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legal services > legal services: financial services > Flashcards

legal services: financial services Flashcards

1
Q

What is the role of the Financial Conduct Authority (FCA)?

A

The FCA conducts business regulation for firms, ensuring their safety and soundness, and regulating consumer credit and second charge mortgages secured over property.

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2
Q

What is the main objective of the FCA as per the Financial Services and Markets Act (FSMA) 2000?

A

(a) Securing an appropriate degree of protection for consumers (consumer protection objective).
(b) Protecting and enhancing the integrity of the UK financial system (integrity objective).
(c) Promoting effective competition in the interests of consumers in the market (competition objective).

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3
Q

What powers does the FCA have in relation to financial promotions and services?

A

The FCA can require firms to withdraw or amend misleading financial promotions with immediate effect and can block the launch of or stop a service or product

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4
Q

What is the role of the Prudential Regulation Authority (PRA)?

A

the PRA is responsible for the authorisation, prudential regulation, and general supervision of firms that manage significant financial risks, such as banks, building societies, insurers, credit unions, certain investment firms, and Lloyd’s of London.

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5
Q

What are PRA-authorised firms or dual-regulated firms?

A

PRA-authorised firms or dual-regulated firms are those regulated by both the PRA for prudential regulation and by the FCA for conduct purposes. These firms include banks, building societies, insurers, credit unions, certain investment firms, and Lloyd’s of London.

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6
Q

What does Section 19 FSMA 2000 (the general prohibition) state?

A

Section 19 FSMA 2000 states that no person may carry on a regulated activity in the UK unless they are authorised or exempt.

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7
Q

What are the consequences of carrying out a regulated activity without authorisation or exemption under Section 19 FSMA 2000?

A

Carrying out a regulated activity without authorisation or exemption is a criminal offence.

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8
Q

What is the financial promotions restriction under Section 21 FSMA 2000?

A

An unauthorised person cannot engage in a financial promotion. It is a criminal offence under Section 25 FSMA 2000 to make an unauthorised financial promotion

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9
Q

Who is the appropriate regulator for solicitors’ firms under FSMA 2000?

A

The appropriate regulator for solicitors’ firms under FSMA 2000 is the FCA, unless the firm is exempt due to being regulated by a designated professional body like the SRA.

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10
Q

What is the exemption for professional firms under FSMA 2000

A

Professional firms, such as solicitors’ firms, that carry out regulated activities as part of their professional work may be exempt from FCA authorisation if they are regulated and supervised by a designated professional body (DPB), such as the SRA.

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11
Q

What are the four tests to determine if an activity is regulated under FSMA 2000

A
  1. Are you in business?
  2. Is there a specified investment?
  3. Is there a specified activity?
  4. Is there an exclusion?
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12
Q

what is the Business test?

A

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

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13
Q

what do specified investments include? give examples…

A
  1. company stocks and shares
  2. debentures, loan stock and bonds;
  3. government securities, such as gilts;
  4. unit trusts and open-ended investment companies (OEICs);
  5. insurance contracts (including life policies and annuities);
  6. regulated mortgage contracts (most residential mortgages);
  7. home reversion/home purchase plans
  8. credit agreements.
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14
Q

which investments are NOT relevant

A
  1. Interests in land
  2. certain national savings products.
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15
Q

What are some specified investment activities under RAO 2001?

A
  1. Dealing as agent
  2. Arranging
  3. Managing
  4. Safeguarding
  5. Advising
  6. Lending money on/administering a regulated mortgage contract
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16
Q

what is dealing as an agent?

A

This involves buying, selling, subscribing for, or underwriting investments on behalf of a client (not the solicitor’s own account) and committing the client to transaction

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17
Q

what is ‘arranging?’

A

This activity involves being the intermediary or contact between the client and another party.

18
Q

what is ‘managing?’

A

Managing investments involves active participation. Applies ONLY to discretionary management, where the solicitor makes decisions on behalf of the client. e.g., trust or probate work where sol is acting as trustee/PR.

19
Q

what is ‘safeguarding?’

A

Safeguarding involves holding and managing investments on behalf of a client, ensuring that the investments are protected and appropriately managed. e.g., trust or probate work.

20
Q

what is ‘advising?’

A

Giving SPECIFIC advice on the merits of buying, selling, subscribing for, or underwriting investments.
Generic advice is outside the scope of FSMA 2000. e.g., a solicitor can advise a client on the respective merits of investing in shares, BUT if the solicitor advises the client to buy shares in a
particular company = regulated activity

21
Q

What is the effect of exclusions under RAO 2001?

A

Exclusions under RAO 2001 mean that activities which would otherwise be regulated are not treated as such. If a solicitor’s activity falls under an exclusion, authorisation is not required for that specific transaction.

22
Q

what are the 6 exclusions in RAO 2011?

A

(a) introducing;
(b) using an Authorised Third Party;
(c) acting for an execution-only client;
(d) acting as trustee or personal representative;
(e) the ‘professional/necessary’ exclusion;
(f) the ‘takeover’ exclusion.

23
Q

What is the “Introducing” exclusion in RAO 2001 for arranging activities?

