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Professional Conduct > Regulation of Financial Services > Flashcards

Regulation of Financial Services Flashcards

1
Q

How is the provision of financial services regulated in the UK?

A

Financial Services and Markets Act 2000

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2
Q

Will many law firms obtain FCA authorisation?

A

No - stringent level of regulation + small proportion of work for clients requiring authorisation = not cost-efficient

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3
Q

What is the general prohibition under s19(1) of FSMA and what is a breach of it?

A
  • No person may carry on a regulated activity unless he is an authorised person or exempt person
  • Breach = criminal offence

So solicitor must assess whether activity is governed by s19

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4
Q

What are the 2 components of a ‘regulated activity’?

A

A specified investment + specified activity

E.g. advising on the merits (activity) of shares (investment)

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5
Q

What if the activity being proposed to by a client is governed by s19(1) and the solicitor is not an authorised nor exempt person?

A

They should refer the client to an independent financial advisor authorised by the FCA instead

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6
Q

Why should lawyers make clients aware of the scope of financial services regulations?

A
  • So lawyer does not commit offence
  • They can properly advise clients about their own statutory constraints
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7
Q

What are the steps of the Financial Services Decision Tree?

A
  1. Is the investment ‘specified’ under FSMA? If yes…
  2. Is the activity a ‘specified activity’ under FSMA? If yes…
  3. Is the activity excluded under FSMA? If no…
  4. Does the activity fulfil the basic conditions in s327 of FSMA and SRA Scope Rule 2? If yes = exemption is possible, if no = authorisation is required
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8
Q

What are the specified investments?

Step 1

A
  • Rights under contract of insurance
  • Shares
  • Instruments creating/acknowledging indebtedness (inc bonds)
  • Government/public securities
  • Rights under a pension scheme
  • Regulated mortgage contracts (covers typical home buyer’s mortgage but not a loan to buy an office or loan to companies)

If not specified, FSMA does not apply + no authorisation required

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9
Q

What are the 4 ‘specified activities’?

Step 2

Person will not require authorisation unless they are carrying out a specified activity by way of business in relation to the specified investment

A
  • Dealing in investments as principal or as an agent - inc buying, selling, subscribing or underwriting securities (shares, GOV securities, rights under pension scheme) or contractually based investments
  • Arranging deals in investments
  • Managing investments (exercising discretion re investments that are securities/contractually based investments)
  • Advising on (the merits of) investments

Fourth is most likely encountered by a lawyer - corporate solicitors often give advice

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10
Q

What will fall under advising on (the merits of) investments (requires 2 things) and what will not?

A
  • Will: advice requiring an element of opinion and a recommendation as to the course of action
  • Will not: generic advice - like to invest in China as opposed to Europe - will not require FCA authorisation (e.g. explaining the legal rights attaching to 2 different classes of shares is fine unless solicitor recommended purchasing shares)

Only advice given to someone who holds or is a prospective investor in a security or relevant instrument relating to merits of buying, selling, subscribing for, exchanging, redeeming, holding or underwriting such investments falls within Art 53(1) [not sure how important this is but leaving this her in case!]

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11
Q

What are the 3 general exclusions under FSMA and what happens if one of them applies?

Step 3

A
  1. Regulated activities are necessary part of other services carried on in course of profession or non-investment business
  2. Regulated activities in connection with the sale of a body corporate
  3. Authorised persons

If they apply = can stop here!

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12
Q

What do the general exclusions not apply to?

A

Contracts of insurance

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13
Q

What would be considered a ‘necessary part’ and when will the exclusion not apply?

Step 3 exclusion 1

Generally quite rare in practice

A
  • It must not be possible for other services to be provided unless dealing/arranging/advising is also provided
  • Will not apply if the specified activity is remunerated separately or to contracts of insurance at all

E.g. client selling leasehold flat, transaction might also involve transfer of a share in a management company or company that owns freehold for block of flats - although shares are specified investments, arranging their sale would be a necessary part of other property work solicitor carrying out = solicitor could arrange for transfer of share without being authorised by FCA

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14
Q

When will regulated activities in connection with the sale of a body corporate - i.e. purchase/sale of shares in company - come under the exclusion?

Step 3 exclusion 2

A

If shares (can inc those already held) consist of/include 50% or more of voting rights in company or may reasonably be regarded as acquisition of day-to-day control of the affairs of the body corporate

Does not matter if two entities are different legal status e.g. company can sell shares to individual or partnership etc.

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15
Q

How does the authorised persons exclusion work? (2 conditions)

Step 3 exclusion 3

A

Solicitor will not be carrying on specified activity if he enters into a transaction as agent for client provided:
1. Transaction was entered into on advice of authorised person; or
2. It is clear the client is not seeking/has not sought advice from solicitor re merits of entering transaction (solicitor has refused if they have)

Same whether it is dealing or arranging

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16
Q

When will the authorised persons exclusion not apply?

What services and what must not be received?

A
  • If transaction relates to contract of insurance, investment services or activities, or
  • If solicitor receives commission from any person for which he does not account to the client
17
Q

If FSMA applies - i.e. work involves carrying out regulated activitiy (specified activity re specified investment) and this is not excluded - what 2 options does the solicitor have?

