Justin Rourke explains the SRA’s recent proposals surrounding solicitor referrals to an independent financial adviser, and the positive changes they could bring.
Since 2012, solicitors have been allowed to make referrals to ‘restricted’ advisers. However, with effect from autumn this year, the Solicitors Regulation Authority (SRA) is driving changes in order to tighten up the referral process to IFAs.
This comes as no surprise, as there are a wide range of arrangements in place at present, some of which are formal and include the passing of remuneration to the referrer and their practice, whereas others are much looser and based on a goodwill basis.
Arrangements can also vary within individual legal practices too, with each solicitor, department or office making referrals to different IFAs based upon their own choices and relationships.
The SRA, like the Financial Conduct Authority (FCA), is keen to ensure that outcomes remains client-focused.
What is proposed?
The draft Code of Conduct for Solicitors, RELs and RFLs indicate that referrals from a solicitor to a financial adviser must be based on a formal, written agreement, supported by a suite of due diligence, which is adopted firm-wide. This places more onus on the legal practice to understand the firm to which they refer their clients, and to be aware of the permissions and expertise that the advisory firm possesses.
The draft wording is currently awaiting the Legal Services Board’s (LSB) agreement to the revisions, but as things stand, the proposals are as follows:
- All agreements relating to referrals must be in writing
- Agreements between the firm and the third party adviser should set out the terms of the agreement which governs the flow of referrals
- Your client must be informed of any financial interest
- Referring law firms must have a better understanding of the organisation to which they refer. For example, is the firm FCA-regulated (it certainly should be), and what activities is it authorised to perform?
- Referrals must be based on a measured approach which aims to benefit the client
- The client needs to consent to being referred
- Referrals must be in the best interests of the client – this is a key requirement in principle 6 of the proposed new SRA Principles
- Research and reasoning of the advisory firm must be laid out in the written agreement
- Code of Conduct 5.1 applies.
These revisions suggest a move away from individuals making a referral based upon their own choice, to a more formal, measured approach that aims to benefit the client concerned.
Whilst this may sound onerous, it does not need to be. I have found that there are a number of similarities between legal, accountancy and IFA practices. There are differences, of course – a fundamental one being that an accountancy practice is driven to maintain an ongoing relationship with clients through audit, annual accounts and tax returns, all of which are mandatory requirements.
IFAs are also required to provide a regular review for clients from whom they receive ongoing remuneration. Such reviews are usually performed at least annually, but could be more frequent, depending upon the complexity of their clients’ needs and requirements.
Accountants and IFAs often have a strong ongoing relationship with their clients as a result of this continuous contact. Legal practices, on the other hand, tend to operate on a more transactional basis – conveyancing, divorce, wills, etc – but this need not be the case.
These upcoming changes will require time, thought and prior planning. More progressive legal, accountancy and IFA firms can learn a great deal from one another.
A cohesive, documented working relationship which is backed up with due diligence can bring about a rounded service to clients, and a formal link with an IFA who is obliged to review their clients’ circumstances at least annually can benefit the solicitor by maintaining an ongoing relationship with a mutual client.
Justin Rourke (Justin.Rourke@armstrongwatson.co.uk) is a financial planning consultant at Armstrong Watson LLP. He specialises in working alongside our specialist legal sector team, which advises law firms throughout the UK on strategic, structural and other business improvement issues as well as providing efficient accounting, tax and SRA accounts rules services.
The Law Society has exclusively endorsed Armstrong Watson LLP for the provision of accountancy services to law firms throughout the whole of the north of England.
This article is a general guide to the issues that we see in practice. It is not a substitute for professional advice which takes account of your personal circumstances. No responsibility can be accepted for any loss occasioned by any person acting or refraining from action on the basis of this article.