Financial Services Flashcards
What is the general position around solicitors giving financial advice?
They can only do so if they are authorised or exempt
Also, they must only do so if they have sufficient expertise, as their service must be competent (Codes of Conduct)
What are the two main restrictions on provision of financial advice?
1) Carrying out a regulated activity (general prohibition)
- Must be authorised or exempt to carry on a regulated activity
- Authorised persons are those with permission granted by FCA
- Carrying on a regulated activity without authorisation or exemption is a criminal offence (max 2 years in prison or unlimited fine + resulting agreement may be unenforceable)
2) Making a financial promotion (financial promotions restriction)
- Unauthorised person cannot engage in a financial promotion
FCA regulates and criminal offence to do so without authorisation
For the general prohibition regarding regulated activities, what are the four tests to establish if there is a regulated activity?
(a) Are you in business?
(b) Is there a specified investment or does the specified activity relate to information about a person’s financial standing or administering a benchmark?
(c) Is there a specified activity?
(d) Is there an exclusion?
Explain the (a) business test
Only a regulated activity if carried on ‘by way of business’
A solicitor giving advice as part of their practice will be ‘in business’
Explain the (b) specified investments test
The following are specified investments:
- Shares (but not shares in the share capital of an open-ended investment company or building society incorporated in the UK);
- Debentures, loan stocks and bonds;
- Government securities such as gilts;
- Unit trusts and open-ended investment companies (OEICs);
- Insurance contracts (life policies) - Many exclusions do not apply to insurance, so the s327 exemption will likely be more relevant there
- Regulated mortgages (most residential mortgages);
- Home reversion/home purchase plans - Enables a homeowner to sell whole or part of their property to a finance provider to raise funds and then become a tenant
- Deposits (cash ISAs + sums held in bank accounts, but only specified activity is ‘accepting deposits,’ which banks mainly do)
- Credit agreements
Investments that will not be relevant include:
Interests in land and most National Savings products
Explain the (c) specified investment activities test
(a) dealing as agent;
- Buying and selling investments when a solicitor is dealing on a client’s behalf and commits them to a transaction
- Selling client shares pursuant to a financial order made on divorce
(b) arranging;
- Solicitor acts as contact between client and stockbroker/other 3rd party for investment purposes
(c) managing;
- Applies to ‘discretionary management’
- Relevant where solicitor acts as trustee or PR
(d) safeguarding;
- Safeguarding or administering client investments
- Relevant where solicitor is PR
(e) advising;
- Advising on a specific investment as to the merits of buying/selling
- Generic advice is not a regulated activity
(f) lending money on/administering a regulated mortgage contract
Explain the (d) exclusions test
Where an exclusion applies, the act is no longer regarded as a regulated activity
(a) introducing
(b) using an Authorised Third Party
(c) acting for an execution-only client
(d) acting as trustee or personal representative
(e) the ‘professional/necessary’ exclusion
(f) the ‘takeover’ exclusion
Give details of the ‘introducing’ exclusion
Only applies to arranging
Applies if solicitor introduces client to an authorised person and has no further role, including facilitating any more communication between the two
Doesn’t apply to insurance contracts
Give details of the ‘Authorised Third Party’ exclusion
Applies to dealing as agent and arranging
Applies where transaction entered into by solicitor on the advice of a person authorised by the FCA; financial advice provided by the ATP
Doesn’t apply if solicitor gets commission which they don’t account for to the client
Doesn’t apply to insurance contracts
Give details of the ‘execution-only client’ exclusion
Applies to dealing as agent and arranging
Applies where client does not seek financial advice from solicitor; solicitor executes transaction only
Doesn’t apply to insurance contracts
Give details of the ‘acting as personal representative’ exclusion
Applies to all activities, except dealing as agent
Applies to a solicitor acting as trustee, not for a trustee
Doesn’t apply if solicitor gets extra remuneration to any he receives as trustee - The trustee exclusion is only disapplied if the solicitor were to be remunerated for the advice given in addition to the remuneration she receives as trustee
Give details of the ‘professional/necessary’ exclusion
Applies to advising, arranging, safeguarding and dealing as agent
Applies if activity is performed as a necessary part of other services provided in the profession
Arranging for acquisition of shares when acting on the acquisition of a company
Arranging for sale of all assets to pay IHT in probate work
Give details of the ‘takeover’ exclusion
Applies to arranging, advising and dealing as agent
Applies to a transaction to acquire or dispose of shares in a company if:
- The shares consist of 50% or more of voting shares in a body corporate; and
- the acquisition or disposal is between parties each of whom is a body corporate, a partnership, a single individual or a group of connected individuals
Useful where a client is seeking to take over or sell its interest in a company
Outside of the four stage test, s327 acts as an exemption for professional firms to carry out certain regulated activities. Give an overview of this exemption.
