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SQE 1 > Legal Services > Flashcards

Legal Services Flashcards

Chapter 4

1
Q

What does the financial service industry comprise of?

A

Firms that advise on, sell and arrange financial products and services.

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2
Q

What principles/rules means that a solicitor should NOT undertake financial services work unless they have expertise in that field?

A

SRA Principle 7 - Need to act in the client’s best interests (Not possible to do this unless they’re competent at undertaking financial services work)

SRA Code of Conduct - Service by a solicitor must be competent - shouldn’t undertake financial service work unless they have sufficient expertise

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3
Q

What happens if the solicitor carries out activities for clients regarding financial services without being authorised to do so?

A

Could involve the commission of a criminal offence.

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4
Q

What is the main legislation which regulates the financial services industry?

A

The Financial Services and Markets Act 2000 (FMSA 2000) - though most of the detail is in the secondary legislation.

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5
Q

What 2 bodies were established under the Financial Services Act which largely regulate the financial services?

A

Financial Conduct Authority (FCA) and the Prudential Regulation Authority.

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6
Q

What is the Financial Policy Committee responsible for?

A

Monitoring the stability of the whole UK financial system

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7
Q

What are 3 key responsibilities carried out by the FCA?

A
  • Responsible for the conduct of business regulations of ALL firms (including dual regulated firms)
  • Responsible for the prudential regulation of firms NOT regulated by the Prudential Regulation Authority
  • Responsible for the regulation of consumer credit and second charge mortgages secured over property.
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8
Q

What are 3 aims of the FCA and where is this listed?

A

Listed in the Financial Services and Markets Act 2000.

1) Securing an APPROPRIATE DEGREE of protection for consumers (consumer protection)

2) Protecting and enhancing the integrity of the UK financial system (integrity)

3) Promoting effective competition in the interests of consumers in the market, including for regulated financial services. (Competition)

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9
Q

What do the FCA’s powers allow them to do to firms?

A
  • Require firms to withdraw or amend misleading financial products with an immediate effect
  • Block the launch of, or stop, a service or product.
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10
Q

What is the Prudential Regulation Authority responsible for?

A
  • Responsible for the authorisation, prudential regulation and general supervision of the firms which manage significant financial risks - banks, building societies, insurers, credit unions, certain investment firms & Lloyds of London (PRA-authorised firms or dual regulated firms).
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11
Q

What does the FSMA 2000 (PRA-regulated Activities) Order 2013 set out?

A
  • Which activities are PRA-regulated (e.g. accepting deposits, effecting a contract of insurance and dealing with investments as a principal)
  • And that any firm that has permission to carry out PRA activities will be designated a PRA-authorised firm.
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12
Q

What are the 2 main restrictions of greatest relevance to solicitors regarding financial services?

A
  • Carrying out a regulated activity (the general prohibition)
  • Making a financial promotion (the financial promotions restriction)
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13
Q

What does the FSMA provide for about general prohibition/carrying out a regulated activity?

A

No person can carry on a regulated activity in the UK unless they are AUTHORISED or EXEMPT.

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14
Q

What does being authorised mean?

A

Authorised = persons with permission granted by the appropriate regulator (FCA)

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15
Q

What is the aim of the general prohibition/carrying out a regulated activity rule?

A

To ensure that financial advice and assistance is only provided by people who are properly qualified and regulated.

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16
Q

Which type of firm will be exempt?

A

Professional firms which don’t carry out ‘mainstream’ investment business but may carry out a regulated activity in the course of carrying out their professional work.

If certain conditions are satisfied, the firm will exempt from having to get authority from the FCA provided it is regulated and supervised by a professional body designated by the Treasury (which includes the SRA).

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17
Q

What are the consequences of carrying out a regulated activity without authorisation?

A

Can be 2 years imprisonment or an unlimited fine.

May also render any agreement with/made by a person carrying out the regulated activity without authorisation UNENFORCEABLE.

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18
Q

What is the financial promotions restriction?

A

An unauthorised person can’t engage in a financial promotion.

FCA is the regulator.

Criminal offence to make an unauthorised financial promotion.

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19
Q

What is a regulated activity?

