Financial Services, Money Laundry, Tax

Question 1

What are the main objectives of the Financial Services Act 2000 (as amended 2010)?

Answer 1

1. Market confidence
2. Financial stability
3. Consumer protection
4. Reduction of financial crime (reducing the extent to which it’s possible for a business carried on by a regulated person to be used for the purpose connected with financial crime.)

Question 2

What are the aims of the PRA (Prudent Regulatory Authority)?

Answer 2

Prudent supervision of banks, building societies, insurance companies and major investment firms.

Guaranteeing safety and soundness of firms to protect policy holders through sound financial management.

Question 3

What are the aims of the FCA (Financial Conduct Authority)?

Answer 3

Guaranteeing markets work well and protect consumers and enhancing integrity of markets.

1. Fair deal for consumers
2. Ensuring markets are resilient and fair
3. Ensure that the possibility of firms being used for financial crime is minimized
4. Competition (effective competition benefits consumers.

Question 4

What is the Twin peak regulatory model?

Answer 4

Two independent groups of supervisors - PRA and FCA

Question 5

What does the Retail Distribution Review (RDR) entail?

Answer 5

1. Independent advice should be truly independent and reflect investors needs.
2. People can clearly identify and understand the services that are being offered.
3. Commission bias is removed from the system and recommendations made by advisers are not influenced by product providers.

Question 6

Define regulated activity according to the Financial Services and Market Act 2000 (as amended 2010) (“FSMA”)?

Answer 6

FSMA section 22 (1)
“an activity is a regulated activity for the purpose of this act if it is an activity of a special kind which is carried on by way of business and: (a) related to an investment of a specified kind”

FSMA section 22 (4)
““Investments” include any asset, right or interest”

FSMA 22 95)
““specified” means specified in an order made by Treasury”

The order refers to Financial Services and Market Act 2000 (Regulated Activities) order 2001. (“RAO”)

Question 7

Which section in RAO set defines regulated activities?

Answer 7

Section II of RAO - Specified activities

Section III of RAO - Specified investments

Question 8

Name the specified investments in RAO Part III

Answer 8

1. Deposits
2. Rights under a contract of insurance (general insurance e.g. home, life, mortgage protection
3. Shares
4. Investments creating or acknowledging indebtedness (e.g. debentures, debenture stock, bonds, CD’s
5. Government and public securities
6. Instruments giving entitlement to investments (e.g a warrant or other instrument entitling the holder to subscribe to a share, debenture or government and public security)
7. Certificate representing certain securities (a certificate or other instrument which confers contractual or property rights)
8. Units in a collective investment scheme
9. Rights under a stakeholder investment scheme
10. Options (does not include an option to a “one of a kind”)
11. Futures
12. Contract of difference (CFD) (contract between two parties stipulating that the seller will pay to the buyer the difference between the current value of an asset and its value at contract time. = derivative
13. Funural plan (not if its taken out within one month of death)
14. Regulated mortgage contracts (must meet certain criteria: land in the EEA, only applies to first legal mortgage on land and 40% must be used or intended to be used for dwelling.

Question 9

Name the regulated activities in RAO Part II

Answer 9

1. dealing in investments as agent or principal
2. arranging deals in investments
3. managing investments
4. safeguarding and administering investments
5. advising on investments

Question 10

Define the regulated activity in RAO Part III “dealing in investments”

Answer 10

Buying, selling, subscribing for or underwriting securities or contractually based
investments (other than investments of the kind specified by article 87 (funeral contracts), or article 89 (rights to or interest in investment) so far as
relevant to that article) as principal is a specified kind of activity

Question 11

Define the regulated activity in RAO Part III “Arranging deals in investments”

Answer 11

Making arrangements for another person (whether as principal or agent) to buy,
sell, subscribe for or underwrite a particular investment which is—
(a) a security,
(b) a contractually based investment, or
(c) an investment of the kind specified by article 86 (Loyd’s syndicate), or article 89 (rights to or interest in investment) so far as relevant to
that article,
is a specified kind of activity.
(2) Making arrangements with a view to a person who participates in the arrangements
buying, selling, subscribing for or underwriting investments falling within paragraph (1)(a), (b)
or (c) (whether as principal or agent) is also a specified kind of activity

Question 12

Define the regulated activity in RAO Part III “Managing investments”

