SQE Legal Services Flashcards
A solicitor is contacted by a regular client who has received some inheritance money. The client wants to use the money to make some share purchases. The solicitor is not authorised by the Financial Conduct Authority, so they put the client in touch with a financial advisor who is authorised. The solicitor passes messages between the client and the financial advisor. Based on the financial advisor’s advice, the client later instructs the solicitor to arrange various share purchases, which the solicitor does. The financial advisor gives the solicitor a proportion of the commission they receive from the client. The solicitor immediately spends the commission.
Can the solicitor rely on an exclusion to avoid a breach of the Financial Services and Markets Act 2000?
A. No, because the solicitor did not account to the client for the commission.
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B. Yes, the solicitor can rely on the authorised third persons exclusion.
C. Yes, the solicitor can rely on the execution-only client exclusion.
D. No, because the solicitor retained a role in the transaction after putting the client in touch with the financial advisor.
E. Yes, the solicitor can rely on the introducing exclusion.
Option A is correct.
This situation would fall within the authorised third persons (ATP) exclusion, if the solicitor had accounted to the client for the commission received from the financial advisor. Although the solicitor has retained an ongoing role in the transaction, it is clear that the financial advice has been provided by the ATP. However, a solicitor cannot rely on the ATP exclusion if they receive any pecuniary reward or other advantage from anyone other than the client, for which they do not account to the client.
Option B is wrong. The solicitor cannot rely on the ATP exclusion because they did not account to the client for the commission received from the financial advisor.
Option C is wrong. The execution-only client exclusion requires that advice was not sought from the solicitor (rather than the transaction being entered into on the advice of an ATP, which is the case here). In any event, the execution-only client exclusion also requires the solicitor to account to the client for any commission received.
Option D is wrong. The solicitor does not have to completely drop out of the transaction in order to rely on an exclusion. The ATP exclusion allows the solicitor to retain an ongoing role.
Option E is wrong. The introducing exclusion applies where the solicitor has no further role in a matter after introducing the client to an authorised person. That is not the case here, as the solicitor retained an ongoing role.
A law firm has been providing financial services to a client under the exemption for professional firms in Section 327 of the Financial Services and Markets Act 2000. The services involved carrying out some transactions on behalf of the client. A partner asks an associate in her department to send her copies of the client’s instructions relating to those transactions. The associate replies that because the instructions were given over the telephone, there are no written records. He assures the partner that the client’s instructions were carried out accurately and as soon as possible.
Which of the following best describes the firm’s position in respect of the SRA Financial Services (Conduct of Business) Rules (the ‘COB Rules’)?
A. The COB Rules have been breached, because they require firms to keep records of instructions from clients to carry out transactions.
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B. The COB Rules have not been breached, because the only records they require firms to keep relate to commission received in respect of regulated activities.
C. The COB Rules have not been breached, because the client’s instructions were carried out as soon as possible.
D. The COB Rules do not apply where a firm is acting under the Section 327 FSMA exemption for professional firms.
E. The COB Rules have been breached and require that the client is immediately informed of the SRA and Legal Ombudsman complaints mechanisms.
Option A is correct. Rule 4.1 of the COB Rules requires a firm to keep records of instructions from a client to effect a transaction.
Option B is wrong. Under the COB Rules, firms are required to keep records of commission received in respect of regulated activities. However, these are not the only records they are required to keep.
Option C is wrong. The COB Rules do require transactions to be carried out as soon as possible unless the firm reasonably believes that it is in the client’s best interests not to. However, the requirement to keep records still applies.
Option D is wrong. The COB Rules apply specifically where firms undertake financial services activities under the s.327 FSMA exemption for professional firms.
Option E is wrong. Rule 2.1 of the COB Rules requires this (and other) information to have been provided before providing the financial services covered by the exemption.
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.
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 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.
A solicitor acts for a client who owns 100% of the share capital in a private limited company. The client wishes to sell 75% of these shares to his daughter. The solicitor advises on the share sale and helps to prepare and negotiate all the necessary documentation. Neither the solicitor nor her firm is authorised by the Financial Conduct Authority to carry on a ‘regulated activity’ as defined in relevant legislation.
Has the solicitor breached the general prohibition against carrying on a regulated activity?
A. No, because an exemption applies to professional firms which are supervised by the Solicitors Regulation Authority.
B. Yes, because the solicitor has given advice on the sale of shares and no exclusion or exemption applies.
C. No, because an exclusion applies if the transaction involves 50% or more of the voting shares in the company.
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D. No, because an exclusion applies if the transaction involves more than 50% of the voting shares in the company.
