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Legal Services > Financial Services > Flashcards

Financial Services Flashcards

1
Q

Which main piece of legislation governs financial services?

A

The Financial Services and Markets Act 2000 (FSMA 2000). This provides the framework but detail is contained in secondary pieces of legislation.

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2
Q

Explain the function of the Financial Conduct Authority (FCA).

A
  • FCA regulates market, having particular responsibility for the conduct of business regulation of all firms (eg solicitors firms).
  • They also have responsibility for regulation of consumer credit and second charge mortgages secured over properties.
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3
Q

What objectives did the FCA set out in FSMA 2000?

A

a) To secure an appropriate degree of protection for consumers (the consumer protection objective);

b) Protecting and enhancing the integrity of the UK financial system (the integrity objective);

c) Promoting effective competition in the interests of consumers in the market, including regulated financial services (the competition objective).

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4
Q

True or False: The FCAs powers extend to authority to tell firms to withdraw or amend misleading financial promotions immediately and to block the launch of, or stop the service of a product.

A

True.

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5
Q

Define the Prudential Regulation Authority (PRA).

A
  • PRA is a subsidiary of the Bank of England.
  • Responsible for authorisation, prudential regulation and general supervision of those firms which manage significant financial risks (ie banks, building societies, insurers, credit unions etc). These firms are known as PRA-authorised firms.
  • Dual regulated firms may be regulated by both the PRA and FCA.
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6
Q

What are the two main restrictions relevant to solicitors?

A

1) Carrying out regulated activity (the general prohibition);
2) Making a financial promotion (financial promotion prohibition).

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7
Q

Explain the general prohibition set out by s19 of FSMA 2000.

A

It provides that no person may carry on a regulated activity in the UK unless authorised or exempt;

Authorised persons are those with permission granted by the appropriate regulator (the FCA) under FSMA 2000;

Carrying on regulated activity without authorisation is a criminal offence under s23 FSMA 2000.

Penalty is up to 2 years imprisonment/ unlimited fine.

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8
Q

Explain the financial promotion prohibition.

A

S21 FSMA 2000 states that unauthorised persons cannot engage in financial promotions.

S25 states it is a criminal offence to make an unauthorised financial promotion.

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9
Q

Give the definition of regulated activity under S22 FSMA 2000.

A

An activity of a specified kind that is carried on by way of business and relates to a specified investment or property of any kind.

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10
Q

Give the four tests used in order to determine whether an activity is regulated.

A

The four tests:
1) Are you in business?
2) Is there a specified investment, or does the specified activity relate to information about a person’s financial standing or administering a benchmark?
3) Is there a specified activity?
4) Is there an exclusion?

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11
Q

Explain the business test.

A

A regulated activity first and foremost must be carried on by way of business. For example a solicitor giving advice etc in that capacity as part of their practice will be ‘in business’.

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12
Q

Explain the specified investments test.

A

Broadly specified investments include:

1) Company stocks and shares (but not shares in open-ended investment companies (OEICS) or building societies incorporated in the UK);

2) Debentures, loan stock and bonds;

3) Government securities such as gilts;

4) OEICs. These are similar to unit trusts, but use the structure of a company rather than a trust;

5) Insurance contracts (including life policies and annuities);

6) Regulated mortgage contracts (ie most residential mortgages);

7) Home reversion/ home purchase plans;

8) Deposits (eg cash ISAs and sums of money held in bank/building society accounts). However the only specified activity relating to these is ‘accepting deposits’ which are mainly carried out by banks;

9) Credit agreements (agreements where solicitor allows client time to pay is exempt provided number of repayments does not exceed 12, the payment terms does not exceed 12 months and the credit is provided without interest or other charges).

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13
Q

List some investments which are not relevant/ do not fall within the definition of specified investments.

A

1) Interests in land;

2) Certain National Savings products.

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14
Q

Explain the specified investment activities test.

A

Specified activity is one specified as such in the RAO 2001, which include but are not limited to the following:

1) dealing as an agent;
2) arranging;
3) managing;
4) safeguarding;
5) advising;
6) lending money on / administering a regulated mortgage contract.

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15
Q

Define dealing as an agent (relating to specified investment activities).

A

Involves buying and selling, subscribing for and underwriting investments when a solicitor is dealing on behalf of client (ie rather than on the solicitor’s own account) and commits that to client transactions. Eg selling shares on behalf of a client pursuant to a financial order arising from a divorce.

