Regulation of Financial Services

Question 1

Who are the two regulators of financial services in the UK?

Answer 1

-Prudential Regulation Authority (PRA)

-Financial Conduct Authority (FCA)

Question 2

What does S19(1) FSMA 2000 state?

Answer 2

No person may carry on a regulated activity in the UK unless they are authorised by the FCA or exempt.

Breach of s19 FSMA is a criminal offence.

Question 3

What is the meaning of a regulated activity under S22 FSMA?

Answer 3

An activity is a regulated activity if it is an activity of a specified kind which is carried on by way of business and-

(a) Relates to an investment of a specified kind.

Regulated activity= specified investment + specified activity

Question 4

What is Step 1 of the FSMA tree?

Answer 4

Is there a specified investment?

Question 5

What are the specified investments listed in Part III of the FSMA RAO?

Answer 5

-Rights under a contract of insurance (Article 75)

-Shares in a company (Article 76)

-Instruments creating or acknowledging indebtedness (Article 77)

-Government and public securities (Article 78)

-Rights under a pension scheme (Article 82)

-Regulated mortgage contracts (Article 88)

Question 6

Does a regulated mortgage contract cover a typical home buyer’s mortgage?

Answer 6

Yes, but it does not cover a loan to buy an office or loans to companies.

Question 7

What is Step 2 of the FSMA tree?

Answer 7

Is there a specified activity?

Question 8

What are the specified activities under Part II of the FSMA RAO?

Answer 8

-Dealing in investments as principal (Article 14) or as agent (Article 21) e.g. buying, selling, subscribing or underwriting securities or contractually based investments

-Arranging deals in investments (Article 25)

-Managing investments (Article 37)

-Advising on the merits of investments (Article 53)

Question 9

What constitutes advising on the merits of investments and does generic advice fall within this specified activity?

Answer 9

The person has to be:

-giving advice requiring an element of opinion, and

-a recommendation as to a course of action

Giving generic advice on investments, such as explaining the legal rights attaching to two different class of shares, will not require FCA authorisation

Question 10

What is Step 3 of the FSMA tree?

Answer 10

Is the activity an excluded activity under the RAO?

Question 11

What is the Article 67 ‘necessary part’ exclusion?

Answer 11

A solicitor will generally not be:

-dealing as an agent
-arranging deals
-advising on the merits

in relation to investments for the purposes of FSMA and therefore will not be carrying on a specified activity, provided that these activities are:

(a) carried on in the course of carrying on any profession or business which does not otherwise consist of the carrying on of regulated activities in the UK; and

(b) may reasonably be regarded as a necessary part of other services provided in the course of that profession or business (Article 67(1) RAO).

Question 12

When will the Article 67 ‘necessary part’ exclusion not apply?

Answer 12

This exclusion will not apply if the specified activity is remunerated separately from the other services.

This exclusion also does not apply to certain investment firms, credit institutions and does not apply to contracts of insurance.

Question 13

What is the Article 70 ‘sale of a body corporate exclusion’?

Answer 13

A solicitor will not be:

-dealing as principal
-dealing as an agent
-arranging an investment
-advising on the merits of an investment

if such activity is carried out in connection with the purchase or sale of shares in a company provided that:

i) the shares consist of or include 50% or more of the voting shares in the company AND the acquisition or disposal is between parties each of whom is a body corporate, partnership, single individual or a group of connected individuals; or

ii) the shares, together with any shares already held by the purchaser, consist of or include 50% or more of the voting shares in the company AND the acquisition or disposal is between parties each of whom is a body corporate, partnership, single individual or a group of connected individuals; or

iii) the object of the transaction may reasonably be regarded as being the acquisition of day-to-day control of the affairs of the body corporate.

Question 14

When is the Article 70 ‘sale of a body corporate’ commonly used and provide an example?

Answer 14

It is commonly used by solicitors working on corporate transactions.

An example of an exclusion under Article 70 would be a firm arranging the transfer of shares in a company in which over 50% of the voting shares in the company are being sold and the transfer is between two companies.

Question 15

What is the Article 22 ‘dealing in investments as agent’ exclusion?

Answer 15

A solicitor will not be dealing in investments as agent for the purposes of FSMA and therefore will not be carrying on a specified activity, if he enters into a transaction as agent for his client with or through an authorised person, provided:

-the transaction is entered into on the advice of the authorised person; or

-it is clear that the client is not seeking and has not sought advice from the solicitor as to the merits of entering into the transaction.

