FSMA Flashcards
What is the general prohibition under FSMA?
Law firms cannot carry out a regulated acitvity unless they are:
- authorised by FCA; or
- exempt
Doing a regulated activity without authorisation or exemption is a breach of FSMA and a criminal offence
Is all financial services work regulated?
No - only those that are regulated activities under FSMA
If it is not a regulated activity, do not need authorisation or an exemption
What is a regulated activity?
Regulated activity = specified investment + specified activity
What is a specified investment?
- Stocks and shares in private or public company
- Bonds
- Government bonds (gilts)
- Credit agreements/loans
- Credit services to consumers
- Funeral plans
- Unit trusts and OEICs
- Insurance policies and insurance distributions
- Mortgages and equity release plans
What are common examples of specified investments?
- Rights under contract of insurance
- Shares
- Pensions
- Bonds
What is not included as specified investments?
- investment property
- land
- tangible assets: sale of a yacht for example does not constitute a regulated activity
What is a specified activity?
- Dealing as agent
- Arranging
- Managing
- Safeguarding
- Advising
Effecting and carrying out insurance contracts and assisting in administration and performance of a contract of insurance
What is advising?
Giving advice to a client who wants to invest their money in relation to a specified investment
- must be specific to a certain product/company/seller
- specific advice on merits of a specific investment
Is general advice a regulated activity?
No
- can give advice on differences between two kinds of investment (bonds vs stocks)
What are the exclusions to specified activities?
- Authorised third person
- Execution-only
- Professional/necessary
- Takeover (if client is buying or selling at least 50% of shares in a company)
- Acting as trustee or PR: if solicitor is acting as trustee or PR this provides an exclusion and is outside of FSMA regulation
What is the professional/necessary exclusion?
Activity is reasonably necessary as part of a solicitor’s job / main work the solicitor is carrying out for the client
E.g., if someone is buying shares in a business, advising on merits of the business and arranging sale of sales; arranging for sale of trusts assets to pay a tax bill; arranging sale of assets in estate to pay liabilities
- the work must not be remunerated separately
What does the necessary part exclusion not apply to?
- contracts of insurance
- certain investment firms or credit institutions
- activity remunerated separately from other services
When will any of the exclusions not apply?
- Solicitor receives a fee and does not tell the client or give the client the fee
- Solicitor just receives a fee and tries to rely on professional/necessary part exclusion
- For any insurance work
What are the conditions for s327 exemption to apply?
- person carrying on regulated activity is a solicitor
- solicitor must not receive a commission, unless they account to the client
- specified activity must be incidental to firm’s legal work
- person must be permitted
- Scope rules complied with
- firm must be authorised by SRA
What are the scope rules?
a) specified activity must arise out of or be complementary to solicitor’s legal work
b) the firm must account to client for fee received
What are extra obligations with respect to insurance activities for firms under Scope?
- Notify SRA
- Appoint insurance distribution officer
- all staff involve must have appropriate knowledge of insurance
- have qualifying indemnity insurance
- tell client about any fee
- tell client the firm is not an insurer
- client is given fair, objective, high-quality advice
What is the case if both s327 and Scope Rules are satisifed?
An exemption is possible
If not: FCA authorisation is required
Scope rules: what happens if the work does not arise out of or is not complementary to provision of professional service?
If it is not a necessary part of a solicitor’s job / does not arise out of –> cannot advise without being authorised by FCA
What is an example of complementary work?
A property solicitor gives legal advice and drafts documents and undertakes a conveyancing transaction involving a regulated mortgage
Giving advice in relation to the mortgage arises naturally
What is an example of work which is not complementary?
A company solicitor is acting on sale of a company for a client. The client asks for advice on whether to invest the sale proceeds in a personal pension or another investment
This advice is not complementary
Scenario: A client has just sold her shares in a business. The solicitor, who is a corporate solicitor and provides advice on the sale and purchase of companies, helped advise on and arrange the sale. The client now has a lot of money and wants advice from the solicitor on how this money should be invested. The solicitor is not authorised by the Financial Conduct Authority.
On what grounds, if any, can the solicitor advise in respect of any investment?
s327 FSMA
Two conditions for this to apply:
- work must arise out of the main legal work done for the client
- work must be incidental or complementary to solicitor’s work
Both are satisfied: money is because of sale of business and solicitor’s main work is advice on company transactions
What is the position for insurance work?
- There are no exclusion to any specified activity when the specified investment is insurance work
- Must consider exemptions under s327 and Scope Rules
- e.g., solicitor can rely on fact that the work is complementary to and arises out of the work
- would have to account to the client for any referral fee
Is property letting and management regulated under FSMA?
No
- the managing of property lets is not a specified activity - does not fall under scope of FSMA
Is B2B lending regulated by FSMA?
Most business-to-business lending is not regulated by FSMA, meaning solicitors can assist clients in negotiating and executing commercial loans
When is advising on investments a specified activit?
Advising is only a specified activity if it is on specific investment products (such as shares in a company)
Advising generally on the differences between two kinds of investments is not the specified activity of advising - does not breach the general prohibition under s19 FSMA
What is the authorised person excluson?
Applies to dealing in investments as agents and arranging deals in investments
Conditions
- transaction is entered into on advice of the authorised third person
- client is not seeking advice from the solicitor as to the merits of the transaction
What is required for a solicitor to rely on Article 67 RAO exclusion?
Solicitor can rely on this exclusion when carrying out specified activities in the course of a profession or business
But, to fall under this exclusion, the regulated activity must NOT be remunerated separately from other services provided
Single best answer for a solicitor relying on Article 67:
- as long as solicitor’s overall fee for the work does not include separate remuneration
Can a solicitor rely on Article 67 RAO exclusion?
Yes, as long as the overall fee does not include a separate remuneration
What is the condition for a solicitor to rely on Article 66 RAO acting as trustee/PR?
The solicitor does not receive any remuneration for the work done in addition to any remuneration received as trustee or PR
- Solicitor can rely on RAO exclusion when carrying out duties as trustee, provided remuneration for this work would be on a time spent basis
How must remuneration be calculated for Article 66 acting as trustee?
No additional remuneration - the solicitor can be remunerated provided it is calculated in reference to time spent
