Legal Services Flashcards
Chapter 4
What does the financial service industry comprise of?
Firms that advise on, sell and arrange financial products and services.
What principles/rules means that a solicitor should NOT undertake financial services work unless they have expertise in that field?
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
What happens if the solicitor carries out activities for clients regarding financial services without being authorised to do so?
Could involve the commission of a criminal offence.
What is the main legislation which regulates the financial services industry?
The Financial Services and Markets Act 2000 (FMSA 2000) - though most of the detail is in the secondary legislation.
What 2 bodies were established under the Financial Services Act which largely regulate the financial services?
Financial Conduct Authority (FCA) and the Prudential Regulation Authority.
What is the Financial Policy Committee responsible for?
Monitoring the stability of the whole UK financial system
What are 3 key responsibilities carried out by the FCA?
- 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.
What are 3 aims of the FCA and where is this listed?
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)
What do the FCA’s powers allow them to do to firms?
- Require firms to withdraw or amend misleading financial products with an immediate effect
- Block the launch of, or stop, a service or product.
What is the Prudential Regulation Authority responsible for?
- 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).
What does the FSMA 2000 (PRA-regulated Activities) Order 2013 set out?
- 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.
What are the 2 main restrictions of greatest relevance to solicitors regarding financial services?
- Carrying out a regulated activity (the general prohibition)
- Making a financial promotion (the financial promotions restriction)
What does the FSMA provide for about general prohibition/carrying out a regulated activity?
No person can carry on a regulated activity in the UK unless they are AUTHORISED or EXEMPT.
What does being authorised mean?
Authorised = persons with permission granted by the appropriate regulator (FCA)
What is the aim of the general prohibition/carrying out a regulated activity rule?
To ensure that financial advice and assistance is only provided by people who are properly qualified and regulated.
Which type of firm will be exempt?
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).
What are the consequences of carrying out a regulated activity without authorisation?
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.
What is the financial promotions restriction?
An unauthorised person can’t engage in a financial promotion.
FCA is the regulator.
Criminal offence to make an unauthorised financial promotion.
What is a regulated activity?
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.
What are the 4 tests to determine whether an activity is regulated?
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?
What is the business test? (Step 1 on previous card)
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.
What are specified investments? (Point 2 of the test for regulated activities)
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).
What specified investments will NOT COUNT as part of regulated activities? (2 things)
- Interests in land
- Certain National Savings products
What are specified investment activities?
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.