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16
Q

Define arranging (relating to specified investment activities).

A

Where a solicitor is the contact between their client and a life company or stockbroker. In this situation they could be classed as arranging.

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17
Q

Define managing (relating to specified investment activities).

A
  • Requires participation beyond holding investments and applies only to ‘discretionary management’ (ie involving the exercise of discretion).
  • This will be most common in firms that undertake probate and trust work, where the solicitor is acting as a trustee/ PR.
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18
Q

Define safeguarding (relating to specified investment activities).

A

Involves safeguarding and administering investments belonging to a client. This is also relevant to firms undertaking probate work.

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19
Q

Define advising (relating to specified investment activities).

A

Involves giving advice to people in their capacity as an investor on merits of buying, selling subscribing for or underwriting an investment.

Advice cannot be about a specific investment.

A solicitor can advise of the benefits of investing in shares over (for example) making a deposit in a bank.

However if they were to advise on buying shares in a specific company, this would constitute a regulated activity.

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20
Q

Explain the applicable exclusions to dealing as an agent.

A
  • Using an authorised third party (ATP);
  • Execution only;
  • Professional/ necessary;
  • Takeover
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21
Q

Explain the applicable exclusions to arranging.

A
  • Introducing;
  • ATP;
  • Execution only;
  • Professional/ necessary;
  • Acting as trustee/ PR;
  • Takeover
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22
Q

Explain the applicable exclusions to advising.

A
  • Professional/ necessary;
  • Acting as trustee or PR;
  • Takeover
23
Q

Explain the applicable exclusions to managing.

A
  • Acting as a trustee/ PR
24
Q

Explain the applicable exclusions to safeguarding

A
  • Professional/ Necessary;
  • Acting as trustee/ PR.
25
Q

Explain the exclusion of introducing.

A
  • This exclusion only applies to the act of arranging. To apply, solicitor must simply introduce client to authorised person and have no further role in this aspect of the client’s matter.
  • If solicitor retains an ongoing role (ie acting as a means of communication between client and authorised person), the exclusion cannot be relied upon.
  • This exclusion DOES NOT apply where the transaction relates to an insurance contract.
26
Q

Explain the authorised third persons (ATP) exclusion.

A
  • Applies to activities of dealing as an agent/ arranging.
  • Applies where transaction is to be entered into based on advice of ATP, ie person authorised by the FCA;
  • Solicitor retains an ongoing role in the transaction, but it is clear the financial advice is being given by the authorised person.
  • Solicitor cannot rely on this exclusion if solicitor receives from any person other than the client, any pecuniary reward (eg commission) or other advantage arising out of the client entering into the transaction, which the solicitor does not account for to the client.
  • Exclusion does not apply where transaction relates to insurance contract.
27
Q

Explain the execution only client exclusion.

A
  • Applies to activities of dealing as agent and arranging;
  • Similar to ATP exclusion, however the requirement is negative (ie requires that advice has not been sought from the solicitor);
  • Exclusion applies where client is an investor + is not seeking and has not sought advice from the solicitor about the merits of the investment (and also that the solicitor has declined to give it if they have been asked for such advice);
  • Cannot apply to contracts/ transactions of insurance.
28
Q

Explain the trustees or PRs exclusion.

A
  • Applies to arranging, managing, safeguarding, and advising fellow trustees/ beneficiaries.
  • It is available to solicitor acting as trustee or PR, but not a solicitor acting for a trustee/ PR.
  • Exclusion does not apply if member of the firm is a trustee or PR, but activity is undertaken by others in the firm.
  • The exclusion does not apply where the solicitor is remunerated in addition to the remuneration they receive for acting as a trustee or PR.
  • Does not apply to insurance transactions or pursuing insurance distributions.
29
Q

Explain the professional/ necessary exclusion.

A
  • Applies to advising arranging, safeguarding and dealing as an agent.
  • Applies where the activity is performed in the course of a profession or business where it may be regarded as necessary to also provide this service as part of the service already being provided (ie it is not possible for the initial service to be provided without also providing the regulated activity).
  • Examples include acting on the acquisition of a company or giving advice on the merits of buying the company; or in probate work where solicitor arranged for the sale of assets to pay IHT.
  • Does not apply if the activity is billed/ reimbursed separately.
  • Also does not apply to insurance contracts.
30
Q

Explain the takeover exclusion.