A

An activity which is defined as 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.

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20
Q

What are the 4 tests to determine whether an activity is regulated?

A

1) Are you in business?

2) Is there a specified investment or does the specified activity relate to information about a person’s financial standing (providing or advising upon credit reference or credit information services) or administering a benchmark? (Benchmarks are used in markets to help set prices, measure performance, work out amounts payable under financial contracts or the value of financial instruments).

3) Is there a specified activity?

4) Is there an exclusion?

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21
Q

What is the business test? (Step 1 on previous card)

A

To qualify as a regulated activity, it must be carried on by way of business.

In most cases, this will be obvious.

A solicitor giving advice in that capacity as part of their practice will be in business.

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22
Q

What are specified investments? (Point 2 of the test for regulated activities)

A

This is defined in RAO 2001(Regulated Activities Order) and would include:

  • Company stocks and shares (But not shares in the share capital of an open-ended investment companies or building societies incorporated in the UK)
  • Debentures, loan stock and bonds
  • Government securities such as gifts
  • Unit trusts and open-ended investment companies
  • Insurance contracts (incl. life policies and annuities)
  • Regulated mortgage contracts (most residential mortgages)
  • Home reversion/home mortgage plans (the former allows a homeowner to sell the whole or a proportion of their property to a finance provider in order to raise funds and then become a tenant of the property whilst the latter does the same as a mortgage but in a way that complies with Islamic law)
  • Deposits (including cash ISAs and sums of money held in bank or building society accounts). - However, only specified activity allowed relating to this is ‘accepting deposits’. Sums received by solicitors acting in the course of their business are exempt under RAO 2001.
  • Credit agreements (an agreement whereby a solicitor allows a client time to pay is exempt provided that the number of repayments doesn’t exceed 12, the payment term doesn’t exceed 12 months and the credit is provided without interest or other charges).
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23
Q

What specified investments will NOT COUNT as part of regulated activities? (2 things)

A
  • Interests in land
  • Certain National Savings products
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23
Q

What are specified investment activities?

A

Set out in Regulated Activities Order 2001 and includes:

  • Dealing as agent
  • Arranging
  • Managing
  • Safeguarding
  • Advising
  • Lending money on/administrating a regulated mortgage contract.

Also some very particular specified activities including establishing, operating or winding up a collective investment scheme or personal pension scheme.

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24
Q

What does dealing as an agent mean?

A

Involves buying, selling, subscribing for or underwriting the investments when a solicitor is dealing on behalf of a client (rather than on their own account) and commits that client to transactions.

E.g. selling shares on behalf of a client pursuant to a financial order made on divorce.

25
Q

What is arranging?

A

Being involved as the contact between the client and the life company or the client and the stockbroker.

26
Q

What is safeguarding?

A

Involves safeguarding and administering investments belonging to a client - relevant for firms that do probate and trust work.

27
Q

What is advising?

A

Giving a person advice in their capacity as an investor on the merits of buying, selling, subscribing for, or underwriting an investment.

Must be advice about a specific investment - general advice is outside the scope of FSMA 2000.

(This means that if the solicitor has the knowledge they can generally advise a client on the respective merits of investing rather than depositing money with a bank but if they advise the client to buy shares in a particular company, this would be a regulated activity).

28
Q

What are exclusions set out in RAO 2001 and what do exclusions do?

A

Exclusions mean that an act which would otherwise be a regulated activity is no longer regarded as such - the solicitor wouldn’t need to be authorised for that particular transaction.

Exclusions include:
- Introducing
- Using an authorised Third Party
- Acting for an execution-only client
- Acting as a trustee or a PR
- The professional/necessary exclusion
- The takeover exclusion

29
Q

What does ‘introducing’ act as an exclusion to? (Which regulated activity)

A

Introducing only applies to the activity of arranging.

This means that when acting as the contact, they can simply introduce the client to an authorised person and then have no further role in this aspect of the client’s matter.

If the solicitor does retain an ongoing role, then exclusion can’t be relied on.

** This exclusion WON’T apply if the transaction relates to an insurance contract.

30
Q

What is the authorised third party exclusion?

A

This applies to the activities of dealing as an agent and arranging.

