Chapter 7

Question 1

The FSMA also regulates the making of a communication. What is communication?

Answer 1

An invitation to make use of the communicator’s investment services or an inducement to buy a particular investment

Question 2

What is the prohibition regarding communications according to section 21 FSMA?

Answer 2

Section 21 FSMA prohibits a solicitor who is not authorized by the FCA from making a financial promotion, unless the contents of it are approved by an authorized or exempt person.

Question 3

What could the definition of financial promotion include?

Answer 3

It could include a firm’s own advertising material (e.g., brochures, websites) if the material refers to the fact that the firm provides, broadly, regulated activities, including EXEMPT regulated activities (there is an exception for designated professional bodies).

The definition is very wide and could apply when solicitors are arranging through, or endorsing the advice of an ATP.

Question 4

How is a financial promotion defined? (3 elements)

Answer 4

1) Making an invitation or inducement
2) In the course of business
3) To engage in investment activity

(3 elements)

Question 5

A communication can be real or non-real time, what does that mean?

Answer 5

Real time: Oral - personal visit, radio, TV program etc.
Non-real time: Written

Question 6

A communication can be one’s own client or to the other side. Who is the other side?

Answer 6

Advisers, brokers, etc.

Question 7

Making a financial promotion is defined as: Communicating an invitation or inducement in the course of business to engage in an investment activity. What does “to engage in an investment activity” mean?

Answer 7

Entering or offering to enter into an agreement, where performance of the agreement constitutes either:

a) a ‘controlled activity’ by either party or
b) exercising certain rights conferred by ‘controlled investments’

Where ‘controlled activities’ and ‘controlled investments’ are similar to ‘regular activities’ and ‘specified investments’ under section 19 of FSMA.

Question 8

Can the activity of an individual buying an investment (i.e., where the activity is NOT engaged in for business purposes) constitute a controlled activity?

Answer 8

Yes.

Question 9

A solicitor advises personal representatives to sell the deceased’s assets which include gilts or share. Could this be a controlled activity and be a breach of section 21 FSMA?

Answer 9

Yes, it could constitute an invitation to deal in investments.

Question 10

A corporate solicitor who coordinates completion of a transaction, which may involve him in communicating with non clients. Could this be a controlled activity and be a breach of section 21 FSMA?

Answer 10

Yes.

Question 11

A solicitor who simply refers a client to an independent financial adviser, where the solicitor receives commission from the IFA, could this be a breach of section 21 FSMA?

Answer 11

Yes.

Question 12

Whenever a solicitor performs an activity that could fall under section 21 FSMA, what should they consider?

Answer 12

Is the activity covered under the exclusions in the Financial Services and Markets Act 2000 (Financial Promotion) Order 2001?

Question 13

In which two cases is a real-time communication considered solicited?

Answer 13

A real-time communication is considered solicited in the following situations:

Initiated by the recipient: If the telephone call or personal visit is initiated by the recipient of the communication, it is considered a solicited communication. In other words, if the recipient actively reaches out or contacts the person making the communication, it is considered a solicited communication.

In response to an express request: If the communication takes place in response to an explicit request from the recipient, it is considered a solicited communication. This means that if the recipient specifically asks for information or expresses a desire to receive further communication, any subsequent communication in response to that request is considered solicited.

It’s important to note that a communication is not considered solicited if the client simply fails to indicate that they do not wish to receive further calls or visits or if they agree to standard terms without making an explicit request for further communication.

Additionally, for a communication to be considered solicited, it should be clear from the circumstances surrounding the initiation or request of the call or visit that the financial promotions made during the communication will pertain to the controlled investments or controlled activities that are being promoted. In other words, the content of the communication should be relevant and related to the specific investments or activities being discussed.

Question 14

What exceptions to financial communications set out in the Financial Services and Markets Act 2000 (Financial Promotion) Order 2001 are there? (7)

Answer 14

1) One-Off Financial Promotions (Articles 28/28A)
2) Introducers (Article 15)
3) Follow-Up Communications (Article 14)
4) All Communications to Investment Professionals
5) Communications by a Professional Firm which carries on Part XX Exempt Regulated Activities
6) Exceptions in Terms
7) Other Communications

Question 15

One-Off Financial Promotions (Articles 28/28A) Exception - which two types of communications are exempt under this provision?

Answer 15

1) One-off non-real time communications and solicited real-time communications (art. 28 FPO)
2) One-off unsolicited real-time communications (art. 28A FPO)

Question 16

One-off non-real time communications and solicited real-time communications (art. 28 FPO) exception. What are the requirements?