Question 16

What is the Article 29 ‘arranging deals through authorised persons’ exclusion?

Answer 16

A solicitor will not be arranging deals in investments for the purposes of FSMA and therefore will not be carrying on a specified activity, if he enters into a transaction for his client with or through an authorised person, provided:

-the transaction is entered into on the advice of the authorised person; or

-it is clear that the client is not seeking and has not sought advice from the solicitor as to the merits of entering into the transaction (or the solicitor has refused to give advice and instead recommended the authorised person to provide advice).

Question 17

When do the Article 22 and 29 exclusions not apply?

Answer 17

These exclusions do not apply:

-if the transaction relates to a contract of insurance; or

-if the solicitor receives a commission from any other person for which he does not account to the client

Question 18

What is Step 4 of the FSMA decision tree?

Answer 18

Step 4 considers whether both S327 FSMA and SRA Scope Rule 2 are satisfied.

Question 19

If S327 FSMA and SRA Scope Rule 2 are satisfied, what is required?

Answer 19

The activity is an exempt regulated activity. The firm must be authorised by the SRA and must comply with the SRA Scope Rules and SRA Financial Services Rules 2019.

Question 20

If S327 FSMA and SRA Scope Rule 2 are not satisfied, what is required?

Answer 20

The activity is not an exempt regulated activity and the firm must be authorised by the FCA and must comply with the FCA Handbook or refuse to carry out the activity.

Question 21

What is the general exemption under S327 FSMA?

Answer 21

This provides where members of a professional body are only carrying on exempt regulated activities they will be exempt from the general prohibition set out in s19(1) FSMA.

Instead, the firm will be subject to rules prescribed by the SRA in relation to such exempt regulated activities.

Question 22

What are the key conditions that must be satisfied under S327(2)-(7) FSMA in order to carry out an exempt regulated activity?

Answer 22

-The person carrying on the regulated activities must be a member of a profession;

-The person must not receive a pecuniary award from a third party in respect of the regulated activities, unless he accounts to his client for the commission

-The specified activity must be provided in a way that is incidental to the provision of professional services (they cannot be a major part of the practice of the firm-it must be a small part of what the firm does for clients overall)

-The person must only carry out regulated activities which he is permitted to carry out (comply with the rules set by the SRA e.g .the SRA Scope Rules)

Question 23

What are the basic conditions that must be satisfied under SRA Scope Rule 2 when carrying out any exempt regulated activities?

Answer 23

(a) You must satisfy the conditions in section 327(2)-(5) of FSMA;

(b) The activities arise out of, or are complementary to, the provision of a particular professional service to a particular client (does it arise naturally out of the work e.g. property work and regulated mortgage, corporate work and sales of shares);

(c) There is not in force any order or direction of the FCA under s328-s329 of FSMA which prevents you from carrying on the activities; and

(d) The activities are not otherwise prohibited by these rules.

Question 24

What does S21 FSMA provide for in relation to financial promotions?

Answer 24

This section provides that it is a criminal offence for an unauthorised person to communicate a financial promotion unless an authorised person has approved its contents or a relevant exemption applies.

Question 25

Describe the ‘sale of a body corporate’ exemption to the S21 FSMA restriction on financial promotions.

Answer 25

Article 62 FPO 2005 provides that where the communication relates to a transaction to acquire 50% or more of the shares or day-to-day control of the company then the communication is exempt from s21 FSMA.

Question 26

Outline the other exemptions to the S21 FSMA restriction on financial promotions.

Answer 26

The financial promotion will be exempt if it is only distributed to persons who fall within one of the following:

-Investment professionals

-High net worth companies (a company with a called up share capital of not less than £5m)

-High net worth individuals

Question 27

What does S85 FSMA provide for in relation to an approved prospectus?

Answer 27

Under S85 FSMA it is a criminal offence to offer shares to the public in the UK without a prospectus.

The prospectus must be approved by the FCA.

Question 28

What are the two exemptions to the S85 FSMA requirement for an approved prospectus?

Answer 28

When the offer is:

-made to or directed at fewer than 150 persons

-sent only to qualified investors eg banks, investment institutions and governments)