A

The ‘Introducing’ exclusion applies when a solicitor introduces a client to an authorised person and takes no further role in that aspect of the client’s matter. (only applies to activity of ARRANGING)

24
Q

When does the “Introducing” exclusion NOT apply?

A

The exclusion does not apply if the solicitor retains an ongoing role, such as acting as a communication link between the client and the authorised person, or if the transaction involves an insurance contract.

25
Q

What is the “Authorised Third Person” (ATP) exclusion in RAO 2001?

A

The ATP exclusion applies to dealing as agent and arranging activities when the transaction is based on advice from an ATP (a person authorised by the FCA.) The solicitor may retain an ongoing role, but financial advice must come from the ATP.

26
Q

When can a solicitor NOT rely on the ATP exclusion?

A

A solicitor cannot rely on the ATP exclusion if they receive any pecuniary reward (e.g., commission) or other advantage from someone other than the client due to the transaction, unless they account for it to the client.

27
Q

What is the “Execution-Only Client” exclusion in RAO 2001?

A

The execution-only client exclusion applies to dealing as agent and arranging activities. When the client, as an investor, is not seeking and has not sought advice from the solicitor about the merits of entering into the transaction. If advice was sought, the solicitor must have declined and recommended the client seek advice from an authorised person.

28
Q

When can a solicitor NOT rely on the execution-only client exclusion?

A

The exclusion cannot be relied upon if the solicitor receives a commission or other advantage from anyone other than the client due to the transaction, unless accounted for to the client. It also does not apply to contracts of insurance.

29
Q

What is the “Trustees or Personal Representatives” exclusion in RAO 2001?

A

This exclusion applies to arranging, managing, safeguarding, and advising fellow trustees or beneficiaries, as well as lending money on or administering a regulated mortgage contract.

30
Q

Who can rely on the “Trustees or Personal Representatives” exclusion?

A

The exclusion is available to solicitors acting AS trustees or personal representatives (PR), NOT to those acting for a trustee or PR. It applies even if a member of the solicitor’s firm is a trustee or PR but the activity is carried out by other firm members

31
Q

When does the “Trustees or Personal Representatives” exclusion NOT apply?

A

The exclusion does not apply if the solicitor is remunerated for the activity beyond what they receive as trustee or PR. However, remuneration based on time spent does not count as additional remuneration.

32
Q

What is the “professional/necessary” exclusion?

A

The “professional/necessary” exclusion applies to advising, arranging, safeguarding, and dealing as an agent when the activity is carried out in the course of a profession or business and is reasonably regarded as a necessary part of other services provided in the course of that profession or business.

33
Q

When does the “professional/necessary” exclusion NOT apply?

A

The exclusion does not apply if the regulated activity is remunerated separately from the other services provided.

34
Q

What is the takeover exclusion and what does it apply to?

A

The exclusion applies to arranging, advising, and dealing as agent for transactions involving acquiring or disposal of 50% or more of voting shares in a body corporate (except OEICs), and transactions aimed at acquiring or disposing of such shares.

35
Q

Who qualifies as eligible parties for the takeover exclusion?

A

The parties must be a body corporate, partnership, individual, or a group of connected individuals (e.g., directors, managers, close relatives, or trustees).

36
Q

What is the purpose of the takeover exclusion, and are there any limitations?

A

The exclusion applies when acquiring day-to-day control of a company, even with less than 50% share acquisition. It does not apply to transactions involving insurance contracts.

37
Q

what does the S.327 Exemption allow solicitors firms to do?

A

Section 327 allows solicitors’ firms to carry out certain regulated activities without FCA authorisation, provided they are regulated by a Designated Professional Body (DPB), like the SRA.

38
Q

What conditions for S.327 must be met for the exemption to apply?

A
  1. No Unaccounted Advantage: The firm must not receive any financial benefit from anyone other than the client, without accounting for it.
  2. Incidental Services: Regulated activity must be incidental to professional services.
  3. the firm must only carry out regulated activities permitted by the DPB;
  4. the activities must not be prohibited by an order made by the Treasury, or any direction
    made by the FCA.
  5. the firm must not carry on any other regulated activities.
39
Q

what is the ‘Incidental’ Test?

A

Specific Test: The regulated activity must arise from or complement the legal service provided to a client
General Test: Regulated activity must not form a major part of the firm’s work; it should be subordinate to the primary legal service.

40
Q

What is included in the definition of “contracts of insurance”?

A

Contracts of insurance include life policies, car insurance, buildings and contents insurance, defective title insurance, after-the-event legal insurance, and annuities. These contracts are considered specified investments.

41
Q

What options do solicitors have when involved in insurance distribution activities?

A

Solicitors involved in insurance distribution activities must either:

  1. Rely on the s 327 exemption e.g., ‘arranging the insurance is incidental.’
  2. Seek FCA authorisation.
  3. Use the limited exceptions available for insurance distribution activities.
42
Q

What does Section 21 of the FSMA 2000 prohibit?

A

It prohibits a person from communicating an invitation or inducement to engage in an investment activity unless the promotion is made or approved by an authorised person or it is exempt. This is known as the financial promotion restriction

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