Legal Services - Financial Services Regulation (1) Flashcards
What is financial services regulation?
Financial Services Regulation: Solicitors and firms are subject to further regulation in respect of conducting and promoting regulated financial activities. This is predominantly regulated by the Financial Conduct Authority.
What are regulated activities?
Regulated Activities: Solicitors cannot conduct regulated activities unless they are authorised by the FCA, or benefit from an exemption.
(1) Authorisation: The FCA can authorise conduct on a case-by-case basis.
(2) Exemption: Firms and solicitors within them can conduct certain regulated activity that is tangential to their legal services work,provided they are regulated by the SRA.
Regulated Activity
Regulated Activity: A regulated activity is a specific activoty related to specified investment activities in the course of business, unless excluded.
(1) Course of Business: The activity must be conducted in the course of business.
(2) Specified Investment: These include stocks and shares, debentures, GILTs, bonds, insurance contracts, regulated mortgages, home reversion/purchase plans, deposits, and credit agreements.
Exception: Does not include Building Society Shares, Land, National Savings Products, or repayment plans to solicitors not exceeding 12 months and without interest.
(3) Specified Activity: In relation to specified investments, solicitors and firms cannot:
Deal as Agent: Buy, sell, subscribe or underwrite for the client.
Arrange: Act as go-between for the client and a broker.
Manage: Manage investments using discretion.
Safeguard: Safeguard investments for the client.
Advise: Provide specific advice on an investment (not generic advice).
Mortgages: Lend on or administer regulated mortgage contracts.
Investment Scheme: Oversee, establish, or wind up an investment or pension scheme.
What are the exclusions?
Exclusions: Where an exclusion applies, an activity is not a regulated activity, meaning no authorisation is required. These exclusions never apply to insurance contracts.
(1) Introducing: Solicitor introduces the client to an authorised party and plays no further role.
(2) Authorised Third Party: Solicitor acts exclusively on the advice of an authorised party, unless they receive a reward from the third party that they do not account to the client.
(3) Execution-Only: Solicitor executes a contract for a client without any advisory role, unless they receive a reward as above.
(4) Office Holder: Solicitor acts in their role as a trustee or personal representative, unless they receive remuneration in addition to their ordinary fee.
(5) Necessity: Investment activity is a reasonably necessary part of the solicitor’s normal services, such as sale of shares to pay inheritance tax, unless they receive additional remuneration as above.
(6) Corporate Takeover: Activity is connected to a transaction totalling at least 50% of the voting shares in a corporate body, or enough to change ‘day-to-day’ control.
What is the professional firm exemption?
Professional Firm Exemption: Non-excluded activities may still be conducted under the ‘professional firm exemption’. Five conditions must be met (s327 FSMA).
(1) Non-Advantageous: The firm must receive no advantage incidental to the activity or, if they do, account this to the client.
(2) Incidental to Services: The activity must be incidental to the firm’s normal professional services.
Incidental to Dominant Service: The activity must be incidental to a dominant legal service, it cannot be exercised for a client in isolation.
Minor Part of Dominant Service: The activity must not be a major part of the dominant service, and certainly must account for less than half of the firm’s income.
(3) Permitted Activities: Only activities permitted by the SRA can be exempted. Firms seeking to distribute from existing insurance policies must notify the SRA, register at the FInancial Services Register, and appoint an ‘Insurance Distribution Officer’.
(4) Prohibited Activities: Activities may be specifically prohibited from exemption.
Treasury: The Treasury will exclude certain activities, such as disposing pension scheme rights, or recommendations to join a Lloyd’s of London syndicate.
SRA: The SRA’s Scope Rules prohibit creation or underwriting of insurance contracts.
(5) Non-FCA Regulated: Firms already regulated by the FCA for any regulated activity cannot benefit from the professional firm exemption.
What is insurance distribution?
Insurance Distribution: Insurance distribution means any advice, exercise or assistance on insurance contracts (RAO 2001).
(1) Contracts: These include life policies, home insurance, car insurance, after-the-event, and annuities etc.
(2) In Practice: Exclusions do not apply to insurance, so firms tend to rely on the professional exemption, or seek FCA authorisation, to advise on insurance.
What are the conduct of business rules?
Conduct of Business Rules: When relying on the professional exemption, firms must comply with the SRA’s Conduct of Business Rules (COB Rules).
(1) Information: Clients must be provided with specified information, such as the lack of FCA authorisation.
(2) Expediency: Firms must carry out transactions as soon as possible (unless this is not in the client’s best interest).
(3) Instructions: Instructions should be obtained through a prescribed Demands and Needs Statement, especially for contracts of insurance.
(4) Record of Instructions: Firms must maintain a record of client instructions, and any subsequent transactions.
(5) Record of Commission: Firms must record commissions made in respect of exempt activities and how they dealt with them.
(6) Record of Execution-Only: Firms acting in an execution-only capacity (usually for investments, as otherwise excluded) must obtain a client letter confirming that the client is not relying on firm advice.
(7) Insurance Distribution: Information on insurance distribution activities must be fair. Incidental remuneration must be accounted prior to conclusion of activity.
What are financial promotions?
Financial Promotions: Firms and solicitors are prohibited from ‘inviting’ or ‘inducing’ persons to engage in an investment activity in the course of business unless exempt (s21).
(1) Invite/Induce: This simply means advice, both in-person or online. For example, advising a client to sell shares. This therefore has a lot of overlap with regulated activities.
(2) Investment Activity: This means a specified investment activity as per above. However, there are no exclusions.
General Exemption
General Exemption: Solicitors may be subject to general exemptions.
(1) Office Holder: Promotions made in the capacity of Trustee or PR are exempt.
(2) Corporate Takeover: Promotions made in the course of a corporate takeover are exempt.
Professional Firm Exemption
Professional Firm Exemption: Professional firms are exempt under one of two conditions.
(1) Real Time: Professional firms can make promotions in ‘real time’, provided that all 3 conditions are met:
Engaged by Client: The firm or solicitor was engaged by the client, not vice versa.
Exempt or Necessity: Promotion refers to a professional exempted activity, or is excluded by virtue of ‘necessity’.
Incidental: Activity is incidental to services requested by client.
(2) Non-Real Time: Professional firms can make promotions in ‘non-real time’, provided they make a series of specific disclaimer and advisory statements.
One-Off Promotion Exemption
One-Off Promotion Exemption: Solicitors can make ‘one-off promotions’ in three circumstances.
(1) Non-Real Time: A one-off promotion specific to a single client is permitted in non-real time.
(2) Real Time (Solicited): A one-off promotion specific to a single client is permitted in real time, if initiated by the client or at their express request.
(3) Real Time (Unsolicited): A one-off promotion specific to a single client is permitted in real time, if the solicitor has reasonable grounds to believe that the client understands the risk of the activity, and the client would expect to be contacted about it.
Introductions Exemption
Introductions Exemption: Solicitors can introduce clients to authorised third parties, provided it is in real time, the solicitor and third party are unconnected, the solicitor makes no incidental benefit, and the solicitor provides no advice.