A
  • Applies to arranging, advising and dealing as agent.
  • Only applies to transactions where there is an acquisition/ sale of shares in a body corporate, or a transactions entered into for the purposes of such an acquisition or disposal if:

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

2) acquisition or disposal is between parties each of whom is a body corporate, partnership, single individual or group of connected individuals.

  • Note it is possible to add the number of shares being acquired by a person to those they already hold in order to achieve the 50% threshold.
  • A group of connected individuals is a single group if people, each of whom will be a director or manager of the company being sold/ bought, or person acting as a trustee for any such persons.
  • Even if the criteria of 50% shareholding is not met, the exemption may still apply if the transaction is regarded as being the acquisition of day-to-day control of the company.
31
Q

Explain the exemption for professional firms under s327.

A
  • Professional firms can carry out certain regulated activities provided certain conditions are met.
  • As such there is an exemption from having to obtain authority from the FCA where the firm is regulated and supervised by a designated professional body such as the SRA. This is important for solicitors as the majority of firms are not FCA authorised.
  • Exemption applies to firms that do not carry out mainstream financial work , but still undertake regulated activities in the course of their work (eg conveyancing, PI and trust work).
  • As such the general prohibition in s19 FSMA 2000 won’t apply to regulated activities carried on by firms of solicitors if following conditions are met:

1) Firm must not receive from person other than its client any pecuniary or other advantage arising from the activity, which it does not account for to the client;

2) Manner of providing the service in the course of carrying on the activities must be incidental to the provision by the firm of professional services (ie services regulated by the SRA);

3) The firm must only carry out regulated activities permitted by the SRA (or other LSB board such as conveyancers board).

4) Activities must not be prohibited by an order made by treasury or any directions by FCA under s328 or 329;

5) The firm must not carry on any other regulated activities.

32
Q

Define pecuniary advantage for the purposes of s327.

A

Same as in para 4.1 of the code of conduct for solicitors. Effectively means any gift/ financial incentive being received.

33
Q

What do the SRA Financial Services (Scope) Rules and the SRA Conduct of Business (COB) rules set out

A

These sets of rules must be complied with by firms at all times when seeking to use their professional services exemption under s327. They effectively set out the scope of the activities which firms can carry out under the professional exemption.

Examples include:

1) Not carrying on activities specified in an order made by the treasury (eg recommending client’s dispose of rights the client has under personal pension schemes and advising client to become a member of a particular Lloyd’s syndicate).

2) SRA but be notified if a firm wishes to engage in insurance distribution activities. To do so the firm must also be registered in the financial services register and have appointed an insurance distribution officer responsible for such activities.

33
Q

Define incidental for the purposes of s327.

A

To determine this the specific and general tests are both applied.

34
Q

Explain the specific test in relation to the definition of incidental (for the purposes of s327 exemption)

A

The specific test relates to the specific client concerned.

SRA rules state the regulated activity must arise out of, or be complementary to, the provision of a particular professional service to a particular client.

Firm cannot carry out a regulated activity in isolation for a client.

The other service being provided must not be a regulated activity, but must be a professional one (ie legal service - eg in corporate work drafting documents, giving legal advice and dealing with regulatory matters).

The professional service being provided to the client must be the primary one, and the regulated activity must be secondary (incidental and subordinate) to the professional service.

35
Q

Explain the general test in relation to the definition of incidental (for the purposes of s327 exemption)

A

The general test provides that the regulated activity cannot be a major part of the firm’s activities. Factors such as the following should be considered:

1) Scale of regulated activity in proportion to other professional services provided;
2) Whether and to what extent the exempt regulated activities are held out as services; and
3) Impression given of how the firm provides those activities (eg through advertisement).

35
Q

Give an example where a firm’s activities would fail to satisfy the general test.

A

Where income from the firm’s investment advice exceeds half of the firm’s total income.

36
Q

Can the s327 exemption be used by firms authorised by the FCA?

A

No.

37
Q

In what situation will the COB rules apply?

A

When the firm is carrying out an exempt regulated activity, and therefore do not apply if the firm is not carrying out a regulated activity at all.

38
Q

What is the status disclosure under Rules 2.1 and 2.2of the COB rules?

