Regulation of Financial Services MCQs Flashcards
A man instructs his solicitor to act for him in the purchase of the entire issued share capital of a private limited company from another company. The solicitor advises on the share purchase and helps to prepare and negotiate all the necessary documentation. Neither the solicitor nor his firm is authorised by the Financial Conduct Authority to carry on a ‘regulated activity’ as defined in the Financial Services and Markets Act 2000 and related secondary legislation.
Has the solicitor breached the general prohibition against carrying on a regulated activity?
Yes, because the solicitor has given advice on the purchase of shares in a specific company and no exclusion or exemption applies.
No, because an exclusion applies if the transaction involves at least 50% of the voting shares in the company.
No, because an exclusion applies if the transaction relates to the purchase of any number of shares in a private limited company.
Yes, because the transaction involves the purchase of the entire issued share capital of the company and no exclusion or exemption applies.
No, because an exemption applies to professional firms which are supervised by the Solicitors Regulation Authority when they engage in corporate work.
No, because an exclusion applies if the transaction involves at least 50% of the voting shares in the company.
Correct. The specified investment here is shares, article 76 RAO. The specified activity is arranging deals in shares. However the exclusion under article 70 RAO applies because the client will be buying 50% or more of the shares in the company.
A solicitor acts for a client who is raising finance secured against his home to fund his new business. The solicitor will be providing advice and preparing all the necessary documentation in connection with the mortgage. The client asks the solicitor to explain the key differences between a repayment mortgage and an endowment mortgage. Neither the solicitor nor his firm is authorised by the Financial Conduct Authority to carry on a regulated activity.
Can the solicitor give the explanation requested about the types of mortgages?
Yes, because such advice is a necessary part of the provision of his legal services.
No, because he is not authorised by the Financial Conduct Authority to give advice in respect of either type of mortgage.
Yes, because the provision of generic advice is outside the scope of the Financial Services and Markets Act 2000.
No, because such advice does not fall within an exemption from the Financial Services and Market Acts 2000.
Yes, because he is subject to the SRA Financial Services (Scope) Rules 2019 and therefore falls within an exemption from the Financial Services and Markets Act 2000.
Yes, because the provision of generic advice is outside the scope of the Financial Services and Markets Act 2000.
Correct. The specified investment here is a mortgage. Advising on the merits of investments is a specified activity under article 53 RAO. However giving generic advice is not a specified activity. To be caught the advice requires an element of opinion on the part of the solicitor and a recommendation as to the course of action. Giving generic advice on the difference between a repayment mortgage and an endowment mortgage is therefore outside the scope of the Financial Services and Markets Act 2000.
You are a solicitor in the corporate department of Price Prior. Your client Ruth wishes to buy 50% of the shares in a company set up by her sister, Patricia, as an investment. Ruth will be buying the shares from Patricia and has instructed you to advise her on the acquisition (including on the merits).
Price Prior is not directly authorised by the Financial Conduct Authority (‘FCA’) to carry out any regulated activities. It does not hold itself out as carrying out regulated activities separate to other professional services it provides and only a small proportion of its work comprises regulated activities. However, some of the solicitors in the firm occasionally carry out exempt regulated activities.
Which ONE of the following statements is CORRECT?
You will need to be authorised by the FCA to act for Ruth on the acquisition.
You will not need to be authorised by the FCA to act for Ruth because Ruth will be buying 50% or more of the shares in the company.
You will not need to be authorised by the FCA to act for Ruth because acting for a client who is acquiring shares in a company is not a specified activity.
You will not need to be authorised by the FCA to act for Ruth because companies are not specified investments under the RAO.
You will not need to be authorised by the FCA to act for Ruth because your advice will be incidental to the provisions of professional services by Price Prior.
You will not need to be authorised by the FCA to act for Ruth because Ruth will be buying 50% or more of the shares in the company.
Correct. The specified investment here is shares, article 76 RAO. The specified activity is advising on the merits, article 53 RAO. However the exclusion under article 70 RAO applies because Ruth will be buying 50% or more of the shares in the company.
You are a solicitor in the corporate department of Price Prior. You recently acted for Herbert in connection with the sale of his personal training business and that sale has now concluded.
Today Herbert has come to see you. Herbert tells you that following the sale, he now has £50,000 cash and he would like some advice about how to invest this money.