The use of the exemption does not result in the act ceasing to be a regulated activity, like an exclusion
General prohibition will not apply to a regulated activity carried on by a firm of solicitors if the following conditions are met:
- (a) the firm must not receive from a person, other than its client, any pecuniary or other advantage arising out of the activity for which it does not account to its client;
- (b) the manner of providing ‘any 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;
- (c) the firm must only carry out regulated activities permitted by the DPB;
- (d) the activities must not be prohibited by an order made by the Treasury, or any direction made by the FCA under s 328 or s 329;
- (e) the firm must not carry on any other regulated activities
Give details of the elements of the exemption, except the meaning of ‘incidental’
(a) Pecuniary or other advantage - Firm must account to client for any such pecuniary advantage
(c) Permitted regulated activities only - Scope Rules from SRA must be complied with at all times
(d) Some activities cannot be provided by professional firms under the s327 exemption - The most relevant to solicitors are incorporated into the Scope Rules
(e) No other regulated activities - S327 exemption cannot be used by FCA authorised firms for any non-mainstream regulated activities
Give details of the ‘incidental’ tests from the s327 exemption
Two tests
1) Specific test – relates to particular client concerned
- Relevant regulated activity must arise out of, or be complementary to, the provision of a particular professional service to a particular client
- Other service must be something like drafting a document, giving legal advice etc
- Regulated activity is incidental or subordinate to provision of the above service
2) General test – activities carried out by the firm which would otherwise be regulated cannot be a major part of the firm’s activities
Consider:
- The scale of regulated activity in proportion to other professional services provided
- Whether and to what extent the exempt regulated activities are held out as separate services; and
- The impression given of how the firm provides those activities, for example through advertising its services
What activities are likely to be carried out under the s327 exemption?
Most credit-related regulated financial services activities and insurance distribution carried out by firms are likely to be carried out under the s 327 exemption.
When do the SRA’s Financial Services (Conduct of Business) Rules apply?
The SRA COB Rules apply only when the firm is carrying out an exempt regulated activity; they do not apply if the firm is not carrying out a regulated activity at all (if an exclusion applies)
Give details of the Conduct of Business rules
Status disclosure – firm must confirm to clients that they aren’t FCA authorised
Best execution – solicitor must act in client’s best interests
Transactions – firm must keep records of instructions from clients to carry out transactions; and instructions to third parties to carry them out
Commissions – firm must record commissions and how those were dealt with
Execution-only clients - Where a firm acts for an execution-only client and the investment concerned is a retail investment product (eg life policies, unit trusts, stakeholder and personal pension schemes), it must send a letter to the client confirming that the client is not relying on the advice of the solicitor, and the firm must keep a copy of this letter
Information distribution activities – all information re this must be communicated to clients clearly, fairly and not in a misleading way
When might an arrangement relating to payment of a solicitor’s fees be classed as an ‘exempt agreement,’ rather than falling under the s327 exemption?
Will be an exempt agreement under the Regulated Activities Order 2001 if:
(a) the number of repayments does not exceed 12;
(b) the payment term does not exceed 12 months; and
(c) the credit is provided without interest or other charges.
Give an overview of the ‘making a financial promotion’ restriction
A person must not, in the course of business, communicate an invitation or inducement to engage in an investment activity unless they are an authorised person or exempt
Tests to determine if a communication falls foul of the financial promotion restriction:
- Is a communication being made?
- Is the communication an invitation or inducement?
- Is there an investment activity?
- Is the communication made in the course of business?
- Does the communication fall within one of the exemptions?
If answer to top 4 is yes, person must be authorised or exempt, otherwise the promotion cannot be communicated
Explain the first 4 elements of the financial promotion restriction test
- Communication
- Giving or transmitting material to the recipient in any form (Leaving a brochure visible will amount to communication)
- Invitation or inducement
Essential elements (tested objectively) are that the communication must:
- Have the purpose or intent of leading the recipient to engage in investment activity
- Be promotional in nature – must seek ‘on its face, to persuade or incite the recipient to engage in investment activity’
- Investment activity
- Defined as entering into a ‘controlled activity’ or exercising rights conferred by a ‘controlled investment.’
- Example - Controlled activities – advising on or managing certain investments
- Example - Controlled investments – shares and insurance contracts
- Business
- Given its ordinary meaning
What is the effect of an exemption to the financial promotions restriction?
If an exemption applies, an unauthorised person can communicate the financial promotion without it being approved by an authorised person
What are the relevant exemptions to the financial promotions restriction?
**One-off promotions **
- One-off, non-real time communications – exempt if communication personal to the client
- One-off, real time, solicited communications – exempt if communication personal to the client
- One-off, real time, unsolicited communications are exempt, if solicitor believes on reasonable grounds:
- (a) that the client understands the risks associated with engaging in the investment activity to which the financial promotion relates; and
- (b) that, at the time of the communication, the client would expect to be contacted by the solicitor in relation to that investment activity.
**Introducers **
Solicitor is exempt when making a real time communication to introduce a client to an authorised person if:
- (a) the solicitor is not connected to (eg a close relative of) the ATP;
- (b) the solicitor does not receive other than from the client any pecuniary reward or other advantage arising out of making the introduction; and
- (c) the client is not seeking and has not sought advice from the solicitor as to the merits of engaging in investment activity (or, if the client has sought such advice, the solicitor has declined to give it but has recommended that the client seeks such advice from an authorised person).
