Legal Services

Question 1

What are the objectives of the FCA?

Answer 1

a) securing an appropriate degree of protection for consumers (the consumer protection objective)

b) protecting and enhancing the integrity of the UK financial system (the integrity objective)

c) promoting effective competition in the interests of consumers in the market, including for regulated financial services (the competition objective)

Question 2

What does the PRA do?

Answer 2

It is responsible for the authorisation, prudential regulation and general supervision of those firms which manage significant financial risks, namely banks, building societies, insurers, credit unions, certain investment firms and Lloyd’s of London.

They will also be regulated by the FCA for conduct persons.

Question 3

What is the penalty for carrying out unauthorised regulated activity?

Answer 3

Up to two years’ imprisonment or unlimited fine.

Question 4

What is regulated activity under the FSMA 2000?

Answer 4

An activity of a specified kind that is carried on by way of business and relates to a specified investment or property of any kind.

Question 5

How do you determine if an activity is regulated?

Answer 5

a) Are you in business?

b) Is there a specific investment or does the specified activity relate to information about a person’s financial standing or administering a benchmark?

c) Is there a specified activity?

d) Is there an exclusion?

Question 6

What does specified investments include?

Answer 6

a) company stocks and shares (but not shares in the share capital of open-ended investment companies or building societies incorporated in the UK)

b) debentures, loan stock and bonds

c) government securities, such as gifts

d) OIECs

e) insurance contracts

f) regulated mortgage contracts

g) home reversion/home purchase plans

h) deposits (only accepting deposits)

i) credit agreements

The following are not relevant:
- interests in land
- certain National Savings products

Question 7

What does specified investment activities include?

Answer 7

a) dealing as agent

b) arranging

c) managing

d) safeguarding

e) advising

f) lending money/administering a regulated mortgage contract

Question 8

What are exclusions to the regulated activities?

Answer 8

Exclusions likely to be relevant to solicitors:

a) introducing
applicable to arranging
not applicable to insurance contracts

b) using an Authorised Third Party (to provide financial advice)
applicable to dealing as agent and arranging
not applicable to insurance contracts

c) acting for an execution-only client
applicable to dealing as agent and arranging
not applicable to commissions and insurance contracts

d) acting as trustee or personal representative
applicable to arranging, managing, safeguarding and advising fellow trustees/beneficiaries
also to lending money on, or administering, a regulated mortgage contract
not applicable to insurance contracts

e) the ‘professional/necessary/ exclusion
applicable to advising, arranging, safeguarding and dealing as agent
not applicable if remunerated separately from the other services
not applicable if consists of taking up or pursuing insurance distribution

f) the ‘takeover’ exclusion
applicable to arranging, advising and dealing as agent
does not apply to contracts of insurance

Question 9

What is the s327 exemption?

Answer 9

Under s327, professional firms are able to carry out certain regulated provided certain conditions are met.

There is an exemption from having to obtain authority from the FCA where the firm is regulated and supervised by a designated professional body, such as the SRA.

This is for firms that do not carry out mainstream financial services but undertake regulated activities in the course of other work.

Question 10

What are the conditions for the s327 exemption?

Answer 10

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

c) the firm must only carry out regulated activities permitted by the DPB

d) the activities must not be prohibited by an order made the Treasury, or any direction made by the FCA under s328 or s329

e) the firm must not carry on any other regulated activities

Question 11

What are the two ‘incidental’ tests?

Answer 11

Specific test relates to the client concerned. Must be complimentary to the provision of particular professional service to a particular client.

General test - the activities carried out must be not a major part of the firm’s activities.

Question 12

What are the SRA rules when a firm is seeking to use the s327 exemption?

Answer 12

a) A solicitor or firm must not carry on any activity that is specified in an order made by the Treasury. Examples include recommending to a client to dispose of any rights the client has under a personal pension scheme. Also, creating or underwriting a contract of insurance.

b) If a firm wishes to undertake insurance distribution activities, 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.

Question 13

When do the COB rules apply?

Answer 13

When the firm is carrying out an exempt regulated activity.