He is considering using all the money to buy shares in Magwitch Enterprises PLC (‘MEP’). He would like your advice on whether shares are generally a good investment at the moment and, in particular, whether or not he should buy the shares in MEP.
Which ONE of the following statements is CORRECT in relation to the above scenario?
You would not be able to advise Herbert without being authorised by the FCA because the advice would not arise out of or be complementary to the provision of professional services to Herbert.
You would be able to give Herbert the advice without being authorised by the FCA, because buying shares is not a specified activity.
You would be able to give Herbert the advice without being authorised by the FCA because you would not be advising on the merits of Herbert buying the shares in MEP.
You would not be able to give the advice to Herbert without being authorised by the FCA because the advice is not incidental to the provision of professional services to Herbert.
You would be able to give the advice to Herbert without being authorised by the FCA because giving this advice to Herbert could reasonably be regarded as necessary to the other non-regulated work you are doing for him.
You would not be able to advise Herbert without being authorised by the FCA because the advice would not arise out of or be complementary to the provision of professional services to Herbert.
Correct. The specified investment here is shares, article 76 RAO. The specified activity is advising on the merits, article 53 RAO. Note however that advising on the merits involves giving an element of opinion and a recommendation as to a course of action. Advising on whether shares generally are a good investment at the moment and also whether Herbert should buy the shares in MEP involves giving an element of opinion and a recommendation as to a course of action, so does fall within the definition of advising on the merits of an investment.
There are no exclusions that apply here. Article 67 would apply if giving the advice on the merits of buying the shares in MEP could reasonably be regarded as a necessary part of advising Herbert on the sale of his personal training business. However, advising how to invest the proceeds of the sale of a business is not a necessary part of the job of a solicitor acting for the seller on the sale of that business.
Looking at step 4 of the FSMA decision tree, giving the advice to Herbert is a small part of the overall work being offered by the firm and would therefore be incidental under s.327 FSMA. However advising Herbert on whether to invest the sale proceeds in shares in MEP is a separate piece of work to advising him on the sale of his business and is not complementary for the purposes of SRA Scope Rule 2.
You would therefore need to be authorised by the FCA to give this advice.
A solicitor acts for a company that is selling all the shares in its wholly owned subsidiary by way of auction. The solicitor is preparing the information memorandum to send to potential buyers, some of whom are companies, some of whom are wealthy individuals.
Neither the solicitor nor the firm is authorised by the Financial Conduct Authority (‘FCA’).
Which one of the following statements is correct?
The solicitor cannot send the information memorandum to the potential buyers unless she gets the document approved by an authorised person.
The solicitor can only send the information memorandum to high net worth companies and high net worth individuals, otherwise she would have to get the document approved by an authorised person.
The solicitor can send the information memorandum to the potential buyers without getting it approved by an authorised person because the transaction is to sell 50% or more of the shares in the subsidiary.
The solicitor can send the information memorandum to the potential buyers because it is not a financial promotion.
The solicitor can send the information memorandum to the potential buyers without getting it approved by an authorised person because the information memorandum is a necessary part of the auction process.
The solicitor can send the information memorandum to the potential buyers without getting it approved by an authorised person because the transaction is to sell 50% or more of the shares in the subsidiary.
Correct. S 21 FSMA 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. The exemption that applies here is the sale of a body corporate exemption (article 62 FSMA 2000 (Financial Promotions) Order 2005) because the communication relates to a transaction to acquire 50% of more of the shares or day to day control of the company and the acquisition / disposal is between parties each of whom is a body corporate, partnership, single individual or group of connect individuals.
You are an apprentice solicitor in the property department at a law firm. Your supervisor has been advising Mr and Mrs Smith (‘the Smiths’) in relation to the purchase of a property. The property will be a new home for occupation by the Smiths which is to be secured by a first legal mortgage over it. The Smiths have obtained advice from a mortgage broker who is authorised by the Financial Conduct Authority (‘FCA’) and they have decided to take out a repayment mortgage with a high street bank (the ‘Bank’). The Smiths have asked your supervisor to liaise with their mortgage broker to make arrangements for them to enter into the mortgage with the Bank. Your supervisor is due to receive £250 commission from the Bank for making these arrangements on the Smiths’ behalf.
Your firm is not directly authorised by the FCA to carry out any regulated activities under the Financial Services and Markets Act 2000 (‘FSMA’). It does not advertise the carrying out of any regulated activities separately from the other professional services provided by the law firm and any regulated activities carried out form a small part of the overall work done by the law firm.
