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Business > FSMA > Flashcards

FSMA Flashcards

1
Q

how are financial services regulated, and how does this apply to law firms?

A
  • The Financial Conduct Authority and the Prudential Regulation Authority are the financial regulators in the UK.
  • The way a firm delivers its services to clients and whether it can provide certain types of advice is regulated by the Financial Services and Markets Act 2000 (as well as ancillary legislation).
  • If the firm is not authorised by the FCA to provide such services, it must either fall within an exception to the prohibition, obtain direct authorisation from the FCA, or not act on the matter
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2
Q

what is the prohibition on providing financial services?

A

it is a criminal offence to carry on a regulated activity unless you are:

  1. an authorised person by the FCA
  2. an exempt person
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3
Q

what is a regulated activity?

A

a specified activity + a specified investment

+ exclusions do not apply

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4
Q

what are the 4 steps to consider whether authorisation by the Financial Conduct Authority (FCA) is required?

i.e., FSMA decision tree

A

1) is the investment ‘specified’?

  • (if no then it is ok to act without authorisation, if yes, then:)

2) is the activity ‘regulated’?

  • (if no then it is ok to act without authorisation, if yes, then:)

3) is the activity excluded under FSMA?

  • (if yes then it is ok to act without authorisation; if no, it is a regulated activity, then:)

4) does the activity fulfil the conditions under FSMA AND SRA Scope Rule 2?

  • (if yes then exemption makes it ok to act without authorisation, if no then authorisation is required and you cannot act)
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5
Q

what is a specified investment? (8)

A
  • Shares in a company
  • rights under an insurance contract
  • pension scheme rights
  • bank deposits
  • government bonds (GILTs)
  • regulated mortgage contracts (where 40% of land is for dwelling)
  • endowment policies
  • unit trusts
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6
Q

what is NOT a specified investment? (6)

A
  • premium bonds
  • investment property
  • opening bank accounts
  • advising on tax implications of e.g., gifting cars/buying holiday home
  • national savings products
  • loan to a company

BUT you must be competent to act nonetheless

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7
Q

if offering shares to the public, do you need to issue a prospectus?

A

Yes - prospectus must be issued and approved by FCA

UNLESS: offer is directed to less than 150 people or offer is only sent to qualified investors (e.g., banks)

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8
Q

what is a ‘specified’ activity? (4)

A
  1. dealing in investments as principal or agent (e.g., buying, selling, subscribing, underwriting securities or contractual investments)
  2. arranging deals in investments
  3. managing investments (e.g., exercising discretion on security investments or contractual investments)
  4. advising on merits of investments
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9
Q

what does advising on investments involve? what is not considered advising on investments?

A
  • Advising = element of opinion + a recommendation on a course of dealing
  • NOT advising = giving generic advice does not require FCA authorisation
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10
Q

what are the 3 excluded activities?

A
  1. regulated activity in connection with a sale of a corporate body (50% or more of voting rights together with shares already held / day-to-day control of company)
  2. regulated activities that are a necessary part of other services that are not regulated in the course of business
  3. dealing with/through authorised persons
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11
Q

what is meant by ‘regulated activities that are a necessary part of other services that are not regulated’?

A
  • this is an excluded activity from the prohibition on providing regulated activity without FCA authorisation (step 3)
  • necessary part = it will not be possible for the other services to be provided unless the specified activity in question is also provided
  • this does NOT apply where the regulated activity is remunerated separately from the other services
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12
Q

what is this an example of:

client selling leasehold flat and transaction involves transfer of shares in a management company or company that owns the freehold of the block of flats

A
  • regulated activities that are a necessary part of other services that are not regulated = excluded activity (step 3)
  • arranging the sale of the shares would be a necessary part of the other work so the solicitor can arrange share transfer without being authorised by the FCA
  • however, the solicitor cannot be remunerated separately for the sale share
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13
Q

when is dealing with or through authorised persons an excluded activity?

A
  • the client is acting on the advice of an authorised person and they are not seeking advice from the solicitor
  • but exclusion does not apply where the solicitor receives a commission from the other person which they do not account to the client = always account for commissions to the client
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14
Q

if the activity is regulated, what must the solicitor do? (2)

A
  1. obtain authorisation from the FCA, or
  2. be supervised by a designated professional body (Law Society for firms) = if the firm complies with the scope rules they can be exempt from FCA authorisation
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15
Q

what is the general exemption from direct authorisation by FCA? (2 parts)

A

If the activity is regulated, then FCA authorisation is not needed if the activity:

  1. meets conditions under s327 FSMA, AND
  2. meets conditions under Rule 2 SRA Scope Rules
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16
Q

what are the 4 conditions under s327 FSMA that must be met in order for the general exemption from FCA authorisation to apply?