Answer 16

One-off non-real time communications (e.g. a letter) and solicited real time communications are exempt under Article 28 FPO, provided the promotions are made
(a) personally,
(b) to one client or even one group of clients and
(c) do not form part of an organised marketing campaign (e.g. promotions in brochures and on websites).

In other words, the product or service to which your communication relates must be tailored to the particular circumstances and specific needs of your client or group of clients (for example, a letter tailored to a client suggesting that he might like to consider an introduction to an ATP for a particular reason; but not, however, where a firm wishes to send details of investment opportunities to a list of potential investors retained on a register by the firm).

Therefore, this exemption should apply when the legal work on which you have been acting for your client gives rise to a need for advice or some other regulated activity, and you wish to introduce the client to an ATP who can provide that advice because he is authorised by the FCA.

However:
Even if none of the above conditions is met, a communication may still be regarded as a one-off communication.
Even where a financial promotion is made both to a client and at the same time to another person who is also present (e.g. a friend or relative, or an ex-spouse and their adviser in a matrimonial dispute), then provided such promotion remains personal to the client, it is the FCA’s view that it would continue to be regarded as ‘one-off’ in nature.

Question 17

One-off unsolicited real-time communications (art. 28A FPO) exception. What are the requirements?

Answer 17

One-off unsolicited real time communications (e.g. a telephone call by the solicitor to the client) will be exempt under Article 28A FPO, provided the solicitor believes on reasonable grounds that the recipient
(i) understands the risks associated with, and
(ii) (at the time the communication is made) would expect to be contacted by the solicitor in relation to, the investment activity to which the financial promotion relates.

Question 18

Introducers (Article 15) Exception - What is covered?

Answer 18

Where you are acting in the course of your exempt activities, you may make any real time communication (e.g. one made in the course of a meeting or telephone call) for the purposes of introducing your client to an Authorised (or exempt) Third Person, provided:

1) you are not a close relative, nor a member of the same group as, the person to the ATP (i.e. the ATP cannot be connected to your solicitor’s practice - e.g. an IFA in a hived- off investment business firm);
2) you do not receive any form of payment arising out of making the introduction - save from the client;
3) the client, as an investor, has not sought advice from you as to the merits of engaging in investment activity (or if he has sought such advice you have declined to give it and have referred the client to an Authorised Person).

Question 19

All Communications to Investment Professionals Exception - What is covered?

Answer 19

All is covered under this (e.g. to an ATP)

Question 20

Communications by a Professional Firm which carries on Part XX Exempt Regulated Activities - which two types of communications are exempt under this provision?

Answer 20

1) Real time financial promotions (art. 55)
2) Non-real time financial promotions (art. 55A)

Question 21

Real time financial promotions (art. 55) under Part XX exception. What are the requirements?

Answer 21

Any real time (even solicited) promotion (e.g. where made during telephone calls or during a meeting) may be made by you, provided it is made with your client (and not any other third party, e.g. advisers or the other side) and:

1) you are carrying on a regulated activity without authorisation, pursuant to Part XX FSMA;
2) your client has engaged you to provide professional services, prior to the communication being made;
3) you carry on the controlled activity to which the communication relates for the purposes of, and incidental to, the provision by you of professional services to the client;
4) the controlled activity to which the communication relates is either exempted by the Part XX exemption for professional firms or excluded from being a regulated activity due to its being a ‘necessary part’ of professional services (Article 67 RAO).

Therefore, if the activity is excluded from being a regulated activity by an exclusion other than the ‘necessary’ exclusion, the Article 55 FPO exemption will NOT apply.
In short, applies to Part XX exemption and ‘necessary part’ exclusion only.

Question 22

Non-real time financial promotions (art. 55A) under Part XX exception. What are the requirements?

Answer 22

This Article enables your firm to refer in its non-real time promotions (e.g. brochures, websites, advertisements, letters and e-mails) to the fact that it can provide certain exempt regulated activities within the DPB regime, provided:

1) you are carrying on an exempt regulated activity under Part XX FSMA;
2) the promotion makes a specific statement and is limited in its content;
3) the promotion contains the following statement:

“The firm is not authorised under the FSMA 2000, but we are able in certain circumstances to offer a limited range of investment services to clients because we are members of the SRA. We can provide these investment services if they are an incidental part of the professional services we have been engaged to provide.’