Answer 12

Managing assets belonging to another person, in circumstances involving the exercise
of discretion, is a specified kind of activity if—
(a) the assets consist of or include any investment which is a security or a contractually
based investment;

Question 13

Define the regulated activity in RAO Part III “Safeguarding and administering investments”

Answer 13

The activity consisting of both—
(a) the safeguarding of assets belonging to another, and
(b) the administration of those assets,
or arranging for one or more other persons to carry on that activity, is a specified kind of activity if:
(i) the assets consist of or include any investment which is a security or a contractually
based investment

Question 14

Define the regulated activity in RAO Part III “Advising on investments”

Answer 14

Advising a person is a specified kind of activity if the advice is—
(a) given to the person in his capacity as an investor or potential investor, or in his
capacity as agent for an investor or a potential investor; and
(b) advice on the merits of his doing any of the following (whether as principal or
agent)—
(i) buying, selling, subscribing for or underwriting a particular investment which is
a security or a contractually based investment, or
(ii) exercising any right conferred by such an investment to buy, sell, subscribe for
or underwrite such an investment.

Question 15

Define the term “underwriting”

Answer 15

Underwriting services are provided by some large specialist financial institutions, such as banks, insurance or investment houses, whereby they guarantee payment in case of damage or financial loss and accept the financial risk for liability arising from such guarantee. An underwriting arrangement may be created in a number of situations including insurance, issue of securities in a public offering, and in bank lending, among others.Securities underwriting is the process by which investment banks raise investment capital from investors on behalf of corporations and governments that are issuing securities (both equity and debt capital). The services of an underwriter are typically used during a public offering in a primary market.

This is a way of distributing a newly issued security, such as stocks or bonds, to investors. A syndicate of banks (the lead managers) underwrites the transaction, which means they have taken on the risk of distributing the securities. Should they not be able to find enough investors, they will have to hold some securities themselves. Underwriters make their income from the price difference (the “underwriting spread”) between the price they pay the issuer and what they collect from investors or from broker-dealers who buy portions of the offering.

Question 16

Define the term “Contractually based investment”

Answer 16

(a) a life policy (except a long-term care insurance contract which is not a qualifying contract of insurance);
(b) an option, future, contract for differences or funeral plan contract;
(c) rights to or interests in an investment falling within (a) or (b).

Question 17

What is a conveyancing solicitor and which regulated activities are they likely to carry out?

Answer 17

1. draw up the legal contracts and arrange for the transfer of title to be registered with the Land Registry
2. provide homebuyers with legal advice relating to the contract, the mortgage offer and property issues that may have been identified by your surveyor.
3. conduct a variety of “searches” through the local authority, and these can reveal crucial information relating to the property you intend to buy, including factors such as boundary disputes, local planning permissions or constraints, and potential environmental factors such as flood risk.

They are likely to carry our the following regulated activities in relation to a range of specified investments:

(a) Mortgages
(b) Life policies
(c) Pension policies
(d) other contracts of insurance
(e) Shares in management and services companies

Question 18

Which regulated activities would a solicitor working with corporate services typically encounter?

Answer 18

1. dealing in investments
2. arranging for another person to deal in investments (e.g. sale or purchase of a company)
3. managing investments (e.g. receiving dividend or shares which form part of a trust fund which the solicitor is administrating)
4. advising an investor (e.g. on the merits on making a particular investment)
5. advising company about contracts of insurance

Question 19

Which regulated activities would a solicitor working with matrimonial services typically encounter?

Answer 19

1. investments
2. advising on divorce settlements (e.g. dividing up investments of the former spouses and deciding which assets should be sold or transferred such as endowment and life insurance policies)
3. advising on how to invest money
4. specialist advice in relation to persons

Question 20

What is a probate solicitor and which regulated activities are they likely to carry out?

Answer 20

Definition of probate is “the official proving of a will”. Dealing with the disposal of assets rather than the purchase.

1. acting on behalf of the trustee or personal representative in the sale of assets during winding up of estate
2. advising on the sale of assets in estate to pay of inheritance tax debts or beneficiaries
3. arranging with stockbroker to buy or sell shares and trusts
4. safeguarding and administering investments
5. pension advice to testator

Question 21

Which regulated activities would a solicitor working with trust services typically encounter?

