Unit 2: Financial Services Flashcards
s 19 FSMA 2000
‘No person may carry on a regulated activity in the UK unless authorised or exempt’
Would a real estate solicitor advising a client to get restrictive covenant indemnity insurance be conducting a regulated activity?
Yes
Two main restrictions on solicitors
(a) carrying out a regulated activity (general prohibition) or
(b) making a financial promotion (the financial promotions restriction)
Regulated Activity: Four Tests
a. Are you in business?
b. Is there a specified investment?
c. Is there a specified activity?
d. Does an exclusion apply?
Which exclusion applies to the activity of ‘arranging’
Introducing: Solicitor introduces client to authorised person and then has no further role
(does not apply to insurance contract)
What would happen if a solicitor carried out a regulated activity without authorisation
Criminal offence
- penalty of up to two years’ imprisonment or an unlimited fine
- could make any resulting agreements unenforceable
Which investments are not relevant for ‘specified investments’
a. Interests in Land
b. Certain national savings products
s 21 FSMA 2000
An unauthorised person cannot engage in a financial promotion
Consequences of a solicitor carrying out unauthorised financial promotion (or any individual)
Criminal Offence
DEF: Regulated Activities
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
Examples of specified activities in relation to specified investments
- dealing as agent
- arranging
- managing
- safeguarding
- advising
- lending money on / administering a regulated mortgage contract
- establishing, operating or winding up a collective investment scheme or personal pension scheme
Exclusions for regulated activities
- Introducing
- using an authorised third party
- acting for an execution-only client
- acting as Trustee or PR
- the professional / necessary exclusion
- the takeover exclusion
When does the takeover exclusion not apply
Arranging
Advising
or dealing as an agent in respect of buying or selling insurance contracts
When does the takeover exclusion apply
Arranging
Advising
dealing as agent
What specified activities does the professional / necessary exclusion apply to
- advising
- arranging
- safeguarding
- dealing as agent
When does the professional / necessary exclusion NOT APPLY
- if activity is renumerated separately from other services
- if activity consists of taking up or pursuing insurance distribution
When does the exclusion of acting as trustee or PR apply (specified activities)
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.
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
Yes
When does execution-only exclusion apply?
- Dealing as agent
- Arranging
When does the exclusion of using an authorised third party apply?
- Dealing as agent
- Arranging
When can a solicitor NOT rely on the execution-only exclusion?
- If solicitor receives any commission or advantage from the client entering into transaction and solicitor DOES NOT ACCOUNT to the client for this
- if the transaction relates to an insurance contract
When does the exclusion of ‘introducing’ apply (specified activity)
Applies to arranging
What conditions must be met for a solicitor to employ the s 327 exemption
- firm does not receive any financial / advantage from the transaction for which they do not account to the client
- the activity is incidental to providing services regulated by the SRA
- the firm only carries out regulated activities by the SRA
- the activities cannot be prohibited by an order by the treasury or any direction by the FCA
- the firm does not carry on other regulated activities
When determining whether the providing of a service is ‘incidental’ to other services, what tests are used?
- Specified Test
- General Test
Incidental: Specified Test
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
Incidental: general test
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)
What must a firm do if a solicitor wants to carry out insurance distribution activities?
- Notify SRA
- Be registered with financial services register
- Appoint an insurance distribution officer to be responsible for these activities
Can the 327 exemption apply to firms already regulated by the FCA?
No, there must be no other regulated activities carried out by the firm
What is the relevance of the SRA Financial Services (Conduct of Business) Rules
They regulate how firms can undertake financial services under the 327 exemption
Significant COB rules
- Status Disclosure (providing client info about its regulated status, and explain complaints mechanism is through SRA and legal ombudsman)
- Best execution (firms have to act in clients interests, should carry out transactions quickly unless its in the client’s best interest not to)
- Firm must keep records of instructions from clients about transactions and subsequent instructions to third parties
- Firm must keep records of commissions received and how they are dealt with
- 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
- 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.
Can solicitors carry out consumer credit activity
Yes, if they are authorised by FCA or by the 327 exemption
When are CCA’s exempt from requirement for authorisation / 327 exemption?
- number of repayments does not exceed 12
- payment term does not exceed 12 months
- credit is provided without interest or other charges
Test for whether financial promotions are restricted
- is a communication being made
- is communication an invitation or inducement
- is there an investment activity
- is the communication made in the course of a business
- does the communication fall within an exception
Objective Test for financial communications (invitation or inducement)
the communication must have purpose or intent of leading recipient to engage in investment activity and be promotional nature (Objective test)
Exemptions for Financial Promotion Restriction
- One-off promotions
- Introducers
When are one-off promotions exempt from the financial promotions restriction?
- 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
- One-off unsolicited real time communications are exempt under art 28A provided the solicitor reasonably believes:
- that the client understands the risks associated with engaging in the investment activity to which the financial promotion relates
- that, at the time of communication, the client would expect to be contacted by a solicitor in relation to this same investment activity