This exclusion applies where the transaction is to be entered into based on the advice of an authorised third party (a person authorised by the FCA). The solicitor here retains an ongoing role but the actual financial advice is coming from an ATP.

*Exclusion doesn’t apply if the solicitor receives a commission (other than from the client) or any other advantage out of the client entering into the transaction, FOR WHICH THE SOLICITOR DOESN’T ACCOUNT TO THE CLIENT.

*Doesn’t apply if the transaction relates to an insurance contract.

31
Q

What is the execution-only client exclusion?

A

Applies to the activities of dealing as an agent and arranging.

The requirement here is negative - advice has NOT been sought from the solicitor.

This exclusion applies where the client, as their capacity as an investor, is NOT SEEKING and HAS NOT SOUGHT advice from the solicitor as to the merits of client’s entering into the transaction (or if the client has sought this, the solicitor has refused to give it and suggested the client get their advice from an authorised person).

*Same restrictions as last one regarding commissions and insurance contracts.

32
Q

What is the trustees or personal representatives exclusion?

A

Applies to arranging, managing, safeguarding and advising fellow trustees/beneficiaries. ALSO applies to lending money on, or administering, a regulated mortgage contract.

This exclusion is available to a solicitor acting AS a PR or trustee - but not to a solicitor acting FOR a trustee or PR.

The exclusion does apply if a member of the firm is a trustee or PR but the activity is actually carried out by other members of the firm.

The exclusion DOESN’T apply if the solicitor gets remuneration on top of money he already gets for acting as a trustee or PR.

For managing and safeguarding, the exclusion is also not available if the solicitor holds themselves out as providing a service comprising managing or safeguarding.

*Doesn’t apply to insurance contracts. Or taking up/pursuing insurance distribution.

33
Q

What is the professional/necessary exclusion?

A

Applies to advising, arranging, safeguarding and dealing as agent.

There is an exclusion if the activity is in the course of carrying on any profession or business and

may reasonably be regarded as a necessary part of other services provided in the course of that profession or business (where it is not possible for the other services to be provided unless the regulated activity is also provided).

E.g. acquisition of a company, giving advice on the merits of buying it and arranging for the acquisition of its shares, arranging for the sale of all the assets to pay Inheritance tax.

*Doesn’t apply if the activity is remunerated SEPARATELY from the other services.

*Also doesn’t apply if the activity consist of taking up or pursuing insurance distribution.

34
Q

What is the takeover exclusion (or body corporate exclusion?)

A

Applies to arranging, advising and dealing as agent.

The exclusion will apply to a transaction to acquire or dispose of shares in a body corporate or for a transaction entered into for the purposes of such an acquisition or disposal if:
- The shares consist of or include 50% or more of the voting shares in the body corporate and
- The acquisition or disposal is between parties each of whom is a body corporate, a partnership, a single individual or a group of connected individuals.

It is possible to add the number of shares being acquired by a person to those already held by them to determine whether the 50% limit has been achieved.

Even if the above criteria are not met (number of shares acquired being less than 50%), but the object of the transaction can reasonably be regarded as the acquisition of day-to- day control of the affairs of the body corporate, exclusion still applies.

*Doesn’t apply to advising on, arranging or dealing as an agent in respect of buying or selling contracts of insurance.

35
Q

What is the exemption for professional service firms?

A

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

Applies to firms which DO NOT CARRY OUT mainstream financial services but undertake regulated activities in the course of other work e.g. conveyancing, personal injury and trust work.

There is an exemption from having to obtain authority from the FCA where the firm is regulated AND supervised by a designated professional body incl. the SRA.

Most solicitors firms are not authorised by the FCA so must rely on this exemption.

36
Q

What 5 factors will mean a solicitor’s firm will get this exemption?

A

1) The firm must not receive from a person OTHER THAN ITS CLIENT any pecuniary (money) or other advantage arising out of the activity for which it doesn’t account to its client

2) Their regulated services must be carried out incidental to their provision of being a firm of professional services (basically must be part of the law firm’s activities)

3) The firm must only carry out regulated activities permitted by the DPB (designated professional body) - SRA.