Answer 21

1. advising trustees on legal and tax implications arising from trust (note that while you can give generic advice, it is difficult to envisage when advice will be truly generic in trust work, as you are likely to be discussing particular investments in the estate)
2. administering day-to-day activities of trust
3. buying or selling shares
4. managing trust that contain investments
5. receiving dividends for investing trust

Question 22

Which regulated activities would a solicitor working with tax services typically encounter?

Answer 22

1. assisting clients in estate planning
2. advising on pension rights
3. managing investments in mutual fund
4. tax advice

Question 23

What identifies trust work for a solicitor?

Answer 23

A trust is created when a person (settlor) gives property to another person (trustee) to hold for the benefit of a third person (beneficiary). A trust is a legal way to hold and protect your assets for the future. A document called the trust deed is the set of rules for the operation of the trust. It sets out who the beneficiaries are, who the trustees are and how the trust will be administered. Trusts can hold assets, invest and borrow money, and operate businesses. They also pay tax

Question 24

Many activities that a solicitor encounters on a day-to-day basis will fall outside the scope of the Act since they are exclusion and exceptions. Name the two types of exclusions and give a short description on what they entail.

Answer 24

General exclusions and Specific exclusions!

General exclusions (apply notwithstanding the particular investment which is subject to the activity)

1. Solicitors as trustees, nominees or personal representatives arranging, managing safeguarding and recommending investments (art 66)
2. Activities that are a necessary part of solicitor’s other professional services (art 67)
3. Sale or purchase of body corporate (art 70)
4. information provided on incidental basis (art 72c)

Specific exclusions (apply depending on the particular investment, which is subject to the activity)

1. Introducing a client to an authorized person for independent advice (art 33)
2. dealing or arranging deal with/through an authorized person (art 29)
3. Execution-only client exclusion (art 29)
4. generic advice only on investments (art 53)

Question 25

When are activities excluded by FCA authorization when a solicitor is acting as trustee, nominee or personal representative arranging, managing, safeguarding and recommending investments (art 66)?

Answer 25

1. It cannot be a contract of insurance and
2. solicitors can only get reimbursed for costs. No other additional remuneration and
3. the arranging or advising must be for or to a fellow trustee or personal representative or for or to a beneficiary under the trust or will or intestacy.

in addition, where the trustee, nominee or personal representative is dealing, managing or safeguarding; the “holding out” restriction applies. This means that the solicitor may NOT hold himself out:

1. in regards to dealing - as providing a service in buying and selling securities or relevant instruments.
2. in regards to managing - providing discretionary investment managing services
3. in regards to safeguarding - as providing a safeguarding and administration service.

Question 26

When are activities excluded by FCA authorization when a solicitor makes arrangements, safeguarding and administering, or recommending investments where reasonably necessary part of other professional services to client? (art 67)

Answer 26

Note that this exclusion does not apply to managing.

1. provision of financial services essential/vital to legal services provided to the client.
2. Not contract of insurance
3. No additional remuneration

e.g. where the solicitor arranges the sale of all the assets in an estate, in the course of administrating the estate, such activities would be excluded from the general prohibition under article 67. Similarly, when a client is selling a flat, the transaction may also involve the sale of shares in a management company for the block of flats. Although such shares are specified investments, arranging their sale may be considered a necessary part of the other property work that the solicitor i caring out. On the other hand, where the solicitor needs to make a decision as to which assets should be sold, the advise from an authorized person should be obtained.

Question 27

When are activities excluded by FCA authorization where a solicitor carries out activities in connection with the sale or purchase of a body corporate (art 70)?

Answer 27

Note that this exemption does not apply to safeguarding and administrating

1. the solicitor is permitted to deal as principle or agent to arrange deals and give advice in connection to the sale or purchase of shares in any body corporate,
   provided,
2. the shares (together with other shares already in the clients possession) consists of 50% or more of the voting shares. This threshold is less if the purchaser has day-to-day control over the running of the company.

Question 28

When are activities excluded by FCA authorization involving provision of information on an incidental basis (72c)?

Answer 28

1. Where the investment is a contract of insurance e.g. a defective title indemnity policy, the solicitor can arrange, manage and safeguard the investment provided that these activities are carried on in the course of his profession which does not otherwise consists of the caring on of regulated activities
2. the information is provided to a potential/actual policyholder and
3. the activity can reasonably be regarded as incidental to solicitor’s profession.

