advice as long as it is limited to being ancillary to their normal legal services. The necessary registration with the SRA through form FA8 should result in the firm then appearing on the FCA website as an exempt professional firm, or “EPF”.

It is, however, the related issue of what has been termed to date “insurance mediation” which has now changed and what will now instead become “insurance distribution”, and is also subject to the need for firms to hold EPF status. This consists of the advice, sales and the administration of insurance products and so has been particularly relevant to certain areas of legal practice such as litigation, probate and conveyancing. The original Insurance Mediation Directive 2002 sought to remove the barriers to a single market for insurance and reinsurance through the sale of such products between insurance agents and brokers but did not cover direct sales by insurers and reinsurers. Now, in an attempt to improve consumer protection standards in this area of the market, the new EU provisions have been extended to the direct sale of insurance products by insurers.

Herein lies a further complication, however, as in transposing the earlier Insurance Mediation Directive the UK Government extended their remit to the sale and administration of insurance products in any event. Consequently we have had a more highly regulated financial services environment in the UK in recent years than was actually required by European law or has applied elsewhere in Europe in any event.

The new requirements

In order to ensure compliance to date, firms have been required not just to register so as be included on the EPF register but also to provide guidance on their status as such to their clients, conventionally through their terms of business documentation. In addition, firms have been required to take reasonable steps to communicate information to the client in a way that is “clear, fair and not misleading” and whenever a policy is obtained for or recommended to the client they must have been served with a “demands and needs statement”. Other requirements, such as only ever to act in accordance with the client’s best interests and keep records of correspondence and any complaints have been covered by more general SRA requirements in any event.

In order to address the new requirements the SRA has updated the two sets of regulations which have been in place since these requirements were first extended to the legal profession – the SRA Financial Services (Scope) and (Conduct of Business) Rules 2001. Apart from the obvious cosmetic change of references from “insurance mediation” to “insurance distribution” the Scope Rules, which set out what a law firm may and may not do under the range of its activities as an exempt firm, add to the list of prohibited activities dealing in insurance based investment contracts and the creation, development, design or underwriting of insurance contracts (Rule 3.1(v) and (w)).

The accompanying Conduct of Business Rules stress that the required client information must be provided “in good time before the conclusion of a contract of insurance” and make clear to the client that it may act as an “ancillary insurance mediator” only (and so not as an insurance provider as such). More detailed changes can be found in Appendix 1 which provides that a demands and needs statement is still required and that this must, of course, be consistent with the client’s circumstances. It will be important to clarify whether the firm is merely identifying insurance products that it mentions to clients or is recommending them, but there may be an inference that it is making a recommendation if the client might fairly interpret any such communication as such given its pattern of dealings with the firm and the reliance it places on it.

Appendix 1 also introduces the requirement at para 12.1 that the firm must ensure that all “relevant employees” (which should probably be interpreted to partners as well) possess “appropriate knowledge and ability” to act in accordance with this aspect of their obligations. This almost certainly means that fee earners at least should have suitable training in the firm’s arrangements and we will therefore be developing a new training module for subscribers on this topic later this month to assist you to comply with this new obligation.

Share on social media