Regulation of Financial Services

Question 1

Why is the provision of financial services heavily regulated in the UK?

Answer 1

To ensure:
- Those providing such services are approved and authorities
- Consumers are adequately protected from negligent advisers

Question 2

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

Answer 2

1. Prudential Regulation Authority (‘PRA’)
2. Financial Conduct Authority (‘FCA’)

Question 3

Whose financial services are PRA responsible for the regulation of?

Answer 3

• Banks and building societies
• Insurers
• [Small number] of significant investment firms

Question 4

Whose financial services are FCA responsible for the regulation of?

Answer 4

• Conduct of business
• Supervision of PRA and FCA firms
• Any firms not regulated by PRA (incl. law firms carrying out financial services-related work

Question 5

When may someone working in a law firm need to be familiar with the regulations of the PRA or FCA?

Answer 5

• Working with investment banks as a corporate lawyer
• Be asked to advice client authorised by FCA/PRA
• In relation to enforcement action by FCA as a litigator
• When asked to arrange life insurance policy as condition of client being granted mortgage for their residence

Question 6

Can a law firm give financial advice?

Answer 6

No

s.19(1) FSMA says only the following can carry out regulated financial services activity:

a) Authorised
b) exempt person

Question 7

What does breach of s.19 FSMA constitute the carrying out of a regulated activity if not authorised or exempt ?

Answer 7

Criminal offence

Question 8

TRUE OR FALSE

Number of firms authorised by the FCA is very large

Answer 8

No - it is very small due to the additional regulatory burden and the detailed provisions/statute they must comply with having been authorised

Question 9

What must a lawyer do if they find themselves in a position, as an unauthorised person, of advising someone on finances?

Answer 9

Refer the client to an independent financial advisor authorised by FCA

Question 10

What are the four steps for a solicitor to follow in gauging whether they need authorisation to provide financial advice?

Answer 10

1. Is there is a ‘specified investment’?
2. Is there a ‘specified activity;?
3. Is there an exclusion available?
4. Can both s.327 FSMA and SRA Scope Rule 2 be satisfied?

Question 11

What are common examples of ‘specific investments’ referred to in step 1 of the FSMA decision tree?

Answer 11

• Rights under a contract of insurance
• Shares in a company
• Rights under a pension scheme
• Bonds
• Regulated mortgage contracts
• Instruments creating or acknowedging indebtness

Question 12

What are common examples of ‘specific activities’ referred to in step 1 of the FSMA decision tree?

Answer 12

• Dealing in investments as agent or principal
• Arranging deals in investment
• Advising on the merits of investments

Question 13

What defines whether someone is ‘advising on the merits of investments’?

Answer 13

Someone giving an element of opinion AND a recommendations as to a course of action

Question 14

What happens in FSMA decision tree making process if the ‘specified activity’ is one of those excluded on the RAO?

Are there any conditions?

Answer 14

The activity does not require authorisation or exemption from FCA - can go on with advising on whatever it is, as long as they are authorised by SRA and comply with their regulation

Question 15

What is the RAO?

Answer 15

Financial Services and Markets Act 2000 (Regulated Activities) Order 2001

Question 16

What are the three common exception provided by the RAO as a part of step 3 of the FSMA decision making tree?

*specific exemptions

Answer 16

• If conditions of activities carried on in connection with sale of a body corporate are met
• Dealing/arranging deals through an authorised person
• Regulated activities necessary as a part of other services carried on in the course of a profession

Question 17

What happens if there are no exclusions available on the RAO as a part of step 3 of the FSMA decision making tree?

Answer 17

Step 4 - Can you satisfy both:

1. s.327 FSMA
2. SRA Scope 2 Rule

Question 18

What is the following course of action from step 4, if one cannot satisfy both s.327 FSMA AND SRA Scope 2 Rule?

Answer 18

The firm must obtain direct authorisation from the FCA and comply with FCA Rule Book

Question 19

What are the four conditions that must be met for a solicitor to carry out exempt regulated activities without being directly regulated by the FCA under s.327 FSMA?

• this is the first part of step 4

Answer 19

• Person carrying out the activity must be a member of a profession
• ^ mustn’t receive payment/commission unless passed onto client (unless client otherwise agrees
• Activities in question must be incidental
• Person must comply with their relevant Designated Body’s (‘DPB’) rules

Question 20

How is ‘regulated activity’ defined by the ss of FSMA s.22?

