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Legal Services > Financial Services > Flashcards

Financial Services Flashcards

1
Q

what is the base line minimum for solicitors to undertake financial services work?

A
  • Solicitors must be competent to undertake any financial services (FS) work otherwise they will not be able to act in the best interests of their client
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2
Q

who are the main regulators?

A
  • Financial Conduct Authority (FCA) & Prudential Regulation Authority (PRA)
  • A business will be regulated by the FCA only or dual-regulated
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3
Q

what does the FCA deal with?

A
  • FCA deals with authorisation, regulation of authorised businesses and prudential regulation of businesses not regulated by the PRA
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4
Q

what power do the FCA have?

A

o FCA can require firms to withdraw / amend misleading financial promotions with immediate effect and stop the launch of a service or product

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5
Q

when will a firm need to be regulated by the PRA?

A
  • A business will also need to be regulated by the PRA if it wants to carry on certain RAs i.e. accepting deposits, effecting insurance contracts
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6
Q

what does the PRA deal with?

A

o PRA deals with authorisation, prudential regulation & general supervision for businesses dealing with financial risk i.e. banks, credit unions, insurers

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7
Q

what is prudential regulation?

A
  • Prudential regulation = ensuring firms are well-managed and can handle financial loss
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8
Q

what is the general prohibition?

A
  • Persons are prohibited from carrying on regulated activities unless authorised or exempt, otherwise it is a criminal offence
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9
Q

when will an activity be a regulated activity?

A

An activity is an RA if is a specified activity that is carried on by way of business and relates to either:
o A specified investment or property of any kind;
o Information about a person’s financial standing;
o Administering a benchmark; or
o Claims management services

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10
Q

explain the decision tree in regard to regulated activities

A
  1. Are they in the course of business?
    a. NO  not an RA. No breach of GP.
  2. YES  is there a specified investment (i.e. stocks, shares, insurance contract, deposit, credit agreement), property, info about financial standing or a benchmark?
    a. NO  not an RA. No breach of GP.
  3. YES  Is the solicitor being asked to deal, arrange, manage, safeguard or advise (i.e. the specified activity)?
    a. NO  not an RA. No breach of GP.
  4. YES  does an exclusion apply?
    a. YES  not an RA. No breach of GP.
  5. NO  are they exempt?
    a. YES  it is an RA, but they can undertake it. No breach of GP.
    b. NO  it is an RA, they will be in breach of GP.
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11
Q

what are the four key questions in relation to RAs?

A
  1. Does the person carry on the activity by way of business in the UK?
  2. Is there a specified investment (SI), property of any kind, information about a person’s financial standard or administering a benchmark?
  3. Is there a specified activity (SA)?
  4. Is an exclusion available under RAO?
  5. Is the person exempt?
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12
Q

explain ‘does the person carry on the activity by way of business in the UK?’

A
  • RA must be carried on by way of business to be an RA, i.e. someone giving advice in their capacity as a solicitor will be an RA
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13
Q

what are the main specified investments?

A

o Stocks and shares
o Debentures, loan stocks and bonds
o Government securities i.e. gilts
o Open ended investment companies (OEICs)
o Insurance contracts (inc. life policies and annuities)
o Regulated mortgage contracts
o Home revisions / purchase plans
o Deposits i.e. into a bank or cash ISA
o Credit agreement

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14
Q

what is not a specified investment?

give an example.

A

interest in land and certain national savings products are not Sis

Therefore, if an unauthorised solicitor gave advice about purchasing a property for investment purposes, this would not amount to an offence under FSMA 2000. It could still be a breach of StaRs if the solicitor didn’t have the knowledge to give this advice.

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15
Q

explain ‘information about a persons financial standing’

A

= providing credit information services and credit references which related to a person’s financial standing

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16
Q

explain ‘benchmark’

A
  • acting as the administrator of a benchmark i.e. setting prices, measuring performance
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17
Q

explain ‘Is there a specified activity (SA)?’

A
  • If it is an SI, property etc, it can be subject to any of the below SAs. In other words, just because it is called a ‘specific investment’ doesn’t mean it needs to be a ‘specific investment activity’ i.e. a credit agreement could be ‘arranged’
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18
Q

what are the specified activities, ‘investment activitites’?

