Financial services and markets Flashcards
What is the main statute that governs financial services?
Financial Services and Markets Act 2000
What are the two bodies that regulate financial services?
Financial Conduct Authority
Prudential Regulation Authority
What is the role of the Financial Conduct Authority?
To regulate markets
Manage conduct of all firms and prudential regulation of firms not regulated by the PRA
Responsible for consumer credit
Can require firms to withdraw/amend misleading products
Can block the launch of a service or product
What is the role of the Prudential Regulation Authority?
Responsible for the authorisation, prudential regulation and supervision of firms which manage financial risks.
Includes banks, insurers, credit unions, Lloyd’s of London
What activities are regulated by the PRA?
Accepting deposits
Effecting insurance contracts
Investments where it is a primary function
What are the two main restrictions on solicitors?
Carrying out a regulated activity (known as the general prohibition)
Making a financial promotion
What is the four step test to determine whether an activity is regulated?
- Are you a business?
- Is there a specified investment, or does the specified activity relate to information about a person’s financial standing or administering a benchmark?
- Is there a specified activity?
- Are there any exclusions?
What constitutes a specified investment?
Shares (not including those in an open-ended investment company or building society incorporated in the UK)
Debentures
Contract of insurance
Regulated mortgages
Home reversion/purchase plans
Deposits
What are the specified investment activities? (5)
Dealing as an agent - committing a client to a transaction involving buying, selling, subscribing or underwriting investments
Arranging - arranging a contract between a life company or stockbroker
Managing - acting as a trustee or personal representative
Safeguarding - probate/trust work.
Advising - on the merits of investing in specific shares.
What happens if a solicitor breaches the general prohibition by providing advice that does not include an exclusion?
They are committing a criminal offence.
What is the effect is an exclusion applies to the regulated activity?
An act that is a regulated activity is no longer regarded as such.
What are the exclusions to regulated activity? (6)
Introducing
Using an Authorised Third Party
Execution-only
Trustee/PR
Professional/necessary
Takeovers
What is the exclusion of ‘introducing’ and what activity does it apply to?
The solicitor must introduce the client to an authorised person and have no further role in the client’s matter.
This applies to the activity of arranging (except for insurance contracts).
What is the exclusion of ‘Using an Authorised Third Party) and what activity does it apply to?
Where a transaction is being entered into on the basis of advice from an ATP, a person authorised by the FCA. The solicitor retains an ongoing role but the financial advice must be provided by the ATP.
This only applies to the activities of dealing as an agent or arranging.
What is the exclusion of ‘execution-only’ and what activity does it apply to?
A transaction is executed by a firm upon the specific instructions of a client where the firm does not give advice on investments relating to the merit or appropriateness.
This applies to the activities of dealing as an agent or arranging.
What is the exclusion of ‘Trustee/PR’ and what activity does it apply to?
Where a solicitor is acting as a trustee or personal representative. It does not apply when they are acting FOR a trustee or personal representative, unless the firm is a trustee and the activity is carried out by other members.
Only applies to arranging, managing, safeguarding and advising fellow trustees and/or beneficiaries AND lending money on, or administering, regulated mortgage contracts.
What is the ‘professional/necessary’ exclusion and what activities does it apply to?
If the activity is performed in the course of carrying on any profession or business and may reasonably be regarded as a necessary part of other services provided in the course of that profession or business.
It only applies to advising, arranging, safeguarding and dealing as an agent.
It does not apply when the activity is remunerated separately from other services or pursuing insurance distribution.
What is the takeover exclusion and what activities does it apply to?
This applies on a transaction to acquire or dispose of shares in a body corporate, or for a transaction entered into for the purposes of such acquisition or disposal if:
(a) the shares consist of or include 50% or more of the voting shares in the body corporate; and
(b) the acquisition or disposal is between corporate bodies, a partnership, an individual or a group of connected individuals
This only applies to arranging, advising and dealing as an agent.
What is the exemption for professional firms in relation to carrying out regulated activities?
Firms that are authorised by the SRA can carry out certain regulated activities without being regulated by the FCA if they can meet the conditions in section 327 FSMA 2000.
What are the conditions under the FSMA that allow a firm to carry out regulated activities without being regulated by the FCA? (5)
The firm must not receive from a person other than its client any pecuniary or other advantage arising out of the activity which does not account to its client.
Any services provided in the carrying out of activities must be incidental to the provision (i.e. the services regulated by the SRA).
The firm must only carry out regulated activities permitted by the designated professional body (SRA).
The activities must not be prohibited by an order made by the Treasury, or any direction made by the FCA under s328 and s329.
The firm must not carry on any other regulated activities.
When do the Conduct of Business Rules apply?
When a firm is carrying out an exempt regulated activity.
What are the rules when carrying out an exempt regulated activity under the COB Rules? (6)
The firm must provide clients with information on the status of regulation of the firm
The firm must carry out transactions for clients ASAP unless it is not in the client’s interest to do so.
The firm must keep records of instructions from clients and to third parties.
The firm must keep records of commissions.
Where a firm acts for an execution-only client and the investment is a retail investment product (e.g. life policies, personal pension schemes), it must send a letter (and retain a copy) to the client confirming that the client is not relying on the advice of a solicitor.
All information must be communicated to clients in relation to insurance distribution activities that is clear and not misleading.
What is consumer credit activity?
Debt management
Debt advice
Credit or hire agreement
Credit brokerage
What should a solicitor ensure when they are carrying out consumer credit activities?
They need to be authorised by the FCA or ensure their business falls within the professional exemption under s327.
What is a potential example of a consumer credit activity that a solicitor could carry out?
When is this arrangement exempt?
Allowing a client more time to pay their fees.
Such arrangement will be exempt if:
- The number of repayments does not exceed 12;
- The payment term does not exceed 12 months; and
- The credit is provided without interest or other charges.
What is insurance distribution?
Activities of advising on, proposing or carrying out other work preparatory to the conclusion of contracts of insurance, of concluding such contracts, or of assisting in the administration or performance of such contracts.
What types of ‘contracts of insurance’ fall within the definition of insurance distribution?
Life policies, car insurance, buildings and contents, defective title insurance, after-the-event legal insurance etc.
What is the financial promotion restriction?
A person must not, in the course of business, communicate an invitation or inducement to engage in an investment activity unless the promotion has been made or approved by an authorised person, or is exempt.
What is the five part test to determine if an unauthorised person falls foul of the financial promotion restriction?
- Is the 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 exceptions?
What type of communication falls within a financial promotion restriciton?
Giving material or transmitting material to the recipient.
Includes F2F, letters, emails, websites.
A person needs to take an active step to make the communication e.g. leaving copies, putting a letter through the door.
What are the exceptions to the financial promotion prohibition?
One off promotions - when the solicitor believes on reasonable grounds that the client:
(a) understands the risks associated with engaging with the activity and
(b) the client would expect to be contacted by the solicitor in relation to that activity.
When the solicitor introduces a client to an authorised person who carries on the controlled activity, provided:
(a) the solicitor is not connected to the ATP
(b) the solicitor does not receive any pecuniary reward or other advantage and
(c) the client is not seeking or has not sought advice from the solicitor as to the merits of engaging in the investment activity (or the solicitor has declined to provide such advice)
What is NOT a specified investment that a solicitor will only receive disciplinary proceedings on if they continue to advise?
Investments related to land
