Legal Services Flashcards
A solicitor is instructed by a client to act in relation to the sale of some of the shares in the client’s company to a competitor. The competitor intends to buy 75% of the issued share capital in the company from the client for £800,000. The solicitor advises the client on the sale, including preparing the relevant contract and stock transfer forms. Neither the solicitor nor her firm is authorised by the Financial Conduct Authority to carry on a “regulated activity” as defined in the Financial Services and Markets Act 2000 and related secondary legislation.
Has the solicitor breached the general prohibition against carrying on a regulated activity?
No, because the solicitor may rely on the takeover exclusion.
Feedback:
(A) The solicitor has not breached the general prohibition against carrying on a regulated activity because she may rely on the takeover exclusion. A regulated activity is defined as an activity specified in the Regulated Activities Order relating to an investment specified in the Order, which is carried out in the course of business, and to which no exclusions apply. Under the takeover exclusion, a solicitor can deal as an agent, arrange, or advise with respect to a client who is buying or selling 50% or more of the voting shares of a company. Here, the solicitor is advising (a specified activity) in relation to shares (a specified investment). However, the advice is in relation to a competitor buying 75% of the shares in the client’s company. Thus, the takeover exclusion applies and the solicitor is not carrying out a regulated activity. (B) is incorrect because, as explained above, there is no regulated activity so the solicitor has no need to rely on the Designated Professional Bodies exemption. (C) is incorrect because shares in private companies are still specified investments which may result in a regulated activity. (D) is incorrect because, as explained above, the takeover exclusion is available. (E) is incorrect because the solicitor is not carrying out a regulated activity and therefore does not need to be authorised.
A solicitor at a large firm represented a UK-based client accused of manslaughter. The client was cleared after a brief hearing. The solicitor noticed that the client paid the firm’s invoice (which was a substantial sum) by transferring money from a bank account in Bosnia and Herzegovina. The solicitor is aware that Bosnia and Herzegovina has been listed as a high-risk jurisdiction for money laundering.
What is the solicitor’s best course of action regarding the client’s suspicious financial activities?
Report his suspicions to the firm’s Money Laundering Reporting Officer.
Feedback:
(B) The solicitor’s best course of action regarding the client’s suspicious financial activities is to report his suspicions to the firm’s Money Laundering Reporting Officer (‘MLRO’). Solicitors have obligations under the Proceeds of Crime Act 2002 to make disclosures of suspicions of money laundering. In cases where a solicitor is acting for a client on a bona fide litigation, it can be a defence to the offence of failure to report that the information falls within a privilege or came to the solicitor in privileged circumstances. In other words, maintaining client confidentiality can supersede the obligation to report suspicions of money laundering. But here, the solicitor’s suspicions are not related to the subject matter of the litigation; they are related to the client’s payment of the invoice for legal fees. Therefore, the solicitor’s suspicions should be reported to the firm’s MLRO. (C) and (E) are incorrect because, as explained above, the solicitor should report their suspicions to the firm’s MLRO to avoid committing the offence of failure to report. (A) is incorrect because within a firm, the solicitor’s obligation is to report suspicious activities to the firm’s MLRO and not to the National Crime Agency. (D) is incorrect because there is no duty to refuse to undertake future representation of the client.
A solicitor is looking after the files of a colleague while the colleague is on holiday. One of the colleague’s clients is involved in a transaction to purchase a company in Birmingham. The solicitor takes a call from the Birmingham based solicitor who is acting for the company. The other solicitor is concerned about the lack of progress on the matter and wants an urgent update as to why there has been a delay. The solicitor flicks through the file and notices that her colleague has made a suspicious activity report about her client to their firm’s Money Laundering Reporting Officer (‘MLRO’). The solicitor passes this information on to the other solicitor because she thinks that the other solicitor may need to notify his own MLRO about the transaction. The solicitor then returns to working on her own clients’ matters.
Which of the following best describes whether the solicitor has committed an offence under the Proceeds of Crime Act 2002?
The solicitor has not committed the offence of tipping off because she can rely on the defence of disclosure between institutions.