Which ONE of the following statements BEST states the CORRECT position?
Your supervisor can advise on the purchase of the property because the Smiths are making their investment on the advice of their mortgage broker who is authorised by the FCA.
Your supervisor could not advise the Smiths in relation to the purchase of the property as he will be giving advice as to the merits of entering into the mortgage under Article 53 RAO.
Your supervisor can advise on the purchase of the property because property is not a specified investment.
Your supervisor cannot advise on the purchase of the property because the purchase does not involve a regulated mortgage contract.
Your supervisor could advise the Smiths in relation to the purchase of the property as long as he accounts to the client for the commission he is due to receive from the Bank.
Your supervisor could advise the Smiths in relation to the purchase of the property as long as he accounts to the client for the commission he is due to receive from the Bank.
Correct. The specified investment here is a ‘regulated mortgage contract’, which is defined in article 61(3) RAO. The mortgage falls within this definition as the lender is providing credit to an individual, the mortgage is secured on land in the EEA and at least 40% of the land is to be used as a dwelling. The specified activity is making arrangements for another person to enter into a regulated mortgage contract, under article 25A RAO. Looking at the exclusions, the exclusion in article 29 applies because Mr and Mrs Smith are acting on the advice of their mortgage broker who is authorised by the FCA. However, the supervisor must comply with article 29 in full, which means under article 29(2)(b), they must account to the client for the commission.
Question 1
A solicitor acts for a client who is a director of a private limited company. The client also
owns 60% of the share capital in the company. The client intends to retire and plans to sell
the entire shareholding to a fellow director of the company. The client asks the solicitor to
advise on the sale and to prepare and negotiate all the necessary documentation. The
solicitor’s firm is not authorised by the Financial Conduct Authority to carry out regulated
activities under the Financial Services and Markets Act 2000.
Which of the following best explains why the solicitor is likely to be able to advise and
act as the client requests?
A Because shares in private companies are not specified investments.
B Because the solicitor would not be carrying out a specified investment activity.
C Because the solicitor can rely on the exemption for professional firms.
D Because the solicitor would be giving generic advice.
E Because the solicitor can rely on the ‘takeover’ exclusion.
Answer
Option E is correct. The client is seeking advice and assistance from the solicitor who is ‘in
business’. Shares in a private company are a specified investment (option A is wrong), and in
acting as the client requests the solicitor will be carrying out the specified investment activities
of advising and arranging (option B is wrong). The solicitor will need to rely on an exclusion or
exemption to avoid breaching s 19 FSMA 2000.
The takeover exclusion applies to a transaction to acquire or dispose of shares in a body
corporate if the shares include 50% or more of the voting shares and is between parties each
of whom is a body corporate, a partnership, a single individual or a group of connected
individuals. Here the client wishes to sell his 60% shareholding in the company to a fellow
director, so the takeover exclusion requirements are satisfied.
Advising on the sale of shares would not be considered generic advice (option D is wrong).
Option C is wrong because the exemption for professional firms is of no relevance as the
solicitor will not be carrying out a regulated activity (and the requirements of s 327 would not
be met)
Question 2
A solicitor has just finished acting for a client in a personal injury case. The client has
decided to buy a flat using the damages that the client has received in the case. The
client has identified a number of possible flats to buy. The solicitor knows nothing about
the property market; nevertheless the client asks the solicitor to advise on which flat
would provide the best investment. The solicitor’s firm is not authorised by the Financial
Conduct Authority to carry out regulated activities under the Financial Services and Markets
Act 2000.
What would be the position if the solicitor gave the advice as requested?
A Criminal proceedings may be brought against the solicitor.
B Disciplinary proceedings may be brought against the solicitor.
C The solicitor will have complied with their duty to act in the best interests of the client.
D Criminal proceedings may be brought against the firm, but not against the solicitor
personally.
E The solicitor will have complied with their duty to act with integrity.
Answer
Option B is correct. Land is not a specified investment and so in giving the advice the solicitor
will not be committing an offence under FSMA 2000. However, the solicitor is not competent to
give the advice. Therefore, the solicitor is in breach of Paragraph 3.2 of the Code of Conduct
for Solicitors, RELs and RFLs and disciplinary proceedings may be brought against them.
Giving advice when not competent to do so would not constitute acting with integrity nor
acting in the client’s best interests.
