2. Financial services and markets Flashcards
A solicitor acts for a client who is a director of a private limited company. The client also owns 70% of the share capital in the company. The client intends to retire and plans to sell the entire shareholding to his daughter. The client asks the solicitor to advise on the sale and to prepare and negotiate all the necessary documentation. The solicitor’s firm is not authorised by the Financial Conduct Authority to carry out regulated activities under the Financial Services and Markets Act 2000.
Which of the following best explains why the solicitor is likely to be able to advise and act as the client requests?
A-Because shares in private companies are not specified investments.
B-Because the solicitor can rely on the ‘takeover’ exclusion.
C-Because the solicitor can rely on the exemption for professional firms.
D-Because the solicitor would be giving generic advice.
E-Because the solicitor would not be carrying out a specified investment activity.
Option B is correct. The client is seeking advice and assistance from the solicitor who is ‘in business’. Shares in a private company are a specified investment (option A is wrong), and in acting as the client requests the solicitor will be carrying out the specified investment activities of advising and arranging (option E is wrong). The solicitor will need to rely on an exclusion or exemption to avoid breaching s 19 FSMA 2000.
The takeover exclusion applies to a transaction to acquire or dispose of shares in a body corporate if the shares include 50% or more of the voting shares and is between parties each of whom is a body corporate, a partnership, a single individual or a group of connected individuals. Here the client wishes to sell his 70% shareholding in the company to his daughter, so the takeover exclusion requirements are satisfied.
Advising on the sale of shares sell would not be considered generic advice (option D is wrong).
Option C is wrong because the exemption for professional firms is of no relevance as the solicitor will not be carrying out a regulated activity (and the requirements of s 327 would not be met).
A solicitor has just finished acting for a client in a medical negligence case. The client has decided to buy a house using the damages that the client has received in the case. The client has identified a number of possible houses to buy. The solicitor knows nothing about the property market, nevertheless the client asks the solicitor to advise on which house would provide the best investment. The solicitor’s firm is not authorised by the Financial Conduct Authority to carry out regulated activities under the Financial Services and Markets Act 2000.
What would be the position if the solicitor gave the advice as requested?
A-Criminal proceedings may be brought against the solicitor.
B-The solicitor will have complied with their duty to act with integrity.
C-The solicitor will have complied with their duty to act in the best interests of the client.
D-Criminal proceedings may be brought against the firm, but not against the solicitor personally.
E-Disciplinary proceedings may be brought against the solicitor.
Option E is correct. Land is not a specified investment and so in giving the advice the solicitor will not be committing an offence under FSMA 2000. However, the solicitor is not competent to give the advice. Therefore, the solicitor is in breach of Paragraph 3.2 of the Code of Conduct for Solicitors and disciplinary proceedings may be brought against them. Giving advice when not competent to do so would not constitute acting with integrity nor acting in the client’s best interests.
A solicitor has been acting for a client in a litigation matter. The case recently concluded with the client being awarded £2 million in damages. The client asks the solicitor for advice on investing this money in debentures and bonds. The solicitor lacks sufficient expertise to advise the client and so the solicitor refers the client to an independent financial adviser. After the client has seen the adviser, the client asks the solicitor to arrange the purchase of the investments that the adviser has recommended. The adviser pays the solicitor £50 commission, which, without reference to the client, the solicitor decides to retain.
Did the solicitor’s actions amount to a regulated activity under the Financial Services and Markets Act 2000?
A-Yes, because the solicitor lacked competence.
B-Yes, because the solicitor received a pecuniary reward.
C-No, because the transaction did not involve a specified investment.
D-No, because the exemption for professional firms prevents the solicitor’s actions from being a regulated activity.
E-No, because the client has taken advice from an authorised third person.
Option B is correct. Debentures and bonds are specified investments (option C is wrong) and the solicitor has engaged in the specified activity of arranging. Ordinarily the solicitor would be able to rely on the ATP exclusion, but this is not available where the solicitor receives commission and fails to account to the client; accordingly, option E is wrong. Option D is wrong as the s 327 exemption does not (in contrast to an exclusion) result in the act ceasing to be a regulated activity. Instead s 327 enables a regulated activity to be carried on without authorisation (in any event the financial services were not incidental on the facts). Finally, option A is wrong as ‘competence’ does not influence whether the act amounts to a regulated activity (but is a professional conduct issue).