Under the professional exemption.

Question 14

What are the COB rules regarding the professional exemption?

Answer 14

• Status disclosure
• Best execution
• Transactions (keep records of instructions)
• Commissions (records of such)
• Execution-only clients (must send letter confirming client not relying on solicitor advice)
• Insurance distribution activities

Question 15

What is insurance distribution?

Answer 15

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.

Question 16

What do contracts of insurance include?

Answer 16

life policies

car insurance

buildings and contents insurance

defective title insurance

after-the-event legal insurance and annuities

Question 17

What is the tests for financial promotions?

Answer 17

a) are you in business?

b) are you making an invitation or inducement?

c) in connection with an investment?

d) in connection with an investment activity?

Question 18

What are the exemptions for FPOs? For firms claiming special exemption under the FSMA 2000 for exempt regulated activities.

Answer 18

Real-time promotions that are solicited
a) if made to a client who has, prior to the communication being made, engaged the solicitor to provide professional services; and

b) where the controlled activity to which the communication relates is exempt because of the exemption for professional firms, or is excluded from being a regulated activity by the ‘necessary’ exclusion; and

c) where the controlled activity to which the communication relates would be undertaken for the purposes of, and be incidental to, the provision of professional services to or at the request of the client.

Non-real time promotions where the solicitor carries on exempt regulated activities.

Question 19

When are one-off unsolicited real-time communications exempt?

Answer 19

When the solicitor believes on reasonable grounds that:

a) the client understands the risks associated with engaging in the investment activity to which the financial promotion relates; and

b) that, at the time of the communication, the client would expect to be contacted by the solicitor in relation to that investment activity.

Question 20

Are introducers exempt from FPO rules?

Answer 20

A solicitor may make any real-time communication in order to introduce a client to an ATP provided:

a) the solicitor is not connected to the ATP (e.g. close relative);

b) the solicitor does not receive other than from the client any pecuniary reward or other advantage arising out of making the introduction; and

c) the client is not seeking and has not sought advice from the solicitor as to the merits of engaging in the client has sought such advice, the solicitor has declined to give it, but has recommended that the client seeks such advice from an authorised person).

Question 21

What are the three stages of money laundering?

Answer 21

Placement

Layering

Integration

Question 22

What is the SRA’s role with regards to anti-money laundering?

Answer 22

Supervisory.

Firms or sole practitioners must apply to the SRA for approval under the Regulations.

Approval must be granted unless the applicant has been convicted of a relevant offence.

Question 23

What internal controls must a firm have re money laundering?

Answer 23

MRLO must be appointed.

Will liaise with National Crime Agency if necessary.

Must also appoint a MLCO if appropriate regarding the size and nature of the firm. Can be same person as MRLO.

Firms must also:
- screen relevant employees prior to and during employment
- establish an independent audit function

Question 24

What is needed for standard due diligence?

Answer 24

Natural persons:
- government document verifying name and address, or name and date of birth; or
- government document with full name and another document with full name and address/date of birth

Company:
- name
- company number
- registered office address and principal place of business
- proof needed if not regulated on registered market
- identify beneficial owners (where simplified due diligence does not apply)

Question 25

When is simplified due diligence permitted?

Answer 25

Where a firm determines through an individual risk assessment that the business relationship or transaction presents a low risk of money laundering or terrorist financing, taking into account the risk assessment.

E.g. a well-known plc in the UK.

Question 26

When is enhanced due diligence necessary?

Answer 26

PEPs, high risk countries, etc

Question 27

What is s328 of PCA?

Answer 27

Arranging

Question 28

What is s329 of PCA?

Answer 28

Acquisition, use or possession

Question 29

What is s327 of PCA?

Answer 29

Concealing, disguising, converting or transferring criminal property or removing it from England Wales Scot or NI.

Question 30

What is s330 of PCA?

Answer 30

Failure to disclose

Question 31

What is s331 PCA?

Answer 31

Failure to disclose by nominated officers

Question 32

What is s333A of PCA?

Answer 32

Tipping off