Financial Services - U2 Flashcards

Question

What is s 327 FSMA 2000?

Answer 1

Gives certain conditions that must be met in order for a firm with a DPB to function without FCA authorisation. This protects firms from being in breach of s 19 FSMA. S 327 FSMA is PROFESSIONAL EXEMPTION. However, some activities will still be prohibited. This cannot be used by firms that are regulated by the FCA.

Answer 2

Basically, only those regulated activities that arise through the nature of the firms activities can be allowed ('incidental' regulated activities) and it must be stuff that the DPB permits and regulates. You shouldnt be paid for doing those activities in particular by someone other than a client - additionally client must be notified of any advantages received (mirrored in 4.1 Code of cond). (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.

Answer 3

2 tests: a general and specific test. Specific test: about the specific client concerned. The relevant regulated activity must ‘arise out of’ or be ‘complementary to’ some other service being provided by the firm to the client. So, there will be a main service the firm will provide, such as legal work... the regulated activity that will occur will occur as a result of providing that service for that particular client. Professional main service + regulated activity = both to the same person/client. For example: Therefore, in a probate matter, where the probate client is the executor (will recieve the professional main service), advice to a beneficiary under the will (regulated service) would not satisfy this test. General test: where 50% or more of a firm's income comes from regulated activity that theyre doing... this is a big no no. (1) To satisfy the ‘general’ test of being incidental, the activities carried out by the firm which would otherwise be regulated cannot be a major part of the firm’s activities. Consider: (a) the scale of regulated activity in proportion to other professional services provided; (b) whether and to what extent the exempt regulated activities are held out as separate services; and (c) the impression given of how the firm provides those activities, for example through advertising its services.

Answer 4

SRA Financial Services (Scope) Rules say: (a) A solicitor or firm must not carry on any activity that is specified in an order made by the Treasury under s 327(6) FSMA 2000. Examples of such activities include recommending to a client to dispose of any rights the client has under a personal pension scheme and advising a client to become a member of a particular Lloyd’s syndicate. Further prohibited activities are set out in the Scope Rules themselves, such as creating or underwriting a contract of insurance. (b) If a firm wishes to undertake insurance distribution activities (see 4.9), it must notify the SRA, be registered in the Financial Services Register and have appointed an insurance distribution officer who will be responsible for such activities. (c) There are further restrictions in the context of corporate finance and credit-related regulated financial services activities

Answer 5

The FCA also has power, under s 328, to issue directions limiting the application of the exemption in respect of different classes of persons or different descriptions of regulated activities.

Answer 6

The COB. Conduct of Business rules. Only operates when the firm is carrying out an exempt regulated activity - thats all it regulates. Not the excluded stuff etc.

Answer 7

There are 6. (1) Status disclosure (Rules 2.1 and 2.2). A firm must provide clients with certain information concerning the status of the firm. For example, the firm must confirm to the client that it is not authorised by the FCA, and explain that complaints and redress mechanisms are provided through the SRA and the Legal Ombudsman. Any information that is provided under these rules must be given in a manner that is clear, fair and not misleading. (2) Best execution (Rule 3.1). A solicitor must act in the best interests of the client (SRA Principle 7). Therefore, the firm must carry out transactions for clients as soon as possible unless it reasonably believes that it is in the client’s best interest not to. (3) Transactions (Rules 4.1 and 4.2). The firm must keep records of: (a) instructions from clients to carry out transactions; and (b) instructions to third parties to carry them out. (4) Commissions (Rule 5.1). The firm must keep records of commissions received in respect of regulated activities and how those commissions were dealt with. (5) Execution-only clients (Rule 7.1). Firm must write letter to client confirming that the client is not relying on solicitor's advice. Firm must also keep copy of the letter. This applies for example, when the execution-only client's need is for you to execute a contract of insurance - this means you cannot rely on the execution-only exclusion. You have to rely on the professional exemption. (6) Insurance distribution activities (COB Rules, Part 3). All information about insurance distribution must be communicated to clients in a way that is clear, fair and not misleading, and information on the nature of the remuneration received in relation to a contract of insurance must be provided to the client before the conclusion of the initial contract.

Answer 8

Credit brokerage, debt collecting under a consumer credit or hire agreement, debt advice and debt management or administration) is a relatively new type of regulated activity for the purposes of s 22 FSMA 2000. So, credit-related activity is now regulated.

Answer 9

A solicitor could be carrying out a credit-related activity by virtue of the way in which the solicitor accepts the payment of their fees, including allowing a client time to pay. However, such an arrangement will be regarded as an exempt agreement under RAO 2001 if all of the following conditions apply: (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. In most other cases, such arrangements are likely to be covered by the s 327 exemption (in which case Part 4 of the COB Rules will apply).

Answer 10

Anything to do with making insurances happen and end really. Often seen in probate stuff, property stuff and personal injury claims. The definition of ‘insurance distribution’ in RAO 2001 includes: The 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 and performance of such contracts, in particular in the event of a claim … ‘Contracts of insurance’ are defined widely, and include life policies (eg endowment policies), car insurance, buildings and contents insurance, defective title insurance, after-the-event legal insurance and annuities. Rights under contracts of insurance are specified investments. BUT, to do insurance distribution, firms will need authorisation by FCA or rely on the s 327 professional exemption + follow COB. NO exclusions can be used for this.

Answer 11

provides that 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 (by FCA for 'approver permission') or it is exempt. This is known as the financial promotion restriction.

Answer 12

* Is a communication being made (communication can be direct or indirect + any form of communication)? * Is the communication an invitation or inducement (involves persuasion and incitment language)? * Is there an investment activity (such as shares and insurance contracts)? * Is the communication made in the course of business? * Does the communication fall within one of the exemptions? If answer is yes to first 4, this will mean that this is a financial promotion communication and will need to be authorised by the relevant person or must fall within the relevant exemptions.

Answer 13

(1) One-off non-real time promotions - must only be done where client understands the risks and where it can be reasonably expected of solicitor to mention these investment activities. (2) Introducing a 3rd party authorised person (an ATP), provided that the solicitor is not connected to the ATP, or recieving a reward from the introduction from anyone other than the client AND client must not recieve advice from solicitor about engaging in this activity - so solicitor must refuse to give advice.

Answer 14

Trick question: Land is not a specified investment - so will not be in breach of s 19. It will be in breach of the Codes of Conduct tho (Para 3.2) - so solicitor will have disciplinary hearings brought against them as they are not knowledgeable in the area but is still trying to give their client advice.