A
  1. Dealing in investments as agent
  2. Arranging deals in investments
  3. Managing investments
  4. Safeguarding and administering investments
  5. Advising on investments
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19
Q

what is ‘dealing in investments as agent’?

A

Buying, selling or subscribing to investments and committing to transactions on behalf of the client

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20
Q

what exclusions apply to ‘dealing in investments as agent’?

A

 ATP
 Execution-only client
 Professional exclusion
 Takeover exclusion

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21
Q

what is ‘arranging deals in investments’?

A

Making arrangements for the client to buy, sell or subscribe to an investment (i.e. the solicitor is the contact between the client and the company, stockbroker etc)

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22
Q

what exclusions apply to ‘arranging deals in investments’?

A

 Introducing
 ATP
 Execution-only client
 Acting as a trustee/PR
 Professional exclusion
 Takeover exclusion

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23
Q

what is ‘managing investments’?

A

Involves participating beyond merely holding the investments and applies only when the solicitor can exercise discretion (common where solicitor is a PR or trustee)

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24
Q

what exclusions apply to ‘managing investments’?

A

 Acting as a trustee/PR

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25
Q

what is ‘safeguarding and administering investments’?

A

The investments are safeguarded and administered by the solicitor, but belong to the client

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26
Q

what exclusions apply to ‘safeguarding and administering investments’?

A

 Acting as a trustee/PR
 Professional exclusion

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27
Q

what is ‘advising on investments’?

A

Solicitor must be advising in their capacity as an investor, the advice must be about a specified investment.

Generic advice will not be a RA, i.e.:
Generic advice = solicitor advising on merits of investing shares rather than depositing in a bank account
Regulated activity = advice to buy shares in a particular company

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28
Q

what exclusions apply to ‘advising on investments’?

A

 Acting as a trustee/PR
 Professional exclusion
 Takeover exclusion

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29
Q

what are the specified activities, ‘consumer credit activities’?

A

Credit brokerage
Debt collecting under consumer credit
Hire agreement
Debt advice
Debt management
Debt administration

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30
Q

what are the specified activities, ‘insurance distribution activities’?

A

Advising on or proposing an insurance contract
Carrying out work in preparation for conclusion of the contraction
Concluding the contract
Assisting in the administration and performance of a contract

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31
Q

explain ‘is an exclusion available under RAO?’

A
  • An exclusion means the activity will not be regarded as an RA
  • These exclusions apply to the above ‘investment activities’ only
  • If the activity is a CCA or IDA skip to exemptions
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32
Q

what is the effect if an exclusion applies?

A
  • An exclusion means the activity will not be regarded as an RA
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33
Q

what are the exclusions?

A

Introducing
Authorised Third Party (ATP)
Execution-only Client
Acting as a Trustee/PR (T/PR)
Professional/Necessary Exclusion

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34
Q

what does ‘introducing’ apply to?

give an example

A

arranging

  • Example > a solicitor who introduces the client to an authorised person (i.e. a company or stockbroker) and has no further role could rely on this exclusion. Whereas a solicitor who is a means of communication between the client and authorised person could not
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35
Q

what does ‘ATP’ apply to? Explain this.

A
  • Applies to: dealings as an agent and arranging
  • A solicitor can deal as an agent or arrange an investment for the client where the client has instructed them to do this on the basis of advice they have received from an ATP recommended.
  • This cannot be relied on if the solicitor receives a benefit from any person other than the client for entering into the transaction which the solicitor does not account for
36
Q

Give two examples of ATP

A

o Example > the client seeks investment advice from the solicitor. The solicitor refers them to an ATP. The client then asks the solicitor to arrange the purchase of the investments the ATP has recommended.

o Example > if the ATP pays the solicitor commission which the solicitor does not tell the client about, then they cannot rely on this exclusion.

37
Q

what does ‘execution only’ apply to? Explain this.

A
  • Applies to: dealing as an agent and arranging where the client has not sought investment advice from the solicitor (or if they have and the solicitor has declined and recommended they take advice from an ATP) and the solicitor is instructed to enter into the transaction
  • This cannot be relied on if the solicitor receives a benefit from any person other than the client for entering into the transaction which the solicitor does not account for
38
Q

what does ‘acting as a trustee/PR apply to? Explain this.

