Chapter 2 Flashcards

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1
Q

What are three activities where solicitors could become involved with financial services and investment activities on behalf of their clients?

A

1) Arranging transactions
2) Giving advice
3) Referring clients to an independent financial advisor

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2
Q

What is conveyancing?

A

Conveyancing is the legal process of transferring the ownership of property from one person to another. It involves a series of legal and administrative tasks that ensure the transfer of property is legally binding and secure.

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3
Q

What are 7 areas where solicitors could potentially get involved in investment activities?

A

1) Conveyancing
2) Corporate
3) Tax
4) Employment
5) Matrimonial clients
6) Litigation
7) Trusts

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4
Q

In conveyancing, what three activities are considered investment activities?

A

1) Arranging an endowment-linked (life policy) or pension fund mortgage for a client
2) Obtaining advice for a client on which policy is most suitable
3) Advising and arranging for a client to enter into a regulated mortgage contract or even into a general (non-investment) insurance contract

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5
Q

What is a endowment?

A

An endowment is a financial asset or fund that is donated or set aside for a specific purpose, such as supporting a charitable organization, funding a scholarship, or providing income for a nonprofit organization.

Endowments are designed to be long-term investments, with the goal of preserving the principal and generating income over a period of many years. The income generated by the endowment can be used to support ongoing operations, fund new initiatives, or provide scholarships or other forms of support.

Endowments are often structured as permanent funds, which means that the principal is not intended to be spent, but rather is invested in perpetuity to generate income to support the designated purpose. However, some endowments may be designed to be spent down over time, such as to fund a specific project or initiative.

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6
Q

In corporate, what five activities are considered investment activities?

A

1) The sale or purchase of a company (dealings in company shares)
2) Arranging a deal with a view to your corporate client’s buying or selling investments - e.g,, instructing a stockbroker to buy shares for a client, or arranging with an insurance broker for a client to take out an endowment policy
3) Preparing the paperwork for a listing of shares or for the prospectus to a share issue
4) A corporate client might ask a firm to set up a personal pension scheme, ‘key man’ or permanent health insurance for each its executive directors
5) Client setting up in partnership may need advice on pensions, life insurance and permanent health insurance

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7
Q

What is a ‘key man’ insurance?

A

Key man insurance is a type of life insurance policy that is designed to protect a business or organization in the event that a key employee or executive becomes incapacitated or dies.

The policy is purchased by the business, which pays the premiums and is named as the beneficiary. In the event that the key employee covered by the policy dies or becomes unable to work, the insurance company pays out a lump sum to the business, which can be used to cover expenses related to the loss of the key employee, such as hiring and training a replacement or paying off debts.

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8
Q

In tax, what two activities are considered investment activities?

A

1) Assistance to clients approaching retirement age in the area of estate planning
2) Advice on the possibility of deferring or phasing the drawing down of pension rights to increase the pension annuities
3) Managing a client’s investments in a mutual fund

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9
Q

In employment, what two activities are considered investment activities?

A

Negotiating a dismissal package for a client who has been unfairly or wrongfully dismissed by his employer
Pension top-ups and transfers, when negotiating the terms of the settlement

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10
Q

With matrimonial clients, what three activities are considered investment activities?

A

1) Advice in connection with divorce settlements - dividing up the investments of the former spouses; which assets should be sold or transferred
2) A client who may instruct you to make a will may need pension advice
3) Giving a client advice on how to best invest money - or even advising a client not to sell some quoted shares (still advising)

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11
Q

In litigation, what activity is considered investment activity?

A

While in theory, litigation lawyers should not be involved in investment activities for a client, in practice litigation clients may well need advice on lump sum investments - what to do with damages checks and how to invest the money

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12
Q

In trusts, what activity is considered investment activity?

A

Managing a trust in the capacity of trustee that contains investments (unit trusts, gilts, company shares etc.)

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13
Q

What are gilts?

A

Gilts are a type of fixed-income security issued by the UK government. The term “gilt” is short for “gilt-edged securities,” which refers to the high creditworthiness of the UK government and the low risk associated with investing in these securities.

Gilts are typically issued with a fixed interest rate and a maturity date, and are backed by the full faith and credit of the UK government. They are considered to be a relatively low-risk investment, as the UK government is seen as a reliable borrower with a long history of repaying its debt obligations.

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14
Q

What four strategies can firms of solicitors use in regard to financial services?