Question 3
A solicitor has been acting for a client in a litigation matter. The case recently concluded
with the client being awarded £3 million in damages. The client asks the solicitor for advice
on investing this money in debentures and bonds. The solicitor lacks sufficient expertise to
advise the client and so the solicitor refers the client to an independent financial adviser.
After the client has seen the adviser, the client asks the solicitor to arrange the purchase
of the investments that the adviser has recommended. The adviser pays the solicitor £50
commission, which, without reference to the client, the solicitor decides to retain.
Did the solicitor’s actions amount to a regulated activity under the Financial Services
and Markets Act 2000?
A No, because the exemption for professional firms prevents the solicitor’s actions from
being a regulated activity.
B No, because the client has taken advice from an authorised third person.
C No, because the transaction did not involve a specified investment.
D Yes, because the solicitor lacked competence.
E Yes, because the solicitor received a pecuniary reward
Answer
Option E is correct. Debentures and bonds are specified investments (option C is wrong) and
the solicitor has engaged in the specified activity of arranging. Ordinarily the solicitor would
be able to rely on the ATP exclusion, but this is not available where the solicitor receives
commission and fails to account to the client; accordingly option B is wrong. Option A is
wrong as the s 327 exemption does not (in contrast to an exclusion) result in the act ceasing
to be a regulated activity. Instead s 327 enables a regulated activity to be carried on without
authorisation (in any event the financial services were not incidental on the facts). Finally,
option D is wrong as ‘competence’ does not influence whether the act amounts to a regulated
activity (but is a professional conduct issue).
Question 19
A man instructs his solicitor to act for him in the purchase of the entire issued share capital of a private limited company from another company. The solicitor advises on the share purchase and helps to prepare and negotiate all the necessary documentation.
Neither the solicitor nor his firm is authorised by the Financial Conduct Authority to carry on a ‘regulated activity’ as defined in the Financial Services and Markets Act 2000 and related secondary legislation.
Has the solicitor breached the general prohibition against carrying on a regulated activity?
A. Yes, because the solicitor has given advice on the purchase of shares in a specific company and no exclusion or exemption applies.
B. Yes, because the transaction involves the purchase of the entire issued share capital of the company and no exclusion or exemption applies.
C. No, because an exemption applies to professional firms which are supervised by the Solicitors Regulation Authority when they engage in corporate work.
D. No, because an exclusion applies if the transaction relates to the purchase of any number of shares in a private limited company.
E. No, because an exclusion applies if the transaction involves at least 50% of the voting shares in the company.
E - No, because an exclusion applies if the transaction involves at least 50% of the voting shares in the company.
A solicitor has been instructed by a client company that is suffering cash flow difficulties. The solicitor has been instructed by the client to advise on its directors’ duties in respect of monitoring the company’s financial position. In the course of discussions, the client mentions that it is considering attempting to improve its financial position by investing in equity securities and asks whether the solicitor can recommend any stockbrokers.
The solicitor’s brother is a partner in a firm of stockbrokers which is authorised by the Financial Conduct Authority and which has made substantial returns for the solicitor and other clients.
The solicitor has concluded that making the referral would:
(i) not in any way compromise his independence as the client’s legal advisor; and
(ii) be in the best interests of the client because the stockbrokers are the best available in this field.
The solicitor will not get a financial benefit from the referral. The solicitor knows that the brother would be grateful for the business introduction.
Which of the following steps should the solicitor take next?
A. Cease to act for the client.
B. Refer the client to an individual at the stockbrokers other than the solicitor’s brother.
C. Get written confirmation from the brother that the solicitor will not get a financial benefit in return for the business referral.
D. Inform the client that the solicitor’s brother is a partner of the stockbrokers.
E. Ask somebody else in the solicitor’s firm to refer the client to the stockbrokers.
D - Inform the client that the solicitor’s brother is a partner of the stockbrokers.
Question 39
A solicitor acts for a client who is raising finance secured against his home to fund his new business. The solicitor will be providing advice and preparing all the necessary documentation in connection with the mortgage.
The client asks the solicitor to explain the key differences between a repayment mortgage and an endowment mortgage. Neither the solicitor nor his firm is authorised by the Financial Conduct Authority to carry on a regulated activity.
Can the solicitor give the explanation requested about the types of mortgages?
A. Yes, because such advice is a necessary part of the provision of his legal services.
B. Yes, because he is subject to the Solicitors’ Financial Services (Scope) Rules and therefore falls within an exemption from the Financial Services and Markets Act 2000.
