On 13 October the government announced proposals designed to remove the requirement that incidental investment business conducted by accountancy firms be regulated by the Financial Services Association once the Financial Services and Markets Bill comes into force - at a date referred to as N2. Of the 6,700 or so firms of accountants authorised to do investment business, it seems most will escape FSA regulation by virtue of the new proposals. However, some 1,000 accounting firms will require authorisation from the FSA. Most elements of the new regulatory regime will apply to professional firms in the same way as to any other regulated firm. The new regime will impose significantly more obligations on firms than the existing arrangements and much work will need to be done to prepare for FSA regulation. All firms regulated by the FSA will be subject to the 'qualifying conditions for authorisation', 'principles for business' as well as 'principles for individuals' and a raft of detailed rules and guidance most of which is yet to be finalised. One of the more significant aspects of FSA regulation will be the proposed 'approved persons' regime. The effect of this is that certain controlled functions can only be undertaken by FSA-approved persons. Under present proposals it is likely that all partners in small and medium-sized accountancy firms authorised by the FSA will require registration even if the investment business activities are only conducted in one part of the firm. It appears that only where there is a clearly designated management group will partners not involved in investment business activities escape the regime. Persons within the regime will be subject to the full range of the FSA's not inconsiderable disciplinary powers. After N2 the FSA expects to charge annual fees to those that it regulates. In respect of firms presently regulated by the professional bodies, the FSA has stated that fee levels cannot be determined at this stage. However, it does point out that under current arrangements operated by the self-regulatory organisations fees, even a small firm will usually exceed £1,000 per annum. The implication is that the FSA does not expect annual fees to be less than this. Accountancy firms regulated by the FSA will also be subject to capital requirements, a common feature of the existing regime in so far as investment businesses are concerned. While the FSA has indicated that it does not intend to impose new capital requirements on professional firms immediately after N2, it is reviewing the prudential requirements to be applied to all types of business and a new integrated set of requirements is expected to be introduced in early 2002. While this may seem a long way off, such changes may have significant business and systems implications for firms. Nevertheless, after N2 the FSA will need to be satisfied that accountants undertaking investment business are adequately resourced. It is presently considering two possibilities, one that firms should be able to demonstrate that they are able to meet their debts as they fall due, and the other, that firms be required to maintain positive net assets at all times. Both these tests would need to apply to the firm as a whole and would no doubt lead to some form of periodic reporting, possibly on a quarterly basis. The FSA has stated that it aims to develop a coherent and consistent style of regulation across all firms carrying on investment business. Accountants can expect to have to put in place clearly defined compliance procedures that measure up to those currently operating in the investment community. The supervision and enforcement regime likely to take shape after N2 will be new. Firms will find themselves dealing with a regulator whose powers extend from intervention and investigations on the one hand to instituting criminal proceedings for breaches of the money laundering regulations on the other. Some of these issues will have a significant impact on those firms presently undertaking mainstream investment business. Firms should consider carefully the issues during the consultation period. Further, they should be considering what steps they need to take to gear up for statutory regulation and should be tasking an appropriate individual to keep them abreast of developments. In some cases consideration may need to be given to hiving off investment departments into separate companies. There is still much work that will need to be done prior to N2; effective compliance arrangements will have to be established, responsibilities clearly defined and partners and staff trained in the new regime. Ben Blackett-Ord is a director of Bovill Gunn, an FSA compliance consultancy ACCA DELIGHTED BY ANNOUNCEMENT The accountancy institutes were delighted with last month's news that only 2,000 professional services firms, which include accountants, solicitors and actuaries, would fall under the FSA's remit. ACCA had been particularly concerned that many of its smaller members who offer investment business as an incidental sideline could have found themselves facing huge hikes in fees under the new system, but it greeted the announcement of the changes with relief. ACCA director Anthony Booth said the body had been concerned that the increased cost and demands would be completely inappropriate to the advice given. 'At the moment, we can offer precautionary authorisation at an economical rate because we also monitor these firms for audit. The FSA will require us to keep an eye on those people doing incidental business to make sure they are not going further than they should. The government has come up with a very sensible solution,' he said. Many had feared smaller firms would be forced to stop offering their clients incidental investment advice as part of their service. But FSA chief Howard Davies said: 'We intend that these activities should generally be regulated as part of the conduct of the profession by the relevant professional body, subject to the regulatory arrangements being made very clear to their clients.'
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