A solicitor acts for a client who owns 100% of the share capital in a private limited company. The client wishes to sell 75% of these shares to his daughter. The solicitor advises on the share sale and helps to prepare and negotiate all the necessary documentation. Neither the solicitor nor her firm is authorised by the Financial Conduct Authority to carry on a ‘regulated activity’ as defined in relevant legislation
Has the solicitor breached the general prohibition against carrying on a regulated activity?
A-No, because an exemption applies to professional firms which are supervised by the Solicitors Regulation Authority.
B-Yes, because the solicitor has given advice on the sale of shares and no exclusion or exemption applies.
C-No, because an exclusion applies if the transaction involves 50% or more of the voting shares in the company.
D-No, because an exclusion applies if the transaction involves more than 50% of the voting shares in the company.
E-Yes, because the solicitor has given advice on the sale of shares between connected individuals and no exclusion or exemption applies.
Option C is correct. The client is seeking advice and assistance from his solicitor who is ‘in business’. Shares are a specified investment, and in dealing with the share sale the solicitor will be carrying out the specified investment activities of advising and arranging. The solicitor will need to rely on an exclusion or exemption to avoid breaching s 19 of the Financial Services and Markets Act 2000 and committing a criminal offence.
The takeover exclusion (as set out in the Regulated Activities Order 2001) applies to a transaction to acquire or dispose of shares in a body corporate if the shares include ‘50% or more’ of the voting shares and is ‘between parties each of whom is a body corporate, a partnership, a single individual or a group of connected individuals’. Here the client wishes to transfer 75% of the shares to his daughter and so the takeover exclusion requirements are satisfied - the solicitor may complete the work without breaching the general prohibition.
As a result, options B and E are wrong. The solicitor has not breached the general prohibition against carrying out a regulated activity. Option C is wrong because the takeover exclusion applies to a transaction to acquire or dispose of 50% or more of a company’s voting shares, and not just to transactions involving more than 50% of the company’s shares.
Option A is not the best answer. Due to the takeover exclusion, the solicitor has not undertaken a regulated activity, and therefore there is no need to consider any exemptions that apply to the performance of such activities.
A law firm has been providing financial services to a client under the exemption for professional firms in Section 327 of the Financial Services and Markets Act 2000. The services involved carrying out some transactions on behalf of the client. A partner asks an associate in her department to send her copies of the client’s instructions relating to those transactions. The associate replies that because the instructions were given over the telephone, there are no written records. He assures the partner that the client’s instructions were carried out accurately and as soon as possible.
Which of the following best describes the firm’s position in respect of the SRA Financial Services (Conduct of Business) Rules (the ‘COB Rules’)?
A-The COB Rules have been breached, because they require firms to keep records of instructions from clients to carry out transactions.
B-The COB Rules have not been breached, because the only records they require firms to keep relate to commission received in respect of regulated activities.
C-The COB Rules have not been breached, because the client’s instructions were carried out as soon as possible.
D-The COB Rules do not apply where a firm is acting under the Section 327 FSMA exemption for professional firms.
E-The COB Rules have been breached and require that the client is immediately informed of the SRA and Legal Ombudsman complaints mechanisms.
Option A is correct. Rule 4.1 of the COB Rules requires a firm to keep records of instructions from a client to effect a transaction.
Option B is wrong. Under the COB Rules, firms are required to keep records of commission received in respect of regulated activities. However, these are not the only records they are required to keep.
Option C is wrong. The COB Rules do require transactions to be carried out as soon as possible unless the firm reasonably believes that it is in the client’s best interests not to. However, the requirement to keep records still applies.
Option D is wrong. The COB Rules apply specifically where firms undertake financial services activities under the s.327 FSMA exemption for professional firms.
Option E is wrong. Rule 2.1 of the COB Rules requires this (and other) information to have been provided before providing the financial services covered by the exemption.