C. Yes, because the provision of generic advice is outside the scope of the Financial Services and Markets Act 2000.
D. No, because such advice does not fall within an exemption from the Financial Services and Markets Act 2000.
E. No, because he is not authorised by the Financial Conduct Authority to give advice in respect of either type of mortgage.
C - Yes, because the provision of generic advice is outside the scope of the Financial Services and Markets Act 2000.
A solicitor is employed by a firm of solicitors that is regulated by the Solicitors Regulation Authority (SRA) and is an ‘exempt professional firm’ for the purposes of financial services. The firm is not authorised by the Financial Conduct Authority. The solicitor is acting for a woman who is considering buying one of two neighbouring plots of farmland.
The woman would like advice on which of the two plots she should purchase and the solicitor refers the woman to a chartered surveyor who is ‘tied’ to a particular land agent. The woman selects, and decides to proceed with the purchase of, one plot of land on the basis of the advice she receives from the chartered surveyor. Neither the solicitor nor the firm receive a commission or other benefit as a result of referring the woman to the surveyor. The firm and the solicitor comply at all times with the SRA Financial Services (Conduct of Business) Rules and the SRA Financial Services (Scope) Rules.
Which of the following statements best describes why the solicitor is not in breach of the general prohibition under s.19 of the Financial Services and Markets Act 2000?
A. The plot of land is not a specified investment.
B. The solicitor is not acting in the course of business.
C. The solicitor can take advantage of the authorised third party exclusion.
D. The solicitor can take advantage of the introducing exclusion.
E. The solicitor’s advice is exempt as the firm is regulated by the SRA.
A - The plot of land is not a specified investment.
You meet with a client who has instructed the firm for over 20 years. He is approaching retirement and has asked you to assist him with financial planning for the future. He is seeking advice on two issues:
Whether he should give his collection of vintage cars to his nephew, and
He would like your opinion regarding whether he should purchase shares in a start-up company run by his niece. She has invented a computer coding game for children. He would like to support her by buying some shares in the business.
Neither you nor your firm are authorised by the Financial Conduct Authority to carry on a regulated activity. Are you able to provide the advice the client seeks?
Select one alternative:
You can provide this advice to the client since he is a high net worth individual and is well known to the firm.
You can only advise the client in relation to the purchase of the shares. You must not provide advice in relation to the gifting of the vintage cars.
You cannot provide advice to the client on either issue, since to do so would be a breach of the general prohibition under FSMA.
You can only advise the client about gifting the vintage cars. You must not provide advice in relation to the purchase of the shares.
You can provide advice to the client on both issues, provided you are competent to do so.
You can only advise the client about gifting the vintage cars. You must not provide advice in relation to the purchase of the shares.
This question concerns the general prohibition on providing financial advice under s 19 FSMA. Shares are a specified investment under Article 76 RAO and therefore you cannot advise on the share purchase unless one of the exemptions applies or you are an authorised person. You can advise about gifting of the vintage cars, since this is a general tax issue and not covered by FSMA.
Your client recently sold a business for a substantial profit. She is now seeking advice regarding what to do with the monies from the sale.
She is seeking advice on two issues. Firstly, she would like you to assist her with a cash purchase of a holiday cottage in Cornwall. Secondly, she would like some advice in relation to setting up a personal pension scheme.
Neither you nor your firm are authorised by the Financial Conduct Authority to carry on a regulated activity. Are you able to give the client the advice requested?
Select one alternative:
You cannot provide advice to the client on either issue, since to do so would constitute a breach of the general prohibition under FSMA.
You can only advise the client about purchasing the holiday cottage, provided you are competent to do so.
You can advise the client on both issues, provided you are competent to do so.
You should not provide any advice, but instead refer the client to an authorised person who will be able to provide advice on both issues.
You can only advise the client about the pension plan, provided you are competent to do so.
You can only advise the client about purchasing the holiday cottage, provided you are competent to do so.
This question concerns the general prohibition on providing financial advice under s 19 FSMA. The pension scheme is a specified investment under Article 82 ROA, therefore you cannot advise on the pension scheme unless one of the exemptions applies or you are an authorised person. You can advise on the purchase of the holiday cottage since this is not covered by FSMA. You must however be competent to give this advice, otherwise you would be in breach of CCS 3.2.