A
  • Applies to: arranging, managing, safeguarding, advising fellow trustees and/or beneficiaries and administering or lending money on a regulated mortgage
  • This applies where the solicitor is acting as a T/PR and either they or another member of the firm carries out the activity
39
Q

when does acting as a trustee/PR not apply?

A

This will not apply where:
o The solicitor is acting for the T/PR;
o The solicitor receives additional renumeration on top of what they would normally receive as T/PR;
o The solicitor holds themselves out as providing a management/safeguarding service; or

40
Q

when will the professional/necessary exclusion apply?

A

dealing as an agent, arranging, safeguarding, and advising where the RA can be reasonably regarded as a necessary part of the other services the business provides

i.e. other services cannot be provided unless the RA is also provided

41
Q

when will the professional/necessary exclusion apply?

A
  • Does not apply where the SA is paid separately from other services
42
Q

give examples of the professional/necessary exclusion

A
  • Example 1  in probate work solicitors will need to arrange the sale of assets to pay inheritance tax
  • Example 2  when acting on the acquisition of a company the solicitor will need to give advice on the merits of buying and arranging of shares
  • Example 3  client has won damages and wants advise about investing the money. The solicitor couldn’t rely on this exclusion because investment advice cannot be ‘reasonably regarded’ as part of the other services provided.
43
Q

what does the ‘takeover exclusion’ apply to?

A

dealing as an agent, arranging and advising in connection with the purchase or sale of shares in a company

and certain transactions

44
Q

which transactions does the takeover exclusion apply to?

A

either:

  1. Involve the acquisition or disposal of at least 50% of the voting shares and which is between parties that are a company partnership, individual or connected group of individuals

If the purchaser already owns shares, the shares they are acquiring can be added to the ones they already own in order to satisfy the 50% element

Connect group = each will be a D or manager or one of their close relatives or a trustee

  1. Where the object of the transaction can be reasonably regarded as the acquisition of the day-to-day control
45
Q

when does the takeover exclusion not apply?

A

it does not apply to open ended investment companies

46
Q

give an example of the takeover exclusion

A
  • Example > client has won damages and wants advice about investing in shares. A solicitor can only advise and rely on this exception if the damages would allow the client to purchase more than 50% of shares in the company.
47
Q

explain ‘is the person exempt?’

A

S327 professional services exemption allows firms to carry on RAs if they meet the certain conditions

48
Q

what are the s327 conditions?

A

o The firm is regulated by a DPB (i.e. the SRA)
o They account to the client for any benefit received not from the client
o The RAs are incidental to their professional services
o The RA must not be prohibited
o They only provides RAs permitted by the DPB
o The firm is not authorised to carry out other RAs

49
Q

what does s327 apply to?

A

all of the SAs above i.e. specific investment activities, credit consumer activities, insurance distribution activities

50
Q

if s327 applies, what is the effect?

A
  • If applicable, the firm will not be seen to be carrying out the RA
51
Q

what happens if the firm cannot rely on an exclusion or exemption?

A
  • If the firm cannot rely on the s327 exemption, they would need to be authorised by the FCA otherwise they will breach the GP
52
Q

re: s327

when will an RA be ‘incidental’?

A

if it is specific or general

53
Q

re: s327

explain incidental (specific)

A

(specific) It relates to a particular client and the RA arises out of providing another professional service (i.e. not an RA) to that client; or
 The RA could not be carried out in isolation for the client
 The RA and other service must be provided to the same person i.e. if executor is the client, but the advice is given to the beneficiary this would not count

54
Q

re: s327

explain incidental (general)

A

(general) It does not form a major part of the firm’s activities, i.e.:
 More than ½ of its income is from investment business
 A large proportion of RAs compared to other services provided
 The extent RAs are held out as separate services

55
Q

re: s327

explain ‘not prohibited’

A

The RA must not be prohibited by the Treasury, a s328/329 order or under FSMA (non-exempt activities) 2001

FSMA 2001 does not include specific investment activities discussed above. Some examples: insurance contracts, regulated mortgages

56
Q

re: s327

what must firms comply with if carrying on RAs under s327?

A
  • The SRA has created the Financial Services Rules (SCOPE) and Conduct of Business rules (COB) which firms must comply if carrying on RAs under s327
57
Q

re: s327

what are the rules under SCOPE?