For example: the solicitor will be able to give his conveying clients name and contract details of an authorized person. Such person can advise the client with the view to arranging a defective title indemnity policy. However, the solicitor would not be able to become more involved in this, by example filling in the necessary forms.

Question 29

What is a defective title indemnity policy?

Answer 29

Defective title is a generic term. A title is considered to be defective where there is potential for a third party to establish or attempt to establish an estate right title or interest which is adverse to, or in derogation of, the property owner’s title to the property.

A defective title can lead to the property owner being liable for compensation or damages; can result in the prevention or curtailment of a development; can even result in the property owner being forced to relinquish title to part or all of the property

Question 30

Is introducing a client to an authorized or exempt person who is likely to provide independent financial advice or discretionary management of investments deemed a regulated activity?

Answer 30

No, its caught by a a specific exclusion, provided that:

1. the solicitor should have no further contract in relation to the activity
2. No active participation (otherwise not deemed as arranging)

Question 31

Is acting through an Authorized Third Person deemed a regulated activity?

Answer 31

A solicitor whom is not an authorized person will not be dealing or arranging a deal for the purpose of the Act and will not therefore be caring on a regulated activity (specific exclusion) if he enters into a transaction as agent for his client with or through an authorized person.

1. the transaction is entered into on the advice of the authorized person. Needs to be clear that the client, in capacity of investor, has not sought advice from the solicitor as to the merits of entering into the transaction or;
2. client has sought advice, but the solicitor has declined to give it and has recommended client seek advice from an authorized person.
3. No commission is received for which you do not account to the client.

Can have an ongoing role and act as the link between the client and the Authorized Third Person (“ATP”) e.g. by attending meetings, providing information to the ATP and presenting the ATPs advice to the client. Rather than merely making an introduction and then stepping out of the process.

Question 32

Is the giving of generic advice on investments a regulated activity?

Answer 32

No, since it is a specific exclusion. It would not constitute a regulated activity of advising such as advising on the benefits of re-payment mortgages as compared to endowment mortgages. Only advice as a regulated activity if relating to;

1. Merits of buying or selling particular instruments
2. opinion by solicitor or recommendation as to course of action.

Question 33

Name the exclusions to specified Investments

Answer 33

1. Land
2. Currency
3. Works of art
4. Chattels
5. Tangible assets
6. National Savings Products
7. Sums received as deposit by a practicing solicitor in course of profession.

Question 34

What is the General Prohibition in 19(1) FSMA?

Answer 34

“no person may carry on a regulated activity in the UK… unless he is:

1. an authorised person; or
2. an exempt person

This could be a criminal offence and can result in 3 years in prison and/or fine. Any agreement made by a person in contravention of the prohibition is unenforceable.

Question 35

What are the exemptions to the General Prohibition n s. 327 FSMA?

Answer 35

The general prohibition does not apply to the carrying on of a regulated activity by a person if
(a) person is member of a profession or controlled or managed by one or more such members. (the principle must accept responsibility for the regulated activity on the persons behalf)

(b) Person can not get money from any person which cannot be accounted to his client, when caring out the activity
(c) the regulated activity must be incidental to his professional services.

Question 36

“Shares or stock in capital of any company” are specified investments due to them being a security. What are the exclusions?

Answer 36

Shares in OEIC’s (which are regulated as “unites in collective investment schemes) and building society share accounts.

Question 37

“Instruments creating or acknowledging indebtedness” is a specified investment due to it being a security. What are the exclusions?

Answer 37

Bank notes, bank statements, cheques, bankers’ drafts, letter of credit and bills of exchange (not not exclude bank bills)

Question 38

“Government and public securities” are specified investments due to them being a security. What are the exclusions?

Answer 38

National Savings

Question 39

“Instruments giving entitlement to investments” is a specified investment due to it being a security. What are the exclusions?

Answer 39

There are no specific exemptions. Instead it included share warrants. A Share Warrant is a document issued by the company stating that its bearer is entitled to the shares or stock specified therein. Share warrants are negotiable instruments. They are transferable by mere delivery without registration of transfer.

Question 40

“Units in a collective investment scheme” is a specified investment due to it being a security. What are the exclusions?

Answer 40

There are no specific exemptions. Instead it includes units in a unit of trust fund or shares in an OEIC.