Feedback:
(E) The solicitor has not committed the offence of tipping off because she can rely on the defence of disclosure between institutions. The indirect offence of tipping off can arise where there is a disclosure to a third person that a suspicious activity report has been made to the police, HM Revenue and Customs, the National Crime Agency, or the firm’s MLRO if that disclosure might prejudice any investigation that might be carried out. However, a legal professional will not commit a tipping off offence if (1) the disclosure is made to another legal professional in a European Economic Area state; (2) the disclosure relates to a client or former client of both parties, or a transaction involving them both; (3) the disclosure is made for the purpose of preventing a money laundering offence; and (4) both parties have equivalent professional duties of confidentiality and protection around personal data. Here, the solicitor disclosed her colleague’s suspicious activity report to the other solicitor, which could constitute tipping off. However, the solicitor may rely on the defence of disclosure between institutions. The disclosure was made to another lawyer in the UK (a European Economic Area state), the disclosure related to a transaction involving them both, the disclosure was made to prevent the other solicitor committing his own money laundering offence (that is, failure to report), and both parties are in the UK and have equivalent professional duties of confidentiality. (A) is incorrect because the relevant offence here is tipping off, not failure to report. In any event, the solicitor has no independent suspicions about her colleague’s client’s involvement in money laundering and therefore does not need to make her own report to the MLRO. (B) is incorrect because, as explained above, the solicitor has not committed the offence because a defence is available. (C) is incorrect because the applicable defence here is disclosure between institutions rather than disclosure within an undertaking. The latter defence would be available if the other solicitor worked within the same organisation as the solicitor. (D) is incorrect because the disclosure in a tipping off offence may be in writing or oral.
A solicitor is at a birthday party for her aunt. One of her cousins approaches the solicitor at the bar. The cousin explains that she is thinking about selling her company to a competitor. The competitor intends to buy 100% of the shares in the cousin’s company for £750,000. The cousin asks the solicitor for advice on whether this sale is a good idea. The solicitor is not authorised by the Financial Conduct Authority to carry on a “regulated activity” as defined in the Financial Services and Markets Act 2000 and related secondary legislation.
Can the solicitor give the requested advice about the sale?
Yes, because the solicitor is at a social event and so would not be advising by way of business.
Feedback:
(E) The solicitor can give the requested advice about the sale because she is at a social event and so would not be advising by way of business. Under the general prohibition of the FSMA, a solicitor cannot carry out a regulated activity unless authorised or exempt from authorisation. A regulated activity is defined as an activity specified in the Regulated Activities Order relating to an investment specified in the Order, which is carried out in the course of business, and to which no exclusions apply. For a solicitor, “in the course of business” generally means the activity is carried out for a client as part of their legal work, rather than one carried out in their personal capacity. Here, the solicitor has been asked to provide advice (a specified activity) on the sale of her cousin’s company’s shares (a specified investment). However, since she is at a social event in her personal capacity and the cousin is not a client, the solicitor would not be carrying on a specified activity in relation to a specified investment in the course of business. Therefore, there is no regulated activity in breach of the general prohibition. (A) is incorrect because shares are a specified investment whether the relevant company is public or private. (B) is incorrect because the solicitor has no need to rely on an exclusion as the “in business” element of the regulated activity definition has not been met. (C) is not correct because, as explained above, while the solicitor would be advising on a specified investment, the “in business” element of the regulated activity definition has not been met. (D) is incorrect because the solicitor is not carrying on a regulated activity and therefore has no need to be authorised.
A newly qualified solicitor decided to work freelance. The solicitor is not authorised by the Financial Conduct Authority to carry on a ‘regulated activity’ as defined in the Financial Services and Markets Act 2000 (‘FSMA’) and related secondary legislation.
Which of the following activities would the solicitor be able to conduct in her business if no FSMA exclusion or exemption applies?
Arranging for a client’s sale of an investment property.
Feedback:
(D) Under the general prohibition of FSMA, a solicitor may not carry on regulated activity in the UK unless they are authorised or exempt from authorisation. A regulated activity is defined as an activity specified in the Regulated Activities Order relating to an investment specified in the Order, which is carried out in the course of business, and to which no exclusions apply. The specified activities and investments might be remembered with the mnemonic device ‘ADAMS F.M.DIPS’. Activities = Advising, Dealing as an agent, Arranging, Managing, and Safeguarding. The specified investments most relevant to a solicitor = Funeral plans, Mortgage contracts, Debentures, Insurance contracts, Pension schemes, and Shares in a company. The solicitor would be able to arrange for the sale of land for a client because while arranging is a specified activity, land is not a specified investment. (A) is incorrect because advising is a specified activity and a mortgage is a specified investment. (B) and (E) are incorrect because both clearly involve regulated activities (managing and safeguarding, respectively) and specified investments (debentures and pension schemes, respectively). (C) is incorrect because contracting on behalf of a client means the solicitor would be dealing as an agent, which is a regulated activity, and an insurance policy is a specified investment.
A solicitor meets with a woman interested in purchasing several casinos and they agree to the engagement. To comply with money laundering regulations, the solicitor asks the woman to show some sort of identification. The woman shows the solicitor her passport and the solicitor makes a copy of it.
For how long must the solicitor keep the copy of the passport?
Five years after the representation is completed.
