Unit 2: Financial Services

Question 1

s 19 FSMA 2000

Answer 1

‘No person may carry on a regulated activity in the UK unless authorised or exempt’

Question 2

Would a real estate solicitor advising a client to get restrictive covenant indemnity insurance be conducting a regulated activity?

Answer 2

Yes

Question 3

Two main restrictions on solicitors

Answer 3

(a) carrying out a regulated activity (general prohibition) or
(b) making a financial promotion (the financial promotions restriction)

Question 4

Regulated Activity: Four Tests

Answer 4

a. Are you in business?
b. Is there a specified investment?
c. Is there a specified activity?
d. Does an exclusion apply?

Question 5

Which exclusion applies to the activity of ‘arranging’

Answer 5

Introducing: Solicitor introduces client to authorised person and then has no further role
(does not apply to insurance contract)

Question 6

What would happen if a solicitor carried out a regulated activity without authorisation

Answer 6

Criminal offence
- penalty of up to two years’ imprisonment or an unlimited fine
- could make any resulting agreements unenforceable

Question 7

Which investments are not relevant for ‘specified investments’

Answer 7

a. Interests in Land
b. Certain national savings products

Question 9

s 21 FSMA 2000

Answer 9

An unauthorised person cannot engage in a financial promotion

Question 10

Consequences of a solicitor carrying out unauthorised financial promotion (or any individual)

Answer 10

Criminal Offence

Question 11

DEF: Regulated Activities

Answer 11

A regulated activity is defined as an activity of a specified kind that is carried on by way of business and related to a specified investment or property of any kind

Question 12

Examples of specified activities in relation to specified investments

Answer 12

1. dealing as agent
2. arranging
3. managing
4. safeguarding
5. advising
6. lending money on / administering a regulated mortgage contract
7. establishing, operating or winding up a collective investment scheme or personal pension scheme

Question 13

Exclusions for regulated activities

Answer 13

1. Introducing
2. using an authorised third party
3. acting for an execution-only client
4. acting as Trustee or PR
5. the professional / necessary exclusion
6. the takeover exclusion

Question 14

When does the takeover exclusion not apply

Answer 14

Arranging
Advising
or dealing as an agent in respect of buying or selling insurance contracts

Question 15

When does the takeover exclusion apply

Answer 15

Arranging
Advising
dealing as agent

Question 16

What specified activities does the professional / necessary exclusion apply to

Answer 16

1. advising
2. arranging
3. safeguarding
4. dealing as agent

Question 17

When does the professional / necessary exclusion NOT APPLY

Answer 17

1. if activity is renumerated separately from other services
2. if activity consists of taking up or pursuing insurance distribution

Question 18

When does the exclusion of acting as trustee or PR apply (specified activities)

Answer 18

This exclusion applies to
1. arranging,
2. managing,
3. safeguarding and
4. advising fellow trustees and/ or beneficiaries. It also applies to lending money on, or administering, a regulated mortgage contract.

Question 19

Does the trustee / PR exclusion apply if the solicitor is a trustee / PR but the actual activity is carried out by other members of the firm

Answer 19

Yes

Question 20

When does execution-only exclusion apply?

Answer 20

1. Dealing as agent
2. Arranging

Question 21

When does the exclusion of using an authorised third party apply?

Answer 21

1. Dealing as agent
2. Arranging

Question 22

When can a solicitor NOT rely on the execution-only exclusion?

Answer 22

1. If solicitor receives any commission or advantage from the client entering into transaction and solicitor DOES NOT ACCOUNT to the client for this
2. if the transaction relates to an insurance contract

Question 23

When does the exclusion of ‘introducing’ apply (specified activity)

Answer 23

Applies to arranging

Question 24

What conditions must be met for a solicitor to employ the s 327 exemption

Answer 24

1. firm does not receive any financial / advantage from the transaction for which they do not account to the client
2. the activity is incidental to providing services regulated by the SRA
3. the firm only carries out regulated activities by the SRA
4. the activities cannot be prohibited by an order by the treasury or any direction by the FCA
5. the firm does not carry on other regulated activities

Question 25

When determining whether the providing of a service is 'incidental' to other services, what tests are used?

Answer 25

1. Specified Test 2. General Test

Question 26

Incidental: Specified Test

Answer 26

The regulated activity must arise out of , or be complementary to, the provision of a particular professional service to a particular client (the firm cannot carry out the activity in isolation) - the ‘other service’ must not be regulated but must be professional (ie. legal service like winding up an estate) - both services must be supplied TO THE SAME PERSON

Question 27

Incidental: general test

Answer 27

Activities carried out by the firm which would otherwise be regulated, cannot be a major part of the firm’s activities (eg. if the firm’s income from investment business is 1.2 or more of its total income), and other factors include: 1. the scale of regulated activity in proportion to other professional services provided 2. whether and to what extent the exempt regulate activities are held out as separate services; and 3. the impression given of how the firm provides those activities (eg. through advertising its services)

Question 28

What must a firm do if a solicitor wants to carry out insurance distribution activities?

Answer 28

1. Notify SRA 2. Be registered with financial services register 3. Appoint an insurance distribution officer to be responsible for these activities

Question 29

Can the 327 exemption apply to firms already regulated by the FCA?

Answer 29

No, there must be no other regulated activities carried out by the firm

Question 30

What is the relevance of the SRA Financial Services (Conduct of Business) Rules

Answer 30

They regulate how firms can undertake financial services under the 327 exemption

Question 31

Significant COB rules

Answer 31

1. Status Disclosure (providing client info about its regulated status, and explain complaints mechanism is through SRA and legal ombudsman) 2. Best execution (firms have to act in clients interests, should carry out transactions quickly unless its in the client's best interest not to) 3. Firm must keep records of instructions from clients about transactions and subsequent instructions to third parties 4. Firm must keep records of commissions received and how they are dealt with 5. If client is 'execution only' the firm has to sign letter to client confirming that they are not relying on the advice of the solicitor and retain this letter 5. All information about insurance distribution must be communicated to clients in a way that is clear, fair and not misleading, and information on the nature of the remuneration received in relation to a contract of insurance must be provided to the client before the conclusion of the initial contract.

Question 32

Can solicitors carry out consumer credit activity

Answer 32

Yes, if they are authorised by FCA or by the 327 exemption

Question 33

When are CCA's exempt from requirement for authorisation / 327 exemption?

Answer 33

1. number of repayments does not exceed 12 2. payment term does not exceed 12 months 3. credit is provided without interest or other charges

Question 34

Test for whether financial promotions are restricted

Answer 34

1. is a communication being made 2. is communication an invitation or inducement 3. is there an investment activity 4. is the communication made in the course of a business 5. does the communication fall within an exception

Question 35

Objective Test for financial communications (invitation or inducement)

Answer 35

the communication must have purpose or intent of leading recipient to engage in investment activity and be promotional nature (Objective test)

Question 36

Exemptions for Financial Promotion Restriction

Answer 36

1. One-off promotions 2. Introducers

Question 37

When are one-off promotions exempt from the financial promotions restriction?

Answer 37

1. One-off, non-real time communications and solicited real time communications are exempt under FPO 2005 art 28 if the promotion must is one that is personal to the client 2. One-off unsolicited real time communications are exempt under art 28A provided the solicitor reasonably believes: 1. that the client understands the risks associated with engaging in the investment activity to which the financial promotion relates 2. that, at the time of communication, the client would expect to be contacted by a solicitor in relation to this same investment activity