Finacial Services

Question 1

What is Step 1 of FSMR?

Answer 1

Is there a specified investment?

Question 2

What are specified investments?

Answer 2

• Rights under a contract of insurance (Article 75)
• Shares in a company (Article 76)
• Instruments creating or acknowledging indebtedness (Article 77)
• Government and public securities (Article 78)
• Rights under a pension scheme (Article 82)
• Regulated mortgage contracts (Article 88)

Question 3

What are regulated mortgage contracts?

Answer 3

• Article 61(3) RAO says a contract is a ‘regulated mortgage contract’ if, at the time it is entered into, the following conditions are met:
  o the contract is one under which a person (the ‘lender’) provides credit to an individual or to trustees (the ‘borrower’);
  o the contract provides for the obligations of the borrower to repay to be secured by a mortgage on land in the EEA; and
  o at least 40% of that land is used, or intended to be used-
  o (aa) in the case of credit provided to an individual, as or in connection with a dwelling; or
  o (bb) in the case of credit provided to a trustee which is not an individual, as or in connection with a dwelling by an individual who is a beneficiary of the trust, or by a related person.
• Note that the definition of a regulated mortgage contract does cover a typical home buyer’s mortgage, but it does not cover:
  o a loan to buy an office
  o loans to companies

Question 4

Step 2 of FSMR?

Answer 4

Is there a specified activity?

Question 5

What are specified activities?

Answer 5

• Dealing in investments as principal (Article 14) or as agent (Article 21).
• This includes buying, selling, subscribing for or underwriting securities (eg shares, government and public securities, or rights under a pension scheme) or contractually based investments (eg rights under certain contracts of insurance).
• Arranging deals in investments (Article 25)
• Managing investments (Article 37)
• Advising on [the merits of] investments (Article 53)

Question 6

Advising on the merits of investments requirements?

Answer 6

• For ‘advising on the merits’ under Article 53, the person has to be
• giving advice requiring an element of opinion, and
• a recommendation as to a course of action.

Question 7

Is giving generic advice a specified activity?

Answer 7

No

Only advice relating to the merits of buying, selling, subscribing for or underwriting a particular investment which is a security or relevant investment is regulated. To be regulated, the advice requires an element of opinion on the part of the solicitor and a recommendation as to a course of action. - THIS IS WHAT WOULD BE CONSIDERED A SPECIFIED ACTIVITY!!!

• A solicitor giving generic advice on investments (for example, explaining the legal rights attaching to two different classes of shares) will not require FCA authorisation.

Question 8

Step 3 FSMR tree?

Answer 8

is there an exclusion available?

Question 9

Sale of body corporate exclusion?

Answer 9

• if such activity is carried out in connection with the purchase or sale of shares in a company (if the transaction to buy or sell the shares is entered into for the purposes of buying or selling the shares), PROVIDED THAT: …
• i) the shares consist of or include 50% or more of the voting shares in the company AND the acquisition or disposal is between parties each of whom is a body corporate, partnership, single individual or a group of connected individuals; or
• ii) the shares, together with any shares already held by the purchaser, consist of or include 50% or more of the voting shares in the company AND the acquisition or disposal is between parties each of whom is a body corporate, partnership, single individual or a group of connected individuals; or
• iii) the object of the transaction may reasonably be regarded as being the acquisition of day-to-day control of the affairs of the body corporate.
  o Note: the two entities do not each have to have the same legal status to fall within paragraphs i) or ii) eg a company can sell its shares to an LLP; a company can sell its shares to an individual and still fall within i) or ii) above.

Question 10

Article 67: ‘necessary part’ exclusion?

Answer 10

• (a) carried on in the course of carrying on any profession or business which does not otherwise consist of the carrying on of regulated activities in the UK; and
• (b) may reasonably be regarded as a necessary part of other services provided in the course of that profession or business. (Article 67(1) RAO)
  o This exclusion will not apply if the specified activity is remunerated separately from the other services.
• What constitutes a ‘necessary part’ of other services is not specified in the RAO. The FCA’s view is that it must not be possible for the other services to be provided unless the dealing / arranging / advising is also provided.
• For dealing as an agent and arranging deals in investments, it will rarely be necessary to rely on this exclusion as such work can usually be referred to an authorised person – see Articles 22 and 29 RAO respectively.
• In fact cases where the Article 67 exclusion is used are quite rare in practice. However one example where it is commonly used is by property lawyers in relation to leasehold flats:
• Example: when a client is selling a leasehold flat, the transaction might also involve the transfer of a share in a management company or the company that owns the freehold for the block of flats. Although shares are specified investments, arranging their sale would be a necessary part of the other property work the solicitor is carrying out. Therefore the solicitor will be able to arrange for the transfer of the share in the management company without being authorised by the FCA.

Question 11

Does Article 67: ‘necessary part’ exclusion apply to contracts of insurance?

Answer 11

No

Question 12

Dealing in investments as agent: authorised persons exclusion?