Feedback:
(E) The solicitor should keep a copy of the passport for five years after the representation is completed. Broadly, records of customer due diligence (such as verification of clients’ identity) and business relationships should be kept for five years after the end of the relationship. (A) - (D) are incorrect because they do not describe the correct period for which the records must be kept.
A solicitor has joined a new firm and was assigned files from a number of clients. One of the clients whose file was assigned to the solicitor calls and says he is angry because of the lack of progress on their matter. The solicitor finds the appropriate file and notices that the previous solicitor working on the file filed a suspicious activity report about the client with the firm’s Money Laundering Reporting Officer (‘MLRO’). The solicitor explains to the client that a colleague had filed a suspicious activity report but that she would soon resume working on the file. She then returns to working on other matters.
Which of the following best describes whether the solicitor has committed an offence under the Proceeds of Crime Act 2002 (‘POCA’)?
The solicitor may have committed the offence of tipping off because the disclosure might prejudice any investigations into the client.
Feedback:
(D) The solicitor may have committed the offence of tipping off because the disclosure she made might prejudice any investigations into the client. The indirect offence of tipping off can arise where there is a disclosure to a third person that a suspicious activity report has been made to the police, HM Revenue and Customs, the National Crime Agency, or the firm’s MLRO if that disclosure might prejudice any investigation that might be carried out. Here, the solicitor disclosed to the client that the solicitor’s colleague had made a suspicious activity report about the client to the firm’s MLRO. As this disclosure might prejudice any investigation into the client, the solicitor may have committed the offence of tipping off. (A) is incorrect because while the solicitor should keep a client informed about the progress of their matter, she also must avoid committing the offence of tipping off. Thus, she should not have disclosed her colleague’s suspicious activity report to the client. (B) is incorrect because the relevant offence here is tipping off, not failure to report. In any event, the solicitor has no independent suspicions about her colleague’s client’s involvement in money laundering and therefore does not need to make her own report to the MLRO. (C) is incorrect because the mere disclosure of a suspicious activity report to a third party is not sufficient to commit the offence of tipping off. The disclosure must also have the potential to prejudice the investigation. (E) is incorrect because the disclosure in a tipping off offence can be oral or in writing.
A junior solicitor at a large firm was working on a transaction for one of the firm’s clients. Whilst reviewing the client’s file, the solicitor became suspicious that the client might be involved in money laundering, as the client seemed to have deposited a large amount of cash with the firm and did not explain its source. The client’s transaction is scheduled to close in seven days. The solicitor sends an email to the firm’s Money Laundering Reporting Officer (‘MLRO’) but gets an ‘Out of Office’ reply that indicates the MLRO is not coming back for another three weeks.
What action should the solicitor now take?
Determine whether the firm has appointed a deputy MLRO and report his suspicions to this person.
Feedback:
The solicitor’s best course of action to take next is to determine whether the firm has appointed a deputy MLRO and report his suspicions to this person. When the MLRO is away, best practice is for firms to make alternative arrangements, such as appointing an alternative or a deputy MLRO and informing staff about these arrangements. The MLRO and deputy MLRO should be trained to investigate and properly handle suspicious activity reports. (A) is incorrect as it is the MLRO’s (or deputy’s) duty to report to the National Crime Agency. The solicitor’s duty is to report to the MLRO and/or deputy MLRO as necessary. As explained above, the solicitor should first determine whether the firm has appointed an alternative or deputy MLRO. If the firm has not, only then must the solicitor report directly to the National Crime Agency. (B) is not correct because the solicitor’s supervisor apparently is not the MLRO or deputy and so does not necessarily have the training needed to properly handle the matter. (D) and (E) are incorrect because the client’s transaction is due to close before the MLRO returns, so it would not be reasonable to wait or do nothing. Reports should be made as soon as reasonably practicable.
A woman instructs her solicitor to act for her in relation to the sale of an investment property which she owns. She intends to use the proceeds of sale to renovate her own house and to purchase some Premium Bonds. The solicitor advises on the sale of the property and the purchase of the Premium Bonds. Neither the solicitor nor his firm is authorised by the Financial Conduct Authority to carry on a “regulated activity” as defined in the Financial Services and Markets Act 2000 and related secondary legislation.
Has the solicitor breached the general prohibition against carrying on a regulated activity?
No, because the solicitor did not advise the client on a specified investment.