The communication may, in addition, set out the exempt activities that the solicitor is able to offer, provided it is clear that these are the investment services to which the statement relates.

Note: The Article 55A exemption is restricted to regulated activities (i.e. activities to which no exclusion applies under the RAO) covered by the Part XX exemption, and does NOT apply to activities that are excluded from being a regulated activity due to being a ‘necessary part’ of professional services (Article 67 RAO) (in contrast to art. 55 with real-time financial promotions).

You could still, however, make an offer involving excluded activities to a person who responds to a promotion issued by you under Article 55A - provided another exception, such as the one-off financial promotion exception, applies to any subsequent financial promotion.

Question 23

Follow-Up Communications (Article 14 FPO) Exception - What is covered?

Answer 23

This allows you to make a further communication where your initial communication to the client was through a financial promotion that relied upon another FPO exemption (e.g. Article 55A FPO for non real time financial promotions) that required certain information to be disclosed or statements to be made.

However, the subsequent communication must be either a non-real time communication or a solicited real time communication (not an unsolicited real time promotion).

Note, however, that there cannot be an exemption for a follow-up communication to a one- off financial promotion - because the initial promotion would no longer be ‘one-off’!

Question 24

Exemptions in Terms - What is covered?

Answer 24

There are also exemptions in terms similar to the exclusions for regulated activities in respect of:

1) communications by a company to its shareholders or by a trustee / PR to a beneficiary (but without the restrictions in respect of remuneration and holding out);
2) communications relating to the sale or disposal of shares in a company where the ‘takeover of body corporate’ exclusion excludes the activity from regulation (e.g. the shares consist of at least 50% of the voting shares in the body corporate).

Question 25

Other Communications - What is covered?

Answer 25

Finally, there are other communications to which the financial promotion restriction does not apply. These include:

1) a communication made on behalf of a client to a product provider, in order to obtain information about an investment that is available from that provider, or in order to enable the customer to acquire the investment;
2) generic financial promotions - as opposed to promoting a specific investment or a specific service provider;

Thus, if firms mention in brochures or websites that, for example, they cannot provide mainstream investment advice themselves but can refer clients on where necessary, then this would fall within the exemption for generic promotions, provided that a specific authorised person or controlled activity is not mentioned. To rely on this exemption, therefore, any statement made in the brochure or websites must be very general;

3) communications in relation to controlled investments that are issued by the UK or other national government (e.g. gilts);
4) communications by the operator of a collective investment scheme to current participants of the scheme, or by a company to its shareholders (e.g. inviting them to subscribe for new shares).

Question 26

What is the consequence of breaching section 21 FSMA?

Answer 26

Criminal liability
Unenforceability of agreements resulting from unlawful communications

Question 27

What does the Law Society think about section 21 FSMA?

Answer 27

The application of section 21 FSMA is not yet fully clear. In this regard, The Law Society states: “Some firms take the view that, particularly in relation to corporate work, the application of the exemptions in the FPO is so complex (and may not cover every situation) that the safer course is for the firm to be authorised by the FCA”.

Question 28

What are two possible defenses under section 21 FSMA?

Answer 28

1) The person took all reasonable precautions and exercised all due diligence to avoid committing the offence or
2) The person believed on reasonable grounds that the content of the communication was prepared or approved by an authorized person

Question 29

Do communications require approval or do the financial promotion rules apply? What are the questions to answer this question?

Answer 29

1) Am I making a written (non-real-time) or oral (real-time) communication to be made?
2) If so, is it an invitation or inducement?
3) If so, does the invitation or inducement relate to a controlled investment?
4) If so, is the investment or inducement to engage in investment activity?
5) If so, is it made in the course of business?
6) If so, and the financial promotion originates outside the United Kingdom, is it capable of having an effect in the United Kingdom?
7) If the financial promotion was made in the United Kingdom, then the appropriate financial promotion rules will apply, unless the promotion is exempt.
8) If not exempt, the promotion must be approved by an authorized person if it is not a non-real-time financial promotion. Authorized persons are not allowed to approve real-time financial promotions.

Question 30

Grabbit & Co. Law Firm, is authorised by the SRA to carry out non-mainstream regulated activities. The firm sends a monthly marketing bulletin to its clients. The bulletin includes a section entitled ‘Grabbit Tip - the shares to buy’. Is this allowed?

Answer 30

No, this section would constitute a non-real time communication for the purposes of s.21 FSMA
Its contents must be approved by an authorised person prior to circulation to the firm’s clients.