E. Yes, because the solicitor has given advice on the sale of shares between connected individuals and no exclusion or exemption applies.
Option C is correct. The client is seeking advice and assistance from his solicitor who is ‘in business’. Shares are a specified investment, and in dealing with the share sale the solicitor will be carrying out the specified investment activities of advising and arranging. The solicitor will need to rely on an exclusion or exemption to avoid breaching s 19 of the Financial Services and Markets Act 2000 and committing a criminal offence.
The takeover exclusion (as set out in the Regulated Activities Order 2001) 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 transfer 75% of the shares to his daughter and so the takeover exclusion requirements are satisfied - the solicitor may complete the work without breaching the general prohibition.
As a result, options B and E are wrong. The solicitor has not breached the general prohibition against carrying out a regulated activity. Option C is wrong because the takeover exclusion applies to a transaction to acquire or dispose of 50% or more of a company’s voting shares, and not just to transactions involving more than 50% of the company’s shares.
Option A is not the best answer. Due to the takeover exclusion, the solicitor has not undertaken a regulated activity, and therefore there is no need to consider any exemptions that apply to the performance of such activities.
A solicitor acts for a client who owns 100% of the share capital in a private limited company. The client wishes to sell 75% of these shares to his daughter. The solicitor advises on the share sale and helps to prepare and negotiate all the necessary documentation. Neither the solicitor nor her firm is authorised by the Financial Conduct Authority to carry on a ‘regulated activity’ as defined in relevant legislation.
Has the solicitor breached the general prohibition against carrying on a regulated activity?
A. No, because an exemption applies to professional firms which are supervised by the Solicitors Regulation Authority.
B. Yes, because the solicitor has given advice on the sale of shares and no exclusion or exemption applies.
C. No, because an exclusion applies if the transaction involves 50% or more of the voting shares in the company.
D. No, because an exclusion applies if the transaction involves more than 50% of the voting shares in the company.
E. Yes, because the solicitor has given advice on the sale of shares between connected individuals and no exclusion or exemption applies.
Option C is correct. The client is seeking advice and assistance from his solicitor who is ‘in business’. Shares are a specified investment, and in dealing with the share sale the solicitor will be carrying out the specified investment activities of advising and arranging. The solicitor will need to rely on an exclusion or exemption to avoid breaching s 19 of the Financial Services and Markets Act 2000 and committing a criminal offence.
The takeover exclusion (as set out in the Regulated Activities Order 2001) 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 transfer 75% of the shares to his daughter and so the takeover exclusion requirements are satisfied - the solicitor may complete the work without breaching the general prohibition.
As a result, options B and E are wrong. The solicitor has not breached the general prohibition against carrying out a regulated activity. Option C is wrong because the takeover exclusion applies to a transaction to acquire or dispose of 50% or more of a company’s voting shares, and not just to transactions involving more than 50% of the company’s shares.
Option A is not the best answer. Due to the takeover exclusion, the solicitor has not undertaken a regulated activity, and therefore there is no need to consider any exemptions that apply to the performance of such activities.
A solicitor has been acting for a client in a litigation matter. The case recently concluded with the client being awarded £2 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. Yes, because the solicitor lacked competence.
B. Yes, because the solicitor received a pecuniary reward.
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C. No, because the transaction did not involve a specified investment.
D. No, because the exemption for professional firms prevents the solicitor’s actions from being a regulated activity.
E. No, because the client has taken advice from an authorised third person.
Option B 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 E is wrong. Option D 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 A is wrong as ‘competence’ does not influence whether the act amounts to a regulated activity (but is a professional conduct issue).
A firm of solicitors is not authorised by the Financial Conduct Authority to carry out regulated activities. The main specialism of the partners concern probate work. They advise an executor in relation to a large-scale probate matter. They are then approached by the beneficiary under the same will for financial advice. The solicitor is considering providing advice to the beneficiary under the s327 Financial Services and Markets Act 2000 (FSMA) exemption because the advice is incidental.
Which of the following statements best describes how the solicitor can advise the beneficiary?
A. The solicitor cannot advise the beneficiary because the professional service and the regulated activity must be supplied to the same person under the s327 (FSMA) exemption.
B. The solicitor can advise the beneficiary as it is immaterial whether the professional service and the regulated activity are supplied to the same person under the s327 (FSMA) exemption.