Answer 12

• A solicitor [who is not an FCA authorised person] will not be ‘dealing in investments as agent’ [for the client] for the purposes of FSMA and therefore will not be carrying on a specified activity, if he enters into a transaction as agent for his client with or through an authorised person, provided:
• (a) the transaction is entered into on the advice of the authorised person;
• OR
• (b) it is clear that the client is not seeking and has not sought advice from the solicitor as to the merits of entering into the transaction.
• This exclusion applies to the specified activity of ‘dealing in investments as agent’ under Article 21 RAO.

Question 13

Arranging deals through authorised persons exclusion?

Answer 13

• A solicitor [who is not an authorised person] will not be ‘arranging deals in investments’ [for the client] for the purposes of FSMA and therefore will not be carrying on a specified activity, if he enters into a transaction as agent for his client with or through an authorised person, provided:
  o (a) the transaction is entered into on the advice of the authorised person;
  o OR
  o (b) it is clear that the client is not seeking and has not sought advice from the solicitor as to the merits of entering into the transaction (or if the client has sought such advice the solicitor refused to give it and instead recommended the client seeks advice from an authorised person).
   This exclusion applies to the specified activity of ‘arranging deals in investments’ under Articles 25(1) and (2) RAO.

Question 14

When does the authorised person exclusion not apply?

Answer 14

• • if the transaction relates to a contract of insurance or investment services or activities; NOR
• • if the solicitor receives a commission (or any other advantage) from any other person (e.g. the authorised person) for which he does not account to the client.

Question 15

Step 4 FSMR?

Answer 15

General exemption

Question 16

Conditions for general exemption?

Answer 16

• • (such as practising as a the person carrying on the regulated activities must be a member of a profession solicitor (s 325(2));
• • that person must not receive a ‘pecuniary reward’ [eg commission] from a third party in respect of the regulated activities, unless he accounts to his client for the commission (s 327(3));
• • the specified activity must be provided in a way that is incidental to the provision of professional services (s 327(4)); and
    o The FCA has provided the following guidance on s 327(4) in its handbook:
     ‘The FCA considers that to satisfy the condition in section 327(4) regulated activities cannot be a major part of the practice of the firm. The FCA also considers the following further factors to be among those that are relevant:
• the scale of regulated activity in proportion to other professional services provided;
• whether and to what extent activities that are regulated activities are held out as separate services; and
• (3) the impression given of how the firm provides regulated activities, for example through its advertising or other promotions of its services.’
  o To work out whether or not the activity in question is incidental you need to look at the overall work the firm does - is the specified activity the solicitor is being asked to do a small part of what the firm does for clients overall? If so, it will be incidental.
   Most of time it will be incidental
• • the person must only carry out regulated activities which he is permitted to carry out as a result of s 332(3) (i.e. he has to comply with the rules set by his relevant designated professional body - for the SRA, the Scope Rules) (s 327(5)).

Question 17

SRA Scope Rule 2?

Answer 17

sets out the basic conditions that solicitors must satisfy when carrying out any exempt regulated activities

Question 18

SRA Scope Rule 2 conditions?

Answer 18

• 2.1 If you carry on any regulated financial services activities you must ensure that:
  o (a) You satisfy the conditions in section 327(2) to (5) of FSMA;
  o (b) The activities arise out of, or are complementary to, the provision of a particular professional service to a particular client;
  o (c) There is not in force any order or direction of the FCA under sections 328 or 329 of FSMA which prevents you from carrying on the activities; and
  o (d) The activities are not otherwise prohibited by these rules.

Question 19

Examples of legal work where regulated activities might arise out of or be complementary to such work?

Answer 19

• Property work: giving legal advice, drafting documents and undertaking a conveyancing transaction involving a regulated mortgage.
• Corporate work: giving legal or tax advice, drafting documents to effect the sale of shares or other (specified) investments.
• Litigation work: giving legal or tax advice, drafting documents and dealing with court proceedings where regulatory matters are involved.
• It is not possible for a solicitor to undertake a regulated activity in isolation for a client and still have complied with 2.1(b).

Question 20

FSMA - restrictions relating to share sales?

Answer 20

 The restriction on financial promotions under s 21 Financial Services and Markets Act 2000 (‘FSMA’); and
 The requirement for an approved prospectus where shares are to be offered to the public, under s 85 FSMA.

Question 21

Restriction on financial promotions?

Answer 21

 Section 21 FSMA provides that it is a criminal offence for an unauthorised person to communicate a financial promotion unless an authorised person has approved its contents or a relevant exemption applies.

Question 22

Exceptions to the restrictions on financial promotions?

Answer 22

 There are three exemptions to the restriction on financial promotions that are useful for company solicitors in practice:
* Sale of a body corporate – very useful.
* Investment professionals – can be useful
* High net worth – can be useful.
** Certified sophisticated investors (art 50)

Question 23

Sale of body corporate exemption?

