Financial services - Legal services Flashcards
What does the ‘general prohibition’ under Section 19 FSMA 2000 entail?
: It prohibits any person from carrying out regulated activities in the UK unless authorised or exempt. Unauthorized activity is a criminal offense, punishable by up to two years’ imprisonment or an unlimited fine.
What is the penalty for breaching the financial promotions restriction (Section 21 FSMA 2000)?
: Unauthorized financial promotions are a criminal offense, with potential penalties under Section 25 FSMA 2000.
What four tests determine if an activity is regulated under FSMA 2000?
The tests are:
Business test: Is the activity carried on by way of business?
Specified investment test: Does it involve a specified investment?
Specified activity test: Is there a specified activity involved?
Exclusion test: Does an exclusion apply?
What is the ‘business test’ for a regulated activity under FSMA 2000?
A:
To qualify as a regulated activity, it must be carried out “by way of business.” Generally, this is straightforward; for example, a solicitor giving advice as part of their practice would be deemed “in business.”
What types of investments are not considered specified investments under FSMA 2000?
Investments not considered specified include:
Interests in land
Certain National Savings products
What is the ‘Introducing’ exclusion under FSMA 2000, and when does it apply?
The ‘Introducing’ exclusion applies to arranging activities. A solicitor may introduce a client to an authorised person (such as an FCA-authorised advisor) and then have no further role in the transaction. If the solicitor continues to communicate between the client and the authorised person, the exclusion cannot be relied upon. This exclusion does not apply to transactions involving insurance contracts.
What are the specified investments under FSMA 2000?
Specified investments include:
Company stocks and shares (excluding shares in open-ended investment companies or UK building societies)
Debentures, loan stock, and bonds
Government securities (e.g., gilts)
Unit trusts and open-ended investment companies (OEICs)
Insurance contracts (including life policies and annuities)
Regulated mortgage contracts (mainly residential mortgages)
Home reversion and home purchase plans (e.g., Islamic-compliant mortgage alternatives)
Deposits (e.g., cash ISAs and bank account funds, with “accepting deposits” primarily for banks)
Credit agreements (exempt if solicitor grants up to 12 months for repayment without interest or fees)
What is the ‘Authorised Third Person’ (ATP) exclusion, and when does it apply?
A: The ATP exclusion applies to dealing as agent and arranging activities. It is valid if the transaction is based on the advice of an authorised third party (ATP). The solicitor may remain involved in the transaction but cannot give financial advice directly. The exclusion does not apply if the solicitor receives any financial benefit (e.g., commission) from a party other than the client, or if the transaction involves an insurance contract.
What is the ‘Execution-Only Client’ exclusion under FSMA 2000, and when does it apply?
A: The ‘Execution-Only Client’ exclusion applies to dealing as agent and arranging. It is valid if the client is not seeking, or has not sought, investment advice from the solicitor. If advice is sought and the solicitor declines to give it, they must instead recommend the client seek advice from an authorised person. This exclusion does not apply if the solicitor receives commissions or if the transaction involves insurance contracts.
What is the ‘Trustees or Personal Representatives’ exclusion under FSMA 2000, and what are its limitations?
A:
This exclusion applies to arranging, managing, safeguarding, and advising fellow trustees or beneficiaries, as well as lending money on or administering regulated mortgage contracts when the solicitor is acting as a trustee or personal representative. Limitations include:
Role-specific: The exclusion only applies if the solicitor is acting as the trustee or personal representative, not if they are acting on behalf of one.
Firm members: If a firm member is a trustee or PR, other firm members can handle related activities, and the exclusion still applies.
No extra remuneration: The exclusion does not apply if the solicitor receives additional pay beyond standard trustee/PR fees.
Service restriction: If the solicitor publicly offers managing or safeguarding services, the exclusion does not apply to these activities.
This exclusion does not cover contracts of insurance or any insurance distribution activities.
What is the ‘Professional/Necessary’ exclusion under FSMA 2000, and when does it apply?
A: The ‘Professional/Necessary’ exclusion applies to advising, arranging, safeguarding, and dealing as agent. This exclusion is valid if the regulated activity is a necessary part of other professional or business services (e.g., advising on company acquisition or arranging asset sales for probate). Limitations include:
No separate remuneration: The exclusion does not apply if the regulated activity is charged separately from other services.
Insurance restriction: The exclusion is not available for any insurance distribution activities.
MSLN ARRANGING ASSETS WHEN YOU ARE UNABLE TO PAY IHT FOR PROBATE GRANT (PROVIDED PR EXCLUSION DOESNT APPLY)
Takeover exclusion
A: The Takeover Exclusion applies to arranging, advising, and dealing as agent in the sale or purchase of shares in a corporate body when:
50% or more of voting shares are being acquired or sold.
Parties involved are corporate entities, partnerships, individuals, or connected individuals (e.g., directors, managers, or their relatives).
This exclusion also applies if the transaction’s purpose is to gain day-to-day control of the company, even if less than 50% of shares are acquired. Limitations: The exclusion does not apply to insurance-related transactions.
: Under Section 327 FSMA 2000, when does the general prohibition in Section 19 not apply to solicitors?
A: The general prohibition in Section 19 FSMA 2000 does not apply to solicitors if the following conditions are met:
The firm does not receive any pecuniary or other advantage from anyone other than the client for which it does not account to the client.
Providing any service must be incidental to the provision of professional services regulated by the SRA.
The firm only carries out regulated activities permitted by the Designated Professional Body (DPB).
The activities are not prohibited by an order from the Treasury or directions from the FCA under Sections 328 or 329.
The firm does not carry on any other regulated activities
What are the ‘specific’ and ‘general’ tests for determining if a service is incidental under Section 327 FSMA 2000?
Specific Test: The regulated activity must arise out of or be complementary to a particular professional service provided to a specific client. The professional service must be the primary service, while the regulated activity is subordinate. Both services must be provided to the same person.
General Test: The regulated activities should not be a major part of the firm’s overall activities. If the firm’s income from investment business is 50% or more of total income, it fails this test. Factors considered include:
Scale of regulated activity vs. other professional services.
Whether the exempt regulated activities are promoted as separate services.
The impression given about how the firm provides those activities (e.g., through advertising).
what rules must firms comply with when using the professional exemption for regulated activities under Section 327 FSMA 2000?
A: Firms must comply with the SRA Financial Services (Scope) Rules and the SRA Conduct of Business (COB) Rules at all times when seeking to use the professional exemption. These rules dictate the activities that firms can carry out under the exemption.