A

Under SCOPE, a solicitor must not carry on an activity that has been specified under a s327(6) order, i.e.:
o Recommending a client dispose any rights they have under a personal pension scheme
o Advising a client to become a member of a particular Lloyd’s syndicate
o s327(6) gives the Treasury the power to make an order that an exempt professional firm cannot carry on a particular SA

58
Q

re: s327

what are the rules under COB?

A

o Firms must give clients certain information about the firm i.e. that it is not authorised by the FCA, the complaints procedure (inc. SRA & LO)
o Information must be clear and not misleading
o Transactions must be carried out asap unless this is not in the client’s best interests
o Keep records of instructions from clients and to third parties
o Keep records of commission and how this was dealt with
o For execution-only clients where the investment related to a retail investment product (i.e. life policy, pension scheme, insurance contract) the firm must send a letter to the client confirming they are no relying on the advice of the solicitor and keep a copy (NB: if dealing with an insurance contract, the execution-only exclusion wouldn’t apply but they s327 exemption may apply. In which case, they would need to send this letter.)
o Information about renumeration received in relation to an insurance contract must be given to the client before conclusion of the contract

59
Q

re: s327

explain ‘no other RAs’

A
  • Firms already authorised by the FCA cannot rely on s327

o Example  the firm is authorised to carry out certain RAs, they could not use this exemption in order to carry out further RAs.

60
Q

when can a lawyer carry on consumer credit activities?

A

if s327 applies

61
Q

what is the position regarding scope and consumer credit activities?

A

SCOPE prohibits firms from carrying out a lot of CCAs under s327, but client fee arrangements (CFA) are permitted if it is ‘exempt’, it will be exempt where:
o The client is paying in instalments and;
 The agreement is for a fixed amount;
 There is to be no more than 12 instalments;
 These instalments will be paid in 12 months;
 The credit is provided without interest or charged or it is secured on land

Example of CFA  giving the client time to pay

62
Q

when can a firm carry out an insurance distribution activity?

A

Firms cannot carry out IDAs unless:
o They are FCA-authorised;
o The s327 exemption applies
o The IDA is carried out in the capacity of an ancillary insurance intermediary (not covered in manual)

63
Q

explain insurance distribution activities and introducing and give an example

A
  • A firm can introduce a client to an FCA-authorised insurance provider, but they cannot have any further involvement
  • Example  a solicitor is asked to arrange insurance for their client. Contracts of insurance are an SI. Arranging is an SA. Exclusions do not apply to IDAs. This means it is an RA, so the solicitor can only arrange the insurance if they can rely on s327 (or the exception not covered), otherwise he will be in breach of the GP.
64
Q

what is the financial promotion prohibition?

A

A person must not in the course of business communicate an invitation or inducement to engage in investment activity (i.e. financial promotion), unless:
o The person is authorised by the FCA or PRA; or
o The content has been approved by an authorised person; or
o The communication is covered by an exemption

65
Q

when can a person engage in financial promotion?

A

o The person is authorised by the FCA or PRA; or
o The content has been approved by an authorised person; or
o The communication is covered by an exemption

66
Q

what are the consequences of engaged in financial promotion if not permitted?

A

it is a criminal offence to do so

67
Q

what are the stages of approaching financial promotion?

A

o Is there an FP?
o What type of communication is it?
o Does an exemption apply?

68
Q

what are the questions to consider under ‘is there an FP’?

A
  1. In the course of business?
  2. Is there an invitation or inducement?…
  3. …to engage in investment activity?
69
Q

re: financial promotion prohibition

explain ‘in the course of business’

A
  • Someone acting in their capacity as a solicitor will be ‘acting in the course of business’, whereas communications in their personal life wouldn’t count
70
Q

re: financial promotion prohibition

explain ‘is there an inducement or invitation’

give examples

A

i.e. communications which have a promotional element i.e. not those which just inform/educate

Examples of invitations:
o Direct marketing i.e. mail, email, texting
o Prospectuses with application forms
o Invitations to treat

Examples of inducements:
o A link on a website that states ‘10% interest on fixed-term deposits, apply by 31 December, click here to apply’
o Contact information for members of a firm who provide investment advice alongside ‘best opportunity for financial gain’;
o Wording such as ‘shares will increase by 15%, buy now’

71
Q

re: financial promotion prohibition

what is the test for ‘is there an inducement or invitation’?