Answer 20

• Activity that is a specified investment (paraphrased)

Question 21

What does the ‘specified investment [i.e., regulated activity]’ of a mortgage contract cover and not cover?

Answer 21

Covers
- Typical home buyer’s mortgage

Does not cover
- Loan to buy office
- Loan to companies

Question 22

Why is giving generic advice such as ‘invest in China, as opposed to Europe’ not a part of the ‘specified activity’ - advising on the merits of investments - in step 2 of the FSMA decision making tree?

Answer 22

Because it is not advising on merits of
- Buying
- Selling
- Subscribing
- Underwriting

Specific investments

Question 23

What condition regarding the sale of shares must apply where the specified activity is one of arranging deals?

Answer 23

The shares must consist of or include min. of 50% of the voting shares on the company

Question 24

What is the s.327 ‘general exemption’?

Answer 24

Members of a professional body do not need to obtain authorisation from FCA directly if they are carrying on ‘exempt regulated activities’ only

Question 25

What will a firm who is exempt from obtaining authorisation to provide financial advice from FCA directly be required to do instead?

Answer 25

They will be subject to rules prescribed by SRA in relation to those exempt regulated activities

Question 26

What will a firm need to do in the event they are carrying out regulated activities that do not fall within the s.327 exemption?

Answer 26

They will need to obtain authorisation from the FCA directly and comply with FCA handbook

Question 27

What are four basic conditions that must be satisfied when carrying out exempt regulated activities in the SRA Scope Rule 2? * this is the second part of step 4 in the FSMA

Answer 27

a) Satisfy s.327 FSMA conditions b) Activities arise from/complementary to provision of particular service to particular client c) No FCS order or direction in force preventing you from carrying on the activities d) Activities are not otherwise prohibited by these rules

Question 28

Why would the following scenario prohibit a solicitor from providing financial advice without breaching general prohibition of s.19 FSMA?: Property solicitor completes sale of a client's property. Client asks solicitor for advice: should she use sale proceeds from property to invest in British Gas shares?

Answer 28

Because although s.327 conditions have been met (including the advice being 'incidental', it hasn't met the basic conditions in Scope Rules of 'arising from/[being] complementary' This work does not arise naturally from the solicitor's work of selling the property

Question 29

**TRUE OR FALSE** There are two categories of exemptions that are to be examined in the RAO list during step 3 of the FMSA decision tree

Answer 29

True 1. Specific exemptions 2. More general exemptions

Question 30

What are the two restrictions on solicitors acting for a client selling shares?

Answer 30

1. Restriction on financial promotions under s.21 2. Requirement for approved prospectus where shares are to be offered to the public

Question 31

What exceptions apply under s.21 FSMA of an unauthorised person communicating a financial promotion?

Answer 31

a) Person communicating is an authorised person b) Content of the communication is approved by an authorised person

Question 32

Which three categories are exemptions available for which may be useful when circumventing restrictions on financial promotions?

Answer 32

1. Sale of a body corporate 2. Investment professionals 3. High net worth companies or individuals

Question 33

What condition does the solicitor need to meet to satisfy the sale of a body corporate exemption on restriction of financial promotion?

Answer 33

Where the communication relates to: - a transaction to acquire 50% or more of the shares - day to day control of company provided satisfaction of certain conditions

Question 34

What three conditions must be met in addition to the transaction of acquiring or disposing of shares in a body corporate for one of the two sale of a body corporate exemption to apply?

Answer 34

a) Shares consist of 50% or more of voting shares in body corporate b) shares together with those held already by purchaser consists of at least 50% of such shares *and* c) acquisition or disposals is between parties, each who are - body corporate - partnership - individual - group of connected individuals

Question 35

What two conditions must be met in addition to the transaction of acquiring or disposing of shares in a body corporate for two of the two sale of a body corporate exemption to apply?

Answer 35

a) object of transaction is to acquire day to day control of company *and* b) acquisition or disposals is between parties, each who are - body corporate - partnership - individual - group of connected individuals

Question 36

What is defined as a high net worth company?

Answer 36

- Company with called up share capital of more than £5m or - Company with called up share capital of £500k for body corporate with more than 20 members

Question 37

What two exemptions are available that are useful when getting a prospectus approved where shares are to be offered to the public?

Answer 37

1. Offer made to or directed at fewer than 150 persons 2. Offer is sent only to 'qualified investors'

Question 38

What are some examples of 'qualified investors'?

Answer 38

- Banks - Investment institutions - National and regional governments