A

1) Attempt to avoid carrying out any regulated activities and financial promotion altogether
2) Carry out regulated activities from time to time, taking advantage of exclusions in the RAO or exemptions under the FSMA. Most firms will choose that route.
3) Obtain authorization from the FCA (the normal route for businesses that exist to provide financial services - stockbrokers, mortgage brokers, insurance brokers, general financial advisers - also the most complex option)
4) Simply refer to independent financial advisors whenever any financial services or investment matter arises.

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15
Q

What 10 activities are prohibited under the Financial Services (Scope) Rules? (Rules 3.1 to 6.1)

A

1) Activities referred to in the Financial Services and Markets Act 2000 (Professions) (Non-Exempt Activities) Order 2001 (such as accepting deposits, dealing in investments as principal and in relation to regulated mortgage contracts)
2) Entering into a regulated credit agreement as lender or exercising, or having the right to exercise, the lender’s rights and duties under such an agreement
3) Entering into a regulated consumer hire agreement as owner, or exercising or having the right to exercise, the owner’s rights and duties under such an agremeent
4) Operating an electronic system in relation to lending
5) Providing credit references
6) Insurance distribution activities in relation to insurance-based investment products
7) Creating, developing, designing or underwriting a contract of insurance
8) Various corporate finance-related activities
9) Various credit-related regulated financial activities

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16
Q

What is a consumer hire agreement?

A

A consumer hire agreement is a type of contract between a customer (the “hirer”) and a company (the “owner”) for the hire of goods. In this type of agreement, the owner allows the hirer to use the goods in exchange for payment.

Consumer hire agreements are commonly used for items such as household appliances, electronic equipment, furniture, and cars. The hirer typically makes regular payments to the owner for the duration of the hire period, which may be a fixed term or an ongoing arrangement.

Under a consumer hire agreement, the hirer does not own the goods but has the right to use them during the hire period. The owner retains ownership of the goods and is responsible for maintaining them in good condition. The hirer is responsible for taking reasonable care of the goods and returning them in the same condition as when they were hired.

Consumer hire agreements are governed by the Consumer Credit Act 1974 in the UK, which sets out specific requirements for such agreements, including the need for a written agreement, disclosure of key terms and conditions, and the right to terminate the agreement early.

17
Q

Rule 2.1 of the Financial Services (Scope) Rules imposes four basic conditions in respect of any regulated activities a firm may carry out which are not prohibited. What are they?

A

1) Comply with the requirements of the FSMA
2) Activities arise out of, or are complementary to, the provision of a particular professional service to a particular client
3) There is not in force any order or direction of the FCA under s. 328 or 329 FSMA which prevents you from carrying on the activities
4) The activities are not otherwise prohibited by the Scope Rules

18
Q

What could a breach of the Scope Rules result in?

A

1) A criminal offence under s. 23 FSMA
2) An order by the FCA under s. 329 FSMA, preventing the firm from carrying out any regulated activities
3) Disciplinary action by the SRA for breach of professional conduct

19
Q

What are the three most important sources of regulation for solicitor firms engaging in financial services?

A

1) Financial Services (Scope) Rules
2) Financial Services (Conduct of Business) Rules
3) Money Laundering, Terrorism Financing and Transfer of Funds (Information on the payer) Regulations 2017

20
Q

What two officers does a firm regulated by the SRA need to have?
In some cases, law firms also need an additional officer. Which?

A

COLP Compliance Officer for Legal Practice
COFA Compliance Officer for Finance and Administration

Many law firms are also required by law to appoint an officer responsible for the practice’s compliance with the MLR. This individual must either be a member of the Board of Directors (or equivalent management body) or senior management. This means a person who is an officer or employee with sufficient knowledge of your practice’s money laundering and terrorist financing risk exposure and sufficient authority to make decisions affecting that risk exposure. This person can also be the Money Laundering Reporting Officer (MLRO) or COLP, if they are senior enough.

21
Q

In a SRA regulated firm, does the SRA code of conduct apply only to solicitors or all employees?

A

The SRA Code of Conduct applies to all individuals and entities regulated by the Solicitors Regulation Authority (SRA), including solicitors, RELs (registered European lawyers), RFLs (registered foreign lawyers), and non-lawyer managers and employees of SRA-regulated firms. Therefore, all employees, including non-lawyers, are subject to the SRA Code of Conduct.

22
Q

In a SRA regulated firm, what obligation do all employees have in regard to the COLP or COFA?
What is the responsibility of the COLP?

A

They are obligated to report any material or non-material breach of the SRA Code of Conduct.
The COLP is required to keep a written record of all breaches and for reporting any material breaches to the SRA.

23
Q

What do SRA regulated firms need to report to the SRA?

A

If there have been any material changes, including financial difficulties.