Posted 27.9.17

Closer Together? How legal & financial services are working together (or not!)

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Penguin Wealth, the preferred supplier of wealth management advice for Cardiff & District Law Society, has its fingers on the pulse in terms of the realities of legal and financial service cross-pollination thanks to its collaborations with leading lights in both sectors.

Something that recently caught the eye of Penguin is an article by David Ingram, the Managing Director of SIFA, following his work on a proposal coming in next year from the SRA. This article was published in a magazine that goes out to over 5,000 UK financial services professionals.

The article is quite possibly a poor generalisation on how the legal profession and financial services profession work together around the country but Penguin felt it was worth sharing with you given its potential relevance to CDLS members and their law firm.

(DISCLAIMER: While Penguin knows David from our work with SIFA and all of the below are David’s own words and do not reflect the thoughts of the Penguin team in any way.)

A new draft code of conduct from the solicitors' regulator - expected to come into force next year - contains important provisions governing the referral of clients for financial advice

The most common way in which financial advisers and solicitors currently work together is through some form of referral arrangement.

Very few of these arrangements take the form of a formal agreement because any agreement would be between firms rather than individual practitioners, and would therefore require the involvement of other members of the firm - and the reality is that most law firms operate as groups of individuals rather than integrated businesses.

Consequently, due diligence in the selection of financial adviser referees is pretty limited and not undertaken centrally by the practice's compliance officer for legal practice (COLP) - indeed, solicitors continue to refer clients to restricted advisers despite the strong advice of the Law Society to confine their referrals to independents.

Things may, however, be set to change. The Solicitors Regulation Authority (SRA) has recently issued a new draft code of conduct, which is expected to come into force in the autumn of 2018. This contains important new provisions governing the referral of clients for financial advice, stating the requirement that "the agreement is in writing".

Clearly, it would be both unworkable and unenforceable to require each individual referral to be supported by a separate agreement, and the SRA has made clear its intention that referral agreements should be formalised centrally by firms and should govern all individual referrals subsequently made to the appointed advisers.

This should put a stop to the apparent ‘free-for-all' that exists in many law firms, with individual partners and fee-earners acting on their own, instructing their personal friends and contacts with little or no discernible due diligence - giving rise to consequent risk to the firm from inappropriate referrals that result in client dissatisfaction and/ or loss.

It should also empower firms' COLPs to ensure referral arrangements are properly centralised and co-ordinated.

Ideally, advisers will be selected on the basis of their expertise and qualifications, which are relevant to solicitors and will have regard to the potential for two-way traffic, in the form of reciprocal referrals and perhaps even the sharing of fees, which is permitted by the draft code - subject to disclosure to the client.

The SRA recognises the era of silo-based professional services is coming to an end and that solicitors need to look beyond their transaction-based remit and work with providers of complimentary services - particularly financial advisers - in order to provide a holistic client service.

Referral arrangements are, and will continue to be, the main medium for interaction between the two professions, and some firms have entered into formal joint ventures. These have often proved unsuccessful, however, because of the difficulty in getting all the members of the law firm to agree between themselves on any firm-wide arrangements.

Marketing agreements have in some cases been more successful, whereby the solicitors actively promote the services and marketing material of the adviser firm and participate in client-facing events, and are remunerated financially for doing so.

The ultimate form of association is the ‘alternative business structure' (ABS) created by the Legal Services Act of 2007, whereby firms that are jointly owned and managed by legal and financial advisers operate as integrated practices.

The SRA regards the ABS as the business structure of the future but, if it is to be successful, any professional business needs to be relationship-based and managed on a commercial basis - and, in this respect, the adviser model has rather more to commend it than the solicitor one.

In the 1990s, many solicitor firms employed advisers but, through lack of management control, failed to integrate their services as part of the practice. Now the boot is on the other foot and a few enterprising advisers are recruiting solicitors or even acquiring law firms.

Penguin is running an event in conjunction with the Cardiff & District Law Society in November 2017, covering the opportunities and challenges that the legal and financial advice sector face going forward and how we can work together to ensure clients best interests are the number one priority for all of us. 

Click here to visit the Penguin website and to contact its specialists.

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