Answer 23

 Article 62 of the FSMA 2000 (Financial Promotions) Order 2005 (‘FPO’) provides an exemption from s 21 FSMA where the communication relates to a transaction to acquire 50% or more of the shares or day to day control of the company provided certain conditions are met.

Question 24

Investment professionals exemption?

Answer 24

o A person authorised by the FCA
 (art 19 FPO)

Question 25

High net worth companies exemption?

Answer 25

o For example: a company with a called up share capital of not less than £5 million (or £500,000 for a body corporate with more than 20 members) (art 49 FPO)

Question 26

High net worth individuals exemption?

Answer 26

o Certified high net worth individuals (art 48 FPO)

Question 27

Requirement for an approved prospectus?

Answer 27

 Under section 85 FSMA it is a criminal offence to offer shares to the public in the United Kingdom without a prospectus.
* The prospectus must be approved by the relevant regulatory authority, ie the FCA.

Question 28

Prospectus – exemptions?

Answer 28

 There are two exemptions that can be useful in practice:
* the offer is made to or directed at fewer than 150 persons. – Very useful
* The offer is sent only to ‘qualified investors’ (eg banks, investment institutions and national and regional governments) – Can be useful.

Question 29

What is the general prohibition under the Financial Services and Markets Act 2000?

Answer 29

No person may carry on a regulated activity in the UK unless they are authorised or exempt from authorisation

Question 30

What is a regulated activity?

Answer 30

A specified activity in relation to a specified investment carried out in the course of business to which no exclusions apply

Must be in the course of business

Question 31

What are the six specified investments most relevant to a solicitor which are regulated?

What are two things which are not specified investments?

Answer 31

Insurance contracts
Shares/securities
Debentures
Mortgage contracts
Pension schemes
Funeral plans

Interests in land; 2. National savings products, e.g. Premium Bonds

Question 32

What is the difference between an exemption and an exclusion?

Answer 32

An exemption is from the requirement to be authorised under the general prohibition, so all conduct would be excusable under this. An exclusion goes to whether or not the conduct is a regulated activity and therefore caught by the general prohibition, but is not available in all circumstances.

Question 33

What is the Designated Professional Bodies exemption which means a regulated activity would not violate the general prohibition at all

Answer 33

If a solicitor provides a regulated activity incidentally to the provision of legal advice and does not receive compensation for this from anyone else without accounting to the client for it, it is exempted

Question 34

How is whether an activity is incidental determined for the purposes of the Designated Professional Bodies exemption?

Answer 34

By considering whether the activity is incidental:

To the work the firm does as a whole, and
To the client’s particular matter

Question 35

What are some activities in the SRA Financial Services (Scope) Rules to which the Designated Professional Bodies exemption does not apply?

Answer 35

Recommending a client get rid of any rights under a personal pension scheme

The firm entering into a regulated credit agreement as lender (except in relation to the firm’s fees)

Question 36

In order to provide incidental financial services under the Designated Professional Bodies exemption, what two special rules does the SRA impose on firms?

Answer 36

Firms must:

Let clients know at the outset that the firm is regulated by the SRA and not the FCA, and
Confirm that the client is coming to the firm for this incidental service and has not sought/relied upon any advice from the firm in relation to the transaction

Question 37

What are four exclusions that will render a specified activity in a specified investment not a regulated activity?

Answer 37

1. Takeover exclusion
2. Acting as trustee, nominee, or personal representative
3. Introducing or acting through an authorised person
4. The necessary exclusion

Question 38

What is the takeover exclusion that will render a specified activity in a specified investment not a regulated activity?

Answer 38

A solicitor can deal as agent, arrange, or advise with respect to a client who is buying/selling 50% or more of the voting shares of a company, or when the object of the transaction is taking control of the company

Question 39

What is the introducing/acting through exclusion that will render a specified activity in a specified investment not a regulated activity?

Answer 39

A solicitor may arrange/act as an agent with respect to specified investments if the client receives advice from an authorised person and the solicitor is merely assisting the client in acting on this advice

Question 40

In what two circumstances is the introducing/acting through exclusion that would render a specified activity in a specified investment not a regulated activity not available?

Answer 40

1. Where the specified investment is an insurance contract
2. Where the solicitor received payment/commission from the authorised person/any source other than the client

Question 41

What is the necessary exclusion that will render a specified activity in a specified investment not a regulated activity?

Answer 41

It is not a violation of the general prohibition to carry on an activity (other than managing) if the activity is reasonably regarded as a necessary part of providing legal services

Question 42

In what three circumstances is the necessary exclusion that would render a specified activity in a specified investment not a regulated activity not available?

Answer 42

1. Where the activity is managing
2. Where the activity relates to insurance policies
3. Where the activity is billed separately from the main legal advice

Question 43

Even though they are very similar, what is the key advantage of the Designated Professional Bodies exemption over the necessary exclusion?

Answer 43

The Designated Professional Bodies exemption is available for managing, and for activities related to insurance policies, but the necessary exclusion cannot be used in these circumstances.

DPB will always be a better answer choice, but note the instances when it is not available.