Financial Service Regulations

Question 1

Why are financial services regulated?

Answer 1

to ensure that those providing such services are approved and authorised and that consumers are protected from negligent advisers.

Question 2

What is the purpose of the Financial Services and Markets 2000 (Regulated Activities) Order 2001 (ROA)?

Answer 2

establishes the activities to be regulated by the FSMA if they are carried on in the UK.

Question 3

What authority’s regulate financial services in the UK?

Answer 3

Prudential Regulation Authority (PRA) and Financial Conduct Authority (FCA)

Question 4

What does s19(1) FSMA state?

Answer 4

No person may carry on a regulated activity in the UK, unless they are:

a) an authorised person; or
b) an exempt person

Question 5

What is a regulated activity?

Answer 5

specified investment + specified activity

Question 6

Is it an offence to breach s19(1) FSMA?

Answer 6

Yes, it is a criminal offence

Question 7

Examples of a specified investment under RAO Part III

Answer 7

Shares

instruments creating or acknowledging indebtedness

regulated mortgage contracts

Question 8

Examples of specified activities under Part II RAO

Answer 8

Dealing in investments as principal or agent.

arranging deals in investments.

managing investments.

advising on the merits of investments.

Question 9

When can a solicitor be caught in relation to advising on the merits of investments?

Answer 9

The advice requires an element of opinion and a recommendation as to a course of action.

A solicitor giving generic advice relating to investments for example, the right attaching to different shares will not require FCA authorisation. However, advice would be regulated if a solicitor recommended their client purchase ABC shares or take out an mortgage with XYZ building society.

Question 10

What are specific exclusions?

Answer 10

Each specified activity in the RAO has specific exclusions relevant to that chapter.

Question 11

What are the general exclusions under RAO?

Answer 11

Activities that are a necessary part of other services.

Regulated activities in connection with the sale of a body corporate.

Question 12

What are activities that are a necessary part of other services?

Answer 12

Generally a solicitor will not be carrying on a specified activity provided those activities are:

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

the activities can reasonably be regarded as a necessary part of other services provided in the course of that profession or business.

For example, when a company client is selling a leasehold flat, the transaction might also involve the transfer of a share in 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.

Question 13

What are the conditions for the regulated activities in connection with the sale of a body corporate exception?

Answer 13

A solicitor will not be caught if:

The shares consist of or include 50% or more of the voting shares in the company; or

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; or

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.

Question 14

If FSMA applies, what should a solicitor do?

Answer 14

the statutory regime set down in FSMA will apply. The solicitor will either need to be:

Directly authorised by the FCA or Supervised by a Designated Professional Body.

Question 15

Who is a law firm’s DPB?

Answer 15

The SRA. To rely on this exemption, s 327 FSMA must be satisfied and the firm must comply with the SRA Scope Rules.

Question 16

What are the basic conditions specified under s 327 FSMA?

Answer 16

1. person carrying out regulated activity must be a member of a profession.
2. that person must not receive commission from a third party, unless they account to their client for the commission.
3. the specified activity must be incidental to the provision of professional services.
4. that person must comply with the rules set out by their relevant professional body.

Question 17

What does it mean that an activity is `incidental’?

Answer 17

The regulated activities cannot be a major part of the firm’s practice.

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.

Question 18

What is the basic condition specified by Rule 2 of the Scope Rules?

Answer 18

A firm must ensure the activity arises out of or is complementary to the provision of a particular professional service to a particular client.

For example, if you are acting for a client on the sale of a company and the client asks for advice as to how best to invest in a personal pension, the advice would not arise out of the work being done for the client because it is completely unrelated to the non-regulated work.

Question 19

What happens if a firm cannot satisfy the requirements under s 327 FSMA and Scope Rule 2?

Answer 19

The firm must be authorised by the PRA or FCA and must comply with the PRA or FCA Handbook or refuse to carry out the activity.

If the firm is not PRA or FCA authorised, the person carrying out the activity is likely to have breached s19(1) FSMA which is a criminal offence