A

Firm must provide clients with certain info concerning the status of the firm (eg must confirm to client they are not authorised by the FCA and explain the standard procedure for complaints being through the SRA and Legal Ombudsman).

Info must be given in a manner which is fair, clear and not misleading.

39
Q

Explain the best execution (rule 3.1) of the COB rules.

A

Solicitor must act in the best interests of the client and therefore must carry out transaction for clients as soon as possible unless it reasonably believed it is in client’s best interests not to.

40
Q

Explain the Transactions rules (4.1 and 4.2) under the COB Rules.

A

Firm must keep records of:

1) Instructions from client’s to carry out transactions;
2) Instructions to third parties to carry them out.

41
Q

Explain the commissions rule (rule 5.1 in the COB rules)

A

Firms must keep records of commissions received in respect of regulated activities and how those commissions were dealt with.

42
Q

Explain the insurance distribution activities rules under the COB rules part 3.

A

All info about insurance distribution must be communicated to clients in a way which is clear, fair and not misleading, and info on the nature of remuneration received in relation to a contract of insurance must be provided to the client before conclusion of the initial contract.

43
Q

Explain the execution only clients (rule 7.1 COB Rules).

A

If firm acts for an execution only client and investment concerned is a retail investment product (eg life policy, unit trusts pensions schemes etc) ILA letter must be obtained from client and saved on file.

This would apply where a retail investment product is a contract of insurance. Here the execution only exclusion would not apply and as such the solicitor would have to rely on the exemption for professional firms (and comply with the COB rules).

44
Q

True or False: Representing a client in a litigation matter arising from a consumer credit agreement constitutes a credit-related activity for the purpose of FSMA 2000.

A

False. This is NOT a credit-related activity for these purposes and solicitors are free to conduct such litigation.

45
Q

A solicitor could carry on a credit-related activity even through the way they accept payments.

Explain the criteria which would make such payment exceptions an ‘exempt agreement’ under RAO 2001.

A

1) Number of repayments does not exceed 12;
2) Payment term does not exceed 12 months; and
3) Credit is provided without interest or charges.

All three use apply in order for the agreement to be exempt.

45
Q

Given the main exclusion usually applies to insurance related work, how can a firm carry on work such as advising on an insurance contract, or conducting claims on behalf of a client against an insurance company?

A

They must rely on the s327 exemption and therefore notify the SRA, or seek authorisation from the FCA.

46
Q

What does s21 FSMA 2000 prohibit?

A

Solicitor who is not authorised by FCA cannot make a financial promotion (ie communicate an innovation or inducement to engage in investment activity) unless contents are approved by an authorised person.

The exclusions are not available here.

47
Q

Give the two FPO exemptions to financial promotions.

A

1) Trustees and PRs; and
2) Takeovers of body corporates.

These exemptions apply in the same way as for regulated activities.

47
Q

Which three exemptions are available to firms using the exemption for exempt professional firms under s327 FSMA 2000 (in relation to financial promotions)?

A

1) Real-time promotions and non-realtime promotions;
2) One off promotions;
3) Introducers

48
Q

Explain when a real time promotion might be exempt under FSMA 2000 and the FPO.

A

(a) If made to a client who has, prior to the communication being made, engaged the
solicitor to provide professional services; and

(b) Where the controlled activity to which the communication relates is exempt because of the exemption for professional firms, or is excluded from being a regulated activity by the ‘necessary’ exclusion; and

(c) Where the controlled activity to which the communication relates would be undertaken for the purposes of, and be incidental to, the provision of professional services to or at the request of the client.

49
Q

Explain when a one-off promotion might be exempt under the FPO.

A

The communication must be a one-off and personal to the client.

It will be except under the FPO provided the solicitor believes on reasonable grounds:

1) Client understands the risks associated with engaging in the investment activity to which the financial promotions relates;

2) That, at the time of the communication, the client would expect to be contacted by the solicitor in relation to that investment activity.

50
Q

Explain the introducers exemption under the FPO to financial promotions/ solicitation.

A

Solicitor may make any real-time communication in order to introduce a client to an ATP provided:

1) The solicitor is not connected to (ie a close relative of) the ATP;

2) The solicitor does not receive any pecuniary rewards or other advantage arising from making the introduction; and

3) The client is not seeking and has not sought advice from the solicitor as to the merits of engaging in the investment activity (of if the advice was sought the solicitor refused to give such advice).

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