A
  • FCA has devised an objective test - would a reasonable person consider the communication is intending/seeking to persuade or incite the recipient?
72
Q

re: financial promotion prohibition

explain ‘…to engage in investment activity’

A
  • ‘Investment activity’ involves controlled activities and investments. These are nearly identical to specified activities and investments.

Is there a controlled investment? (non-exhaustive list) i.e.:
 Deposit
 Rights under an insurance contract
 Stocks and shares

Is there a controlled activity? i.e. SIAs, IDAs or CCAs

NB: there are no exclusions under the FP prohibition

73
Q

re: financial promotion prohibition

explain stage 2 ‘type of communication’

A

there are 3 ways a promotion can be communicates:
1. Solicited RTCs
2. Unsolicited RTCs
3. NRTC

Real-time communication = RTC
Non-real-time communication = NRTC

Both include communications to anyone (i.e. the other side), not just clients

74
Q

re: financial promotion prohibition

what is a real-time communication? how is this categorised?

A
  • Real-time communication (RTC)  communication during a personal visit, telephone conversation or other interactive dialogue

RTCs are sub-divided into solicited and unsolicited:

Solicited  the recipient initiates or requests the RTC
Unsolicited  a cold call

75
Q

re: financial promotion prohibition

what is a non-real time communication?

A
  • Non-real-time communication (NRTC)  letter, email, radio, TV broadcast or other publication
76
Q

re: financial promotion prohibition

what are the exemptions?

A

Exemptions for Exempt Professional Firms
One-off NRTCs & One-off solicited RTC
One-off Unsolicited RTC
Introductions
Trustees & PRs
Sale of Body Corporate

77
Q

re: financial promotion prohibition

give and overview of ‘exemptions’

A
  • If an exemption does not apply, then unauthorised persons cannot communicate the FP, unless it has been approved by an authorised person
78
Q

re: financial promotion prohibition

give an overview of ‘exemptions for exempt professional firms’

A
  • If a firm carries out RAs under s327 (or under the necessary exclusion for RTC), they can rely on these exemptions to make FPs
79
Q

re: financial promotion prohibition

when can a professional firm make a RT promotion?

A

A professional exempt firm can make a solicited or unsolicited RTC if:
o It is made to a client to who has previously instructed them to provide professional services;
o The solicitor has been required to undertake an RA as part of that service;
o The solicitor was able to rely on s327 or the necessary exclusion to carry out the RA; and
o The FP is incidental to the provision of the professional service or is made at the request of the client.

80
Q

what are the possible sanctions for breach of GP or FPP?

A

Possible sanctions for breach of either prohibition
o Up to 2 years in prison or unlimited fine
o Render an agreement unenforceable
o Professional misconduct
o Breach of contract between lawyer & client

81
Q

re: financial promotion prohibition

when can a professional exempt firm make a NRT promotion?

A

Permissible if the communication includes the wording prescribed in the legislation

Summary of wording  the firm is not authorised under FSMA, but can offer a limited range of ISA and CCAs because they are members of a DPA

82
Q

re: financial promotion prohibition

explain ‘One-off NRTCs & One-off solicited RTC’

A

One-off NRTCs and solicited RTCs are allowed where the communication:
o Is to one recipient or one group of recipients where it is expected they would engage in investment activity (i.e. clients); and
o It is not part of a marketing campaign

83
Q

re: financial promotion prohibition

explain ‘One-off Unsolicited RTC’

A
  • Permissible where the solicitor reasonably believes that the client:
    o Understands the risks of the investment activity (IA); and
    o Would expect to be contacted by the solicitor in relation to the IA
84
Q

re: financial promotion prohibition

explain ‘introductions’

A

A solicitor can make an RTC to introduce a client to an ATP if:
o They are not connected to the ATP;
o They do not receive any benefit from the introduction;
o The client is not / has not sought investment advice from the solicitor (or if they have, the solicitor has declined and recommended they seek advice from an ATP)

85
Q

re: financial promotion prohibition

explain ‘trustees and PRs’

A
  • The FP restriction does not apply to any communication by or between trustees, PRs and beneficiaries
86
Q

re: financial promotion prohibition

explain ‘sale of body corporate’

A
  • The FP restriction does not apply to any communication relating to the transaction of a body corporate by, or on behalf of, a body corporate, partnership, individuals or connected group of individuals

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