FINANCIAL SERVICES Flashcards
LAW
The regulatory framework for fnancial services in the UK is controlled largely by the Financial Services and Markets Act 2000 (‘FSMA’), as amended. The goal of the legislation is to help make sure that banks and other fnancial institutions have good management, so they don’t make bad investments or take too many risks. As solicitors often are involved with financial services, they will be subject to the** financial services regulatory scheme.**
ENTITIES INVOLVED IN FINANCIAL
REGULATION
- Bank of England–Prudential Regulation Authority
- Financial Conduct Authority
Bank of England–Prudential Regulation Authority
The Bank of England is the UK’s central bank, and, like most other central banks, it is responsible for setting monetary policy. The Bank’s Prudential Regulation Authority regulates and supervises fnancial services frms.
Financial Conduct Authority
The Financial Conduct Authority regulates the conduct of all fnancial services frms in the UK. It is an independent body
that is accountable to HM Treasury, although it works very
closely with the Prudential Regulation Authority.
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Objective of Financial Conduct Authority
*Protecting Consumers: The type and level of protection will depend on the type of fnancial product, with more complex products requiring additional disclosures and risk warnings; and
*Protecting Financial Markets: Taking measures to safe-guard the integrity of the UK fnancial system.
Grants Approved Person Status
Financial Conduct Authority
Whilst the Prudential Regulation Authority is mostly responsible for the initial authorisation of financial services firms, the Financial Conduct Authority is responsible for regulating the conduct of those frms and their employees once the frms become authorised. **The Financial Conduct Authority is responsible for granting ‘approved person’ status to people who will work in certain functions of regulated financial services frms, including some solicitors. **
the General Prohibition Rule
Under the Financial Services and Markets Act 2000, no per-son may carry on regulated activity in the UK (that is, an activ-ity related to the fnancial markets) unless they are authorised or exempt from authorisation.
regulated activity
A regulated activity is a specified
activity in relation to a specifed investment, which is carried out in the course of business, and to which no exclusions apply.
The specifed activities and specifed investments which are subject to this rule are set out in the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001
(‘RAO’). It is a criminal offence to carry on a regulated activity without authorisation or exemption.
Which Activities Are Regulated
Advising: Giving advice to an investor or potential
investor (or their agent) on the merits of buying, selling, subscribing for, or underwriting a particular investment (note this does not cover generic advice on whether, for example, the buying or selling of shares in general is a
good investment).***
Arranging: Making arrangements for another person to buy, sell, subscribe for, or underwrite a particular invest-ment.***
*Dealing as Agent: Buying, selling, subscribing for, or underwriting investments as agent for a client.
*Managing: Managing assets belonging to another
person in circumstances which involve the exercise of discretion.
*Safeguarding: Safeguarding assets belonging to another **and administering them.
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What Investments Are Regulated?
*Insurance contracts;
*Shares in a company and other securities;
*Debentures;
*Mortgage contracts;
*Pension schemes; and
*Funeral plans.
Note that interests in land and some national savings prod-ucts such as Premium Bonds are not specifed investments,
Regulation Limited to Activities Carried on byWay of Business
Even if a solicitor carries on a specifed activity with respect to a specifed investment, they will not fall foul of the General Prohibition (against doing these things) unless they do so
by way of business. For a solicitor, this generally means the activity is carried out for a client as part of their legal work, rather than one carried out in their personal capacity.
Exclusions
The Regulated Activities Order sets out a number of exclusions.
If a solicitor’s activities fall within the exclusions, even if they are conducting an otherwise specifed activity involving an other-wise specifed investment, the solicitor will not fall foul of the
General Prohibition as the otherwise regulated activity will beexcluded.
Note, however, that none of these exclusions applyto insurance contracts or insurance policies
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excluded activities
a.The TakeoverExclusion
A solicitor can deal as an agent, arrange, or advise with respect to a client who is buying or selling 50% or more of the voting shares of a company or when the object of the transaction otherwise may be reasonably regarded as taking control of the daily running of a company.
b.Acting as Trustee, Nominee, or Personal Representative
A solicitor can advise, arrange, manage, and safeguard investments when acting as a trustee, nominee, or personal representative.
c.Introducing or Acting Through an Authorised Person
A solicitor can introduce a client to a person authorised by the Financial Conduct Authority (for example, an independent financial advisor, mortgage broker, or stockbroker) in order for the client to receive advice. Additionally, a solicitor may arrange or act as an agent with respect to specifed invest-ments if the client receives advice from the authorised per-son and the solicitor merely assists the client in acting on this advice. However, this exclusion is not available if the solicitor received **any payment or commission **from the authorised person which is not accounted for to the client.
d.The ‘Reasonably Regarded as Necessary’ Exclusion A solicitor will not violate the General Prohibition if they carry on an activity (other than managing assets) in relation to specifed investments that might otherwise be a regulated activity if the activity may reasonably be regarded as a necessary part of providing the legal services. This exclusion cannot be used if the activity is** billed separately** from the main legal advice.
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Incidental Activities of Members of
Designated Professional Bodies
- If there is a regulated activity, the Financial Services and Markets Act 2000 exempts certain incidental activities of members of Designated Professional Bodies, including those supervised by the SRA under the Law Society.
- Under this limited exemption, if a solicitor provides financial services which **arise out of **or are complementary to the legal services provided, the **manner and scale **of their provision is inciden-
tal to the provision of legal advice, and the solicitor **does not receive compensation **for this from anyone else without accounting to the client for it, the services will be exempt-ed. - This exemption is similar to the exclusion for providing** reasonably necessary activities** (see above), albeit a far lower threshold, but may be relevant if, for example, that exclusion was not available due to the type of activity or if the solicitor was advising on an** insurance policy.**
EXAMPLE
Jill is a solicitor and her firm is regulated by the SRA but not authorised by the Financial Conduct Authority. She has a client, Jack, whom she is acting for in an employment
dispute and who is due to receive a six-figure settlement as a result. Jack has asked Jill for advice on investing a portion of this amount as he would like to invest in financial instru-ments, such as shares and debentures, rather than keep the money in a savings account. Jill advises Jack on the merits of investing in a small portfolio of shares in specifc compa-nies, none of which would give Jack more than 50% of the voting shares nor control over the day-to-day running of the company. Jack has asked Jill to look after the portfolio for him, including deciding which shares to purchase/sell. The exclusion for necessary activities does not apply because managing assets is not permitted under that exclusion.
Therefore, Jill will need to rely on the Designated Professional Body exemption. Because Jill is a member of the SRA (a Designated Professional Body) and her advice on invest-
ments is only incidental to Jack’s employment dispute, it falls within this exemption.
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Determining Whether the Activity Is Incidental
Whether an activity is incidental is determined by looking at
1. whether it is incidental to the work the firm does as a whole and also
2. whether it is incidental to the client’s particular matter. For example, the exemption could not be relied on if one of the firm’s main areas of business was the provision of the regulated activities.
general prohibition and regulated activities