Question 41

“long-term insurance contracts (“qualifying contracts of insurance”) with an investment element only”are specified investments due to them being a relevant investment. What does this category include?

Answer 41

These mainly cover:

1. endowment policies (an individual contributes to an investment scheme with a life assurance company)
2. whole life policies (saving scheme in which an individual invests for a specified term or until they die) 3. annuities (sum of money paid annually so long as beneficiary lives)
3. investment bonds (lump sum investment used to provide regular income to the investor over a long term)
4. pension fund management contracts
5. long-term permanent heath insurance.

Question 42

“Long term care insurance contracts and non-investment insurance contracts (including life policies and general insurance contracts” is a specified investment due to it being a relevant investment. What does this include?

Answer 42

Term life policies are insurance policies for a specified term on an individual’s life, so that the insurance policy will pay out a lump sum only where the individual dies before the policy ends.

General insurance contracts are contracts involving no investment element and include policies for accident insurance, fire insurance, disability insurance, car insurance, household insurance, legal expenses insurance, defective title or restrictive covenant indemnity insurance, missing beneficiary indemnity, travel insurance, credit insurance etc.

Question 43

“Options, futures and contracts of different” are a specified investment due to them a relevant investment. What does this include?

Answer 43

“Options” includes options to buy or sell a security (e.g. shares, gilts, and other bonds) or relevant investment, palladium, platinum, gold and silver and currency and options on futures.

“Futures” includes all futures trades on a futures exchange (commodities futures, futures on a stock index, currency, interest rates and bonds).

Question 44

“Funeral plan contracts” are a specified investment due to them a relevant investment. What does this include?

Answer 44

These are arrangements between a customer and a plan provider under which the customer makes a payment(s) to the plan provider, who in return undertakes to provide a funeral for a customer on death. Funeral plan contracts are a form of savings and investment scheme.

Question 45

“Deposits” are a specified investment and fall into the category of neither security or relevant investment. What does this include and exclude?

Answer 45

The regulated activity is only the acceptance of deposit.

Includes: bank and building society’s share accounts and all ISA’s (because ISA’s contain, wither alone or in combination, company shares, unit trusts or insurance which are all investments within the Act)

Excludes: mini-cash ISA’s and money deposited with the National Savings Bank, banks and building societies, a local authority, another company in the same group, a close relative or a practicing solicitor who received the money on account of a client in the course of this profession.

Question 46

“Regulated mortgage contracts” are specified investment and fall into the category of neither security or relevant investment. What does this include and exclude?

Answer 46

A regulated mortgage contract (“RMC”) is one under which:

1. a lender provides credit to a borrower who is an individual or trustees; and
2. the obligation to repay is secured by a first legal mortgage on land in the UK (at least 40% of the land being used or intended to be used as a dwelling by the borrower or where the borrower is a trustee, by a beneficiary of a trust.
3. for the purchase of properly which is secured by a first legal charge against that property, this definition also includes other types pf secured loans where they satisfy the conditions (a) secured bridging loans (b) equity release loans.

Exclusions:

1. loans secured by a second or subsequent charge (because here the lender does not have a first charge)
2. loans secured on commercial premises (as the borrower will not be using the property as or in connection with dwelling)
3. loans to limited companies (since the borrowing is not an individual or trustee

Question 47

Define “Gilts”

Answer 47

Fixed-interest loan securities issued by the UK government.

Question 48

What is an OEIC?

Answer 48

Open ended investment company. Type of company or fund in the United Kingdom that is structured to invest in other companies with the ability to adjust constantly its investment criteria and fund size.

OEIC are units in a collective investment scheme and a specified investment due to it being a security.

Question 49

What is an ISA?

Answer 49

Individual Savings Account - a scheme allowing individuals to hold cash, shares, and unit trusts free of tax on dividends, interest, and capital gains

Question 50

What is a Unit Trust?

Answer 50

A unit trust is an unincorporated mutual fund structure that allows funds to hold assets and provide profits that go straight to individual unit owners instead of reinvesting them back into the fund. The investment fund is set up under a trust deed. The investor is effectively the beneficiary under the trust. It works by pooling your money with other investors into a single fund, which is managed by a fund manager. The fund manager uses the unit trust fund to invest in asset classes through a variety of securities.