A
  1. person carrying out regulated activity is a member of a profession (solicitor)
  2. person must NOT receive payment from a third party unless accounted to the client (can keep money if client gives informed consent)
  3. activity must be provided in a way that is incidental to the provision of professional services (cannot be a major part of the firm)
  4. Designated Professional Body Rules must be complied with (Rule 2 of SRA Scope Rules)
17
Q

when is an activity provided in a way that is INCIDENTAL? Where/why is this relevant?

A
  • this is one condition under s327 FSMA - must be satisfied for exemption from direct FCA authorisation
  • incidental = the regulated activity cannot be a major practice of the firm
  • consider the scale of the activity in proportion to the other professional services provided by the firm and whether the firm holds itself out to provide the regulated activity e.g., in promotional activities
  • note: if there are separate departments and one department performs the regulated activity - this does not prevent the activity from being incidental
18
Q

what is the condition under Rule 2 of SRA Scope Rules that must be met in order for the general exemption from FCA authorisation to apply?

A
  • the activity arises out of OR is complementary to the provision of a particular professional service
  • arises out of = ask what has happened to prompt the activity in question
  • complementary = ask if the specified activity arises naturally out of the work the solicitor is doing for the client
19
Q

you act for a client on the sale of a company and the client asks for advice as to how best to invest in a personal pension

what is this an example of?

A
  • not an activity that ARISES OUT of the provision of a particular service (Rule 2 SRA Scope Rules)
  • the advice would not arise out of the work being done for the client because it is completely unrelated to the non-regulated work
20
Q

A property lawyer, having investigated title, advises their client that the client should buy a particular restrictive covenant insurance policy

is FCA authorisation required?

A
  • this is a regulated activity (specified investment + specified activity + not excluded)
  • BUT this is an activity that is INCIDENTAL and COMPLEMENTARY to the provision of services (s327 FSMA + Rule 2)
  • incidental = activity of advising on merits of insurance policy is a small part of the overall work the firm does
  • complementary = the need to advise arises naturally out of the work as the need for insurance policy has become apparent from the investigations
  • NO FCA AUTHORISATION REQUIRED
21
Q

A corporate lawyer, having sold shares in company X for their client, is asked by the client for advice on whether he should invest the sale proceeds in ABC plc shares

is FCA authorisation required?

A
  • this is a regulated activity (specified investment + specified activity + not excluded)
  • s327 FSMA - the activity is incidental = advising on the merits of investing the sale proceeds in shares in ABC plc should only be a small part of the overall work the firm does for clients
  • BUT the activity is NOT complementary (Rule 2) = the activity does not arise naturally out of the work the solicitor does for the client
  • FCA AUTHORISATION REQUIRED
22
Q

If the general exemption applies (s327 FSMA and Rule 2 conditions met), what happens next?

A

Activity is an exempt regulated activity

solicitor does not need to be authorised by FCA

BUT solicitor must:

  1. comply with SRA scope rules
  2. be authorised by the SRA in relation to this activity
  3. comply with SRA Conduct of Business Rules
23
Q

If the general exemption does not apply (s327 FSMA and Rule 2 conditions met), what happens next?

A

2 OPTIONS:

  1. firm must obtain direct authorisation from the FCA and must comply with the FCA Rule Book, or
  2. solicitor will refuse to give the advice to the client and refer the client to an FCA authorised person

(otherwise it is a criminal offence)

24
Q

what is the financial promotions regime?

A
  • it is an offence to communicate an invitation or inducement to engage in an investment activity unless you are authorised, the content of the communication is approved by an authorised person, or you are exempt
  • e.g., solicitor acting on share sale producing information memorandum if share is being sold at an auction (constitutes financial promotion)
  • exemptions:
  1. sale of body corporate
  2. doc is only distributed to investment professionals (e.g., FCA authorised person)
  3. doc is distributed to high net worth companies, individuals, or sophisticated investments
25
Q

what is the prospectus regime?

A
  • it is an offence to offer shares to the public without an approved prospectus
  • expensive and time consuming to have prospectus approved
  • exceptions:
  1. offer made to less than 150 persons
  2. offer made to qualified investors = banks, investment institutions, governments

Business (19 decks)

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