A

Solicitor must be either:
1. Directly authorised where firm is authorised by FCA directly; or
2. Supervised by Designated Professional Body (Law Society, but SRA is the profession’s independent regulator so repsonsibility for regulation lies with SRA)

18
Q

What conditions must be fulfilled if a solicitor is being supervised by designated professional body and what is the result of their satisfaction?

A
  • Those in s327 FSMA and SRA scope rules
  • If satisfied = this is an exempt regulated activity; no FCA authorisation needed but still subject to SRA rules/restrictions

I.e. ERA can be carried out without direct FCA authorisation

FSMA enables firms authorised and regulated by SRA to carry on exempt regulated activities provided compliance with regulations

19
Q

What if the basic conditions of s327 and Scope Rule 2 are not fulfilled?

A

First must be authorised by FCA or refuse to carry out activity

Are otherwise carrying out a criminal offence

20
Q

What are the 4 conditions in s327 that must all be satisfied and how will they be satisfied??

A
  1. Person carrying on regulated activities must be a member of a profession = met if person is a lawyer
  2. Person must not receive a commission from TP re regulated activities unless he accounts to client for it = easy to meet; only keep if client says so
  3. Specified activity must be provided in a way that is incidental to the provision of professional services
  4. Person must only carry out regulated activities which he is permitted to carry out as a result of s332(3) = aka must comply with SRA Scope rules…
21
Q

What does it mean for the work to be ‘incidental’? When will this not be the case?

A
  • Activity is a small part of work being carried out by firm (in most cases will be)
  • Will not be incidental if it amounts to separate business conducted in isolation from provision of professional services provided by firm
22
Q

How is Scope Rule 2 satisfied?

2 options

A

If the activity arises out of or is complimentary to the provision of a particular professional service to a particular service

23
Q

How is it decided whether work arises out of or is complimentary to service to a client?

A
  • Arises out of: if acting for client on sale of company and clients asks advice on how best to invest in personal pension = would not ‘arise out of’ work being done because it is completely unreleated to non-regulated work
  • Complimenatry: will be complimentary if specified activity arises naturally out of work solicitor is doing for client e.g. undertaking conveyancing transaction involving regulated mortgage, giving tax advice to effect sale of shares etc.
24
Q

When would work be 1. both incidental and complimentary and 2. incidental but not complimentary?

A
  1. Incidental and complimentary = property lawyer investigates title and advises that client should buy particular restrictive covenant insurance policy
    1a. Advising on merits of RC insurance policy is a small part of overall work firm does for clients = incidental
    1b. Need to advise client on this has arisen naturally out of work; has become apparent from investigations already carried out = complimentary
  2. Incidental but not complimentary = corporate lawyer sold shares in X for their client who now asks for advice on using sale proceeds to invest in ABC plc shares
    2a. Advising on merits is small part of overall work = incidental
    2b. Does not arise naturally from work and is unrelated to advice solicitor was giving on sale of shares to company = not complimentary
25
Q

What is the consequence of complying with s327 and Scope Rule 2?

A
  • Activity is an exempt regulated activity and does not need FCA authorisation
  • Firm must comply with Scope Rules and be authorised by SRA and comply with relevant SRA Financial Services Rules
26
Q

Even if the general prohibition under s19(1) does not apply, what still must be considered?

A
  • Solicitor acts in a way upholding public trust (principle 2) and with integrity (principle 5)
  • Ensure service is competent and provided in timely manner (CCS3) and that you properly account to clients for any financial benefit received unless otherwise agreed (CCS4)
27
Q

Summary of Financial Services Decision Tree

A
28
Q

What are the 2 main FSMA restrictions relating to share sales?

A
  1. Restriction on financial promotions
  2. Requirement for approved prospectus where shares to be offered to the public
29
Q

What is a financial promotion?

A

An invitation to engage in investment activity

30
Q

When will the communication of a financial promotion not be a criminal offence? (s21)

2 possibilities

A
  1. Authorised person has approved its contents or
  2. A relevant exemption applies

Approval from authorised person is time consuming and expensive

31
Q

What are the 3 exemptions for restriction on financial promotions? 1 is re sale of something, 2 is where solicitor selling shares in company and memorandum is distributed to only persons believed to be…

A
  1. Sale of a body corporate (very useful) - where transaction is to acquire or dispose of shares in a body corporate consisting of 50% or more of voting shares (already held) / object of transaction is to acquire day to day control of company

Remaining 2 apply if solicitor selling shares in company and information memorandum is distributed only to persons believed to be…
2. Investment professionals authorised by FCA
3. High net worth companies (called up share capital not less than £5m or £500k for body corporate with 20+ members) or individuals (sophisticated investors)

Sale of body corporate exemption can be between different legal entities

32
Q

What is the requirement for an approved prospectus?

A

It is a criminal offence to offer shares to UK public without prospectus approved by relevant regulatory authority (FCA)

33
Q

What 2 types of offers will negate the requirement of an approved prospectus?

A
  1. Offer is made to/directed at fewer than 150 persons
  2. Offer is sent to only qualified investors (banks, investment institutions and national/regional GOVs)

Professional Conduct (8 decks)

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