4) The activities must not be prohibited by an order made by the Treasury or the FCA.

5) The firm must not carry on any other regulated activities.

37
Q

What if the solicitor’s firm does get money or some other advantage from someone other than its client?

A

If they want to take advantage of the s327 exemption, it must account TO THE CLIENT for any pecuniary or other advantage.

38
Q

What does it mean for an regulated activity to be ‘incidental’ to the professional services firm? What two tests must be carried out?

A

Two tests - a specific test and a general test.

The specific test relates to the particular client concerned. The relevant regulated activity must arise out of, or be complementary to, the provision of a particular professional service to a particular client. (Can’t be the solicitor doing a regulated activity for them in isolation, must be part of the primary professional services they otherwise provide).

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 e.g. making up half or more of its total income.

Further factors are:
1) The scale of regulated activity in proportion to the other professional services provided.

2) Whether and to what extent the exempt regulated activities are held out as separate services and

3) The impression given of how the firm provides those activities e.g. through advertising its services.

39
Q

What are permitted regulated activities only?

A

1) A solicitor or firm must not carry on any activity that is specified in an order made by the Treasury. - E.g. recommending to a client to dispose of any right he has under a personal pension scheme and advising a client to become a member of a particular Lloyd’s syndicate.

2) 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.

3) There are further restrictions in the context of corporate finance and credit-related regulated financial services activities.

40
Q

What are not prohibited activities?

A

In the Non-Exempt Activities Order 2001, a list of activities that CANNOT be provided by professional firms under the s327 exemption.

The FCA also has power, under s328, to issue directions limiting the application of the exemption in respect of different classes of persons or different descriptions of regulated activities.

41
Q

What are no other regulated activities?

A

The s327 exemption can’t be used by firms which are authorised by the FCA.

E.g. a firm could be authorised by the FCA concerning defined regulated activities.

Such a firm could not use s327 for any another ‘non-mainstream’ regulated activities.

42
Q

What are the SRA Financial Services (Conduct of Business Rules)?

A

These regulate the way in which a firm may undertake financial services under the professional exemption.

These only apply when the firm is carrying out an exempt regulated activity - they don’t apply if the firm is not carrying out a regulated activity at all.

43
Q

What is status disclosure under the Conduct of Business Rules?

A

Means a firm must provide clients with certain info concerning the status of the firm (e.g. that they’re not authorised by the FCA, explain the complaints and redress mechanisms are provided through the SRA and Legal Ombudsman).

Any info that is provided under these rules must be given in a way which is clear, fair and not misleading.

44
Q

What is the best execution?

A

A solicitor must act in the best interests of the client.

Must carry out transactions for clients ASAP unless it reasonably believes it is in the client’s best interest not to.

45
Q

What is the transactions rules?

A

The firm must keep records of:

1) Instructions from clients to carry out transactions and
2) Instructions from third parties to carry them out.

46
Q

What is the commission rule?

A

The firm must keep records of commissions received in respect of regulated activities and how these commissions were dealt with.

47
Q

What is the execution-only clients?

A

When a firm is acting for an execution-only client and the investment concerned is a retail investment product (life policies, unit trusts, stakeholder and personal pension schemes), it must send a letter to the client confirming that the client is NOT relying on the advice of the solicitor and the firm MUST keep a copy of this letter.

48
Q

What are insurance distribution activities?

A

Stringent requirements must be met when any insurance distribution activities are carried out.

E.g. they must be communicated to clients in a way that is clear, fair and non misleading and info on the nature of remuneration received in relation to a contract of insurance must be provided to the client before the conclusion of the initial contract.

49
Q

What is consumer credit activity and what will solicitors need to do in order to be authorised?

A

Consumer credit activity (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.

Solicitors carrying out these activities will need to be authorised by the FCA to do this OR ensure that the activities fall within the s327 exemption.

50
Q

If a solicitor is carrying out a credit-related activity through the way they accept the payment of their fees (including allowing a client time to pay), what are the conditions that need to apply to make this exempt under RAO 2001?

A

1) The number of repayments doesn’t exceed 12

2) The payment term doesn’t exceed 12 months AND

3) The credit is provided without interest or other charges.