C. The solicitor can advise the beneficiary in isolation even though no other work has been carried out on the beneficiary’s behalf by the solicitor so it is perfectly permissible under the s327 (FSMA) exemption.
D. The solicitor cannot advise the beneficiary because the beneficiary is not the solicitor’s client so it would not be appropriate in the circumstances and no exemption would apply.
E. The solicitor can advise the beneficiary as the s327 (FSMA) rules allow such advice to take place but only in the context of matters relating to wills and probate.
Option A is correct. In order to come within the s327 exemption, the solicitor can provide incidental advice as long as the professional service and regulated activity are provided to the same person. Here the executor and beneficiary are not the same person.
Option B is wrong. The solicitor cannot advise the beneficiary as the professional service and the regulated activity must be supplied to the same person.
Option C is wrong. To take advantage of the s327 exemption, work must be incidental and to the same person.
Option D is wrong. The solicitor cannot advise the beneficiary, but the correct explanation is outlined in option A.
Option E is wrong. There are rules which govern the regulation of such advice as set out in FSMA 2000 and RAO 2001, but they are not exclusive to the provision of advice in relation to wills and probate.
A company plans to dispose of the shares of a wholly owned subsidiary because it wants to concentrate on its core business. The board has enquired of a firm of solicitors whether, in the current climate, it is wise to invest the proceeds of sale of the subsidiary in a local plot of land that has outline planning consent and build a new factory there. The board advises that there is an alternative location for the new factory, but it is currently quite run down and almost 25 miles away. The 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 describes why a solicitor can advise the company on whether to purchase the local plot of land?
A. It is a property transaction.
B. The advice is incidental to the provision of ordinary legal services.
C. Advising on the merits of a purchase of any asset is not a specified activity.
D. The acquisition of land is not a specified investment.
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E. The advice comes within a statutory exclusion.
Option D is correct. Land is not a specified investment and therefore the advice would not be a regulated activity under the Financial Services and Markets Act 2000 (FSMA).
You are prohibited under FSMA from carrying out a regulated activity unless authorised or exempt. You therefore need to decide whether FSMA applies (ie is a regulated activity being undertaken) and, if so, whether the proposed conduct comes within the exemption for professional firms.
Option A is not the best answer because property transactions do not necessarily fall outside the definition of a regulated activity. A property transaction can be caught if a loan is required to purchase the property.
Option B is not the best answer. The reference to ‘incidental advice’ is a reference to the exemption for professional firms set out in s327 of FSMA. There is no need to consider this exemption because the transaction is not a regulated activity.
Option E is wrong because there is no specified investment, the availability of an exclusion is irrelevant (and, in any event, no exclusion would be available on the facts).
Option C is not the best answer because advice on the merits of many investment activities is indeed a specified activity.
A solicitor is approached by the director of a company for some advice. The director wishes to sell 15% of the voting shares in the company to her daughter who already owns 40% of the voting shares in the company. The advice given is deemed to be a regulated activity for the purposes of section 19 of the Financial Services and Markets Act 2000 (“the Act”).
The solicitor would like to help the director but she is concerned that by engaging in the specified activity of advising the client in this matter, she may be in breach of section 19 of the Act.
Does the ‘takeover’ exclusion apply?
A. No, because the ‘takeover’ exclusion does not apply to transfers where the transferee already owns shares in the company.
B. No, because the ‘takeover’ exclusion only applies to the specified activity of managing.
C. Yes, because the ‘takeover’ exclusion applies where the transferee acquires over 50% of the voting shares.
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D. Yes, because the ‘takeover’ exclusion applies to transfers of shares which involve a family member.
E. Yes, because the ‘takeover’ exclusion applies to transactions which involve a specified activity.
Option C is correct. On the facts, the ‘takeover’ exclusion applies. This is because the number of voting shares being acquired are added to those already held by the daughter. She would therefore own 55% of the voting shares after the acquisition.
Option A is wrong. The fact that the daughter already owns shares is relevant, as above, but it is does not mean that the ‘takeover’ exclusion will not apply.
Option B is wrong. The ‘takeover’ exclusion applies to the specified activity of advising, arranging and dealing as an agent. It does not apply to managing.
Option D is wrong. The ‘takeover’ exclusion extends beyond transfers of shares between family members and can apply (for instance) to transfers of shares from one single individual to another.
Option E is wrong. Whilst the giving of advice is a specified activity and the ‘takeover’ exclusion can apply to this specified activity, it will only apply if the ‘takeover’ exclusion test is actually satisfied.