Feedback:
(E) The solicitor has not breached the general prohibition against carrying on a regulated activity because he did not advise the client on a specified investment. A regulated activity is defined as an activity specified in the Regulated Activities Order relating to an investment specified in the Order, which is carried out in the course of business, and to which no exclusions apply. Here, the solicitor has been asked to advise (a specified activity) on using the proceeds of sale to purchase Premium Bonds. However, national savings products such as Premium Bonds are not specified investments. Therefore, in advising on the Premium Bonds, the solicitor was not carrying out a regulated activity in breach of the general prohibition. (A) is incorrect because, as explained above, Premium Bonds are not a specified investment, so the solicitor may provide advice on them without breaching the general prohibition. (B) is incorrect because solicitors can provide investment advice on nonspecified investments without authorisation or exemption. (C) and (D) are incorrect because, as explained above, Premium Bonds are not a specified investment. As there is no regulated activity here, the solicitor would not need to rely on the necessary exclusion or the Designated Professional Body exemption.
A solicitor is instructed by the personal representatives of a deceased person to assist with the administration of the estate. The estate’s assets include Premium Bonds, shares in some public companies, and some cash in the deceased’s bank accounts. The personal representatives have asked for advice on selling all of these assets in order to pay the beneficiaries. Neither the solicitor nor her firm is authorised by the Financial Conduct Authority to carry on a “regulated activity” as defined in the Financial Services and Markets Act 2000 and related secondary legislation.
Which of the following best describes whether the solicitor can give the advice requested?
The solicitor can provide the advice because although the shares are a specified investment, the advice is a necessary part of other services, namely assisting with the administration of the estate.
Feedback:
(D) The solicitor can provide the advice because although the shares are a specified investment, the advice is a necessary part of other services, namely assisting with the administration of the estate. The general prohibition states that no person may carry on a regulated activity unless they are authorised or exempt from authorisation. A regulated activity is an activity specified in the Regulated Activities Order that relates to an investment specified in the Order, is carried out in the course of business, and to which no exclusions apply. Here, the solicitor has been asked to advise (a specified activity) on estate assets including company shares (a specified investment). However, the solicitor is not carrying out a regulated activity because she may rely on the necessary exclusion. A solicitor may conduct activities in relation to specified investments if the activity may reasonably be regarded as a necessary part of performing legal services which do not otherwise consist of carrying on a regulated activity. The advice on the sale of all of the estate assets is incidental to and a necessary part of the service of assisting with the administration of the estate. (A) is incorrect because the company shares are a specified investment although the cash in the bank accounts and the Premium Bonds are not. (B) is incorrect because the cash in the bank accounts is not a specified investment. (C) is incorrect because Premium Bonds are not a specified investment. (E) is incorrect because although the company shares are a specified investment, the solicitor may rely on the necessary exclusion, which means she is not carrying on a regulated activity.
A solicitor is acting for a client in a personal injury claim for which the client is due to receive a substantial settlement. The client has asked the solicitor for advice on what to do with the settlement and says he is considering investing some money in shares and debentures. The solicitor suggests that the client speak to his bank manager for advice on the best savings and investment products. The bank is authorised by the Financial Conduct Authority. After taking advice from the bank, the client asks the solicitor to draw up the necessary paperwork to complete the investment transactions and the solicitor does so. Neither the firm nor the solicitor is authorised by the Financial Conduct Authority to carry on a “regulated activity” as defined in the Financial Services and Markets Act 2000 and related secondary legislation.
Has the solicitor breached the general prohibition against carrying on a regulated activity?
No, because the solicitor can rely on the acting through authorised persons exclusion.
Feedback:
(E) The solicitor has not breached the general prohibition against carrying on a regulated activity because he can rely on the acting through authorised persons exclusion. A regulated activity is defined as an activity specified in the Regulated Activities Order relating to an investment specified in the Order, which is carried out in the course of business, and to which no exclusions apply. Under the acting through authorised persons exclusion, a solicitor can arrange or act as agent with respect to specified investments if the client receives advice from a person authorised by the Financial Conduct Authority and the solicitor merely assists the client in acting on this advice. Here, the solicitor has been asked to make arrangements (a specified activity) for the client to purchase shares and debentures (specified investments). However, the solicitor can rely on the acting through authorised persons exclusion because he has passed on his client to the bank manager (an authorised party) to provide advice on the specified investments, and the solicitor is merely assisting the client in acting on this advice. Thus, the solicitor is not carrying on a regulated activity in breach of the general prohibition. (A) is incorrect because, as explained above, the acting through an authorised person exclusion is available. Also note that the specified activity here is arranging, not advising. (B) is incorrect because there is no regulated activity so the solicitor does not need to rely on the exemption for Designated Professional Bodies. (C) is incorrect because although the solicitor is carrying out the specified activity of arranging, the acting through an authorised person exclusion is available. (D) is incorrect because the solicitor is acting in business. The solicitor is acting for the client as part of an ongoing matter for which the client has engaged the solicitor.