51
Q

What does insurance distribution include?

A

According to RAO 2001, insurance distribution includes:

“Activities of advising on, proposing or carrying out other work preparatory to the conclusion of contracts of insurance”

‘Contracts of insurance’ include life policies, car insurance, building and contents insurance, defective title insurance, after-the event legal insurance and annuities.

52
Q

Are rights under contracts of insurance specified investments? (Yes or no)

If a solicitor introduces a client to an insurance broker, is this regarded as a specified activity? (Yes or no)

Do exclusions apply to the above?

A

Yes &

yes.

Main exclusions will almost certainly not apply to insurance distribution so the firm will have to rely on the s327 exemption, seek authorisation from the FCA or rely on the limited exceptions available for insurance distribution activities.

53
Q

What is the financial promotions restriction?

A

This 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 (authorised by the FCA) or it is exempt.

54
Q

What is the test to see whether a communication by an unauthorised person falls foul of the financial promotion restriction?

A

1) Is a communication being made?
2) Is the communication an invitation or inducement?
3) Is there an investment activity?
4) Is the communication made in the course of business?
5) Does the communication fall within one of the exemptions?

If the first 4 are a ‘yes’, then an unauthorised person can’t communicate the promotion unless it’s been approved by an authorised person or it falls within one of the exemptions.

55
Q

What is communications regarding the test above to see whether a communication by an unauthorised person falls
foul of the financial promotion restriction?

A

Communication = an active step to make the communication.

This includes giving or transmitting material to the recipient - could be face to face, emails, letters or websites.

However, communication DOESN’T NEED TO BE DIRECT - e.g. leaving brochures in the solicitor’s waiting room will amount to communication.

56
Q

What is the difference between the various types of communication - real time and non-real time

solicited and unsolicited.

A

A real time communication is one made in the course of a personal visit, telephone call or other interactive dialogue.

A non-real time communication is any other communication (through letter, email or brochure).

A real time communication is solicited where it is made in the course of a personal visit, telephone conversation or other interactive dialogue that is initiated by or takes place in response to an express request by the recipient.

An unsolicited real time communication is any other real time communication that is not solicited (so not initiated or taking place in response to an express request by the recipient).

The regime is aimed to provide greatest protection where individuals are at their most vulnerable, namely an unsolicited real time communication.

57
Q

Regarding a financial promotion regime, what is an invitation or inducement?

A

The financial promotion regime applies to communication that is an INDUCEMENT or INVITATION to engage in investment activity.

An invitation will directly invite a person to take a step that results in them engaging in investment activity.

An inducement is a significant step in seeking to persuade or incite someone to engage in an investment activity.

This means they have a promotional element/degree of persuasion or incitement rather than just providing info. This test is an objective one.

58
Q

What is an investment activity for the purposes of financial promotion?

A

‘Investment activity’ is defined as entering into a ‘controlled activity’ or exercising any rights conferred by a controlled investment.

This includes advising on and managing certain investments such as shares and insurance contracts.

59
Q

What are exemptions to this rule? (This card focuses on the one-off promotions exemption)

A

Types of communication which are considered to present less risk (solicited real time communications) may be able to take advantage of an exemption.

Examples include:

One off promotions - one-off, non-real time communications and solicited real time communications are exempt if the communication is one that is personal to the client.

One off, unsolicited real time communications are exempt providing the solicitor believes on reasonable grounds:

1) That the client understands the risks associated with engaging in the investment activity to which the financial promotion relates AND
2) At the time of communication, the client would expect to be contracted by the solicitor in relation to that investment activity.

60
Q

What are exemptions to this rule? (This card focuses on the introducers exemption)

A

A solicitor may make any real time communication in order to introduce a client to an authorised person who carries out the controlled activity to which the communication relates, provided:

1) The solicitor is not connected to (e.g. a close relative of) the ATP
2) The solicitor doesn’t receive a pecuniary reward or other advantage for making the introduction from anyone other than their client
3) The client is not seeking and has not sought advice from the solicitor as to the merits of engaging in investment activity (or if they have, the solicitor has declined to give it but has recommended that the client gets such advice from an authorised person).

SQE 1 (19 decks)

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