7 - Equity Finance Flashcards
What are financal services?
Advising on, dealing in, and arranging investment products on behalf of clients.
This includes shares, pensions, endowment policies, regulated mortgage contracts (a mortgage which is used to buy a property of which 40% or more is used as a residential dwelling.)
Why are financial services regulated?
To ensuure that those providing financial services are approved and authorised and that consumers are adequately protected from negligent advisors.
How is the provision of financial services regulated in the UK?
The key statute governing financial services is the Financial Services and Markets Act 2000 (FSMA), together with the Financial Services and Markets 2000 (Regulated Activities) Order 2001 (SI 2001/544), as amended, is known as the Regulated Activities Order (‘RAO’) and establishes the activities to be regulated by FSMA if they are carried on in the UK by an entity by way of business.
Why is the regulation of financial services important for law firms?
Important from the perspective of a solicitor having to ensure that in the course of their practice the solicitor does not commit an offence, but also in terms of being aware of the statutory constraints which might be placed on a client in terms of the deal being proposed.
Few law firms have obtained direct FCA authorisation because the stringent level of regulation imposed by the FCA, coupled with the relatively small proportion of work for clients which would require direct FCA authorisation
Who are the regulators of financial services?
There are two regulators: the Prudential Regulation Authority (‘PRA’) and the Financial Conduct Authority (‘FCA’).
What is the general prohibition under the FSMA?
s19(1) FSMA states:
“No person may carry on a regulated activity in the United Kingdom, unless he is:
(a) An authorised person, or
(b) An exempt person.
It is a criminal offence to breach this.
A regulated activity = Specified Investment + Specified Activity. E.g., advising on the merits of shares.
s19 could come up in the exam so need to know statute number.
What are the four steps to consider to determine if the financial activity is regulated by the FSMA?
1) Is the investment ‘specified’ under FSMA? (see Part III RAO)? If yes
2) Is the activity a ‘specified activity’ under FSMA? (See Part II RAO) If yes
3) Is the activity excluded under FSMA? (See Part II RAO)? If no
4) Does the activity fulfil the basic conditions in s. 327 of FSMA and SRA Scope Rule 2? If yes, exemption is possible; if no, authorisation is required.
What investments are “specified” under FSMA?
This includes shares (Article 76), instruments creating or acknowledging indebtedness such as bonds and other debt instruments (Article 77), and regulated mortgage contracts (Article 88), as defined in Article 61(3) RAO.
What activities are a “specified activity” under FSMA?
Include dealing in investments as a principal (Article 14) or as an agent (Article 21), which covers buying, selling, subscribing for, or underwriting securities or contractually based investments; arranging deals in investments (Article 25); and managing investments (Article 37), which involves exercising discretion over investments that are securities or contractually based investments.
Are advising on the merits of investments a specified activity?
Advising on the merits of investments (Article 53(1) RAO) is a common specified activity.
Generic advice, e.g., how to invest in different regions or providing information, is not considered a specified activity.
Advice becomes regulated under Article 53(1) if it involves a recommendation or opinion to a client who is or could be an investor, regarding actions like buying, selling, or holding investments.
Which activities are excluded under FSMA?
Excluded activities fall outside FSMA’s scope and don’t require additional compliance under its regulations.
Specific Exclusions - “Dealing in Investments as Agent” (Article 21) is excluded if the activity involves deals with or through authorised persons (Article 22).
General Exclusions -
Article 67 RAO: Regulated activities that are a necessary part of other services provided in a profession or non-investment business are excluded, provided they are integral to those services and not separately remunerated.
Article 70 RAO: Activities related to the purchase or sale of shares in a company are excluded if the shares represent 50% or more of the voting shares, and the transaction is intended to acquire day-to-day control of the company.
If the FSMA applies, what should a solicitor do?
Solicitors must either be directly authorised by the FCA or supervised by a Designated Professional Body like the Law Society, which is regulated by the SRA. The firm must comply with the SRA Financial Services (Scope) Rules 2019 to carry on exempt regulated activities.
The Scope Rules set out the scope of the regulated financial services activities that may be undertaken by firms authorised by the SRA (but not the FCA).
For the regulated activities to be exempt, which conditions of the FSMA must be met?
In order for the regulated activities to be exempt regulated activities all the conditions set out in s 327(2) – (7) FSMA must be satisfied.
- The person must be a member of a profession (e.g., solicitor, s 325(2) FSMA).
- No third-party commission is allowed unless accounted for to the client, with informed consent (SRA guidance).
- The regulated activity must be incidental to the provision of professional services.
- The person must comply with rules set by their designated professional body (e.g., SRA Scope Rules under s 332(3) FSMA).
When is the activity incidental? (FSMA)
The regulated activities must not be a major part of the firm’s practice.
Consider:
- Scale of the activity relative to other professional services.
- Whether the services are presented as separate from other legal services.
- How the firm advertises or promotes its regulated activities.
Regulated activities are not incidental if they form a separate business. It’s incidental if the specified activity is a small part of the firm’s overall work for clients.
What must be satisfied for an activity to be exempt under s 327 FSMA and Scope Rule 2?
Need to satisfy s327 FSMA and Scope Rule 2. If these can be satisfied, you are carrying out an exempt activity.
Scope Rule 2 Conditions:
The activity must arise out of or be complementary to the provision of a particular professional service to a client (Scope Rule 2.1(b)).
Arising Out Of: The activity should be directly related to the non-regulated work (e.g., advice on investments tied to a company sale).
Complementary: The activity must naturally arise from the existing work (e.g., legal/tax advice, drafting documents related to investments).
