UNIT 2 - Financial Services Flashcards
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.
CORRECT ANSWER E - 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).
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.
CORRECT ANSWER B - 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.
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.
CORRECT ANSWER E - 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).
TRUE OR FALSE:
A solicitor can provide any type of financial services advice to a client provided that the solicitor has sufficient expertise in the relevant field.
FALSE - Even if possessing relevant expertise (although this is of course essential from a professional conduct perspective) a solicitor will be subject to the same legislation that applies throughout the financial sector and so will have to consider what that legislation permits them to do.
Which ONE or MORE of the following are potential consequences of a solicitor carrying out regulated activity in the field of financial services without authorisation?
A) Imprisonment.
B) A fine.
C) Unenforceability of an agreement in which the solicitor was involved.
D) Professional misconduct.
E) Breach of contract.
CORRECT ANSWERS ALL - as all are potential consequences of the activity described. Note, however, that not all arise directly from FSMA 2000. Some arise by virtue of the person concerned also being a solicitor.
The law underpinning this question can be found in ss.19 and 23 FSMA 2000. s.19 FSMA 2000 states that ‘no person may carry on a regulated activity in the UK unless authorised or exempt’. s.23 FSMA 2000 makes such carrying on a criminal offence.
Options A and B describe direct criminal consequences of unauthorised activity according to s.23 FSMA 2000.
Option C describes an additional specific consequence of contravening s.19 FSMA 2000.
Option D follows from Options A, B and C. Even without locating specific SRA Principles or paragraphs of the SRA Codes of Conduct, it should be clear that breaking the law and potentially rendering clients’ transactions unenforceable is not appropriate professional behaviour for a solicitor.
Option E follows from all of Options A, B, C and D. The professional relationship that a solicitor typically has with a client, setting out services to be provided in return for payment, is clearly contractual. The behaviour described and its consequences are likely to amount to a breach of that contract (at the very least: depending on the nature of the work being undertaken there could be similar consequences in other contexts).
Note that Options D and E can be deduced to be correct simply by identification of Options A, B and C as being so together with a general appreciation of the professional role and responsibilities of a solicitor.
TRUE OR FALSE:
A solicitor who allows a client to pay their fee in regular monthly instalments over a period strictly limited to five years, where the outstanding balance attracts interest at a rate no higher than the Bank of England base rate, will be regarded as having an ‘exempt agreement’ under the FSMA 2000 (Regulated Activities) Order 2001 (RAO 2001).
FALSE - Although the terms of the arrangement described here could be seen as reasonable, they fall a long way outside the conditions for an ‘exempt agreement’ in respect of what is classed as ‘consumer credit activity’ by the solicitor.
This sort of consumer credit activity will be regarded as an ‘exempt agreement’ under RAO 2001 if all the following conditions apply:
The number of repayments does not exceed 12;
The payment term does not exceed 12 months; and
The credit is provided without interest or other charges.
None of these conditions are met on the facts, as there will be 60 payments spread over 60 months and interest will be charged, even if it is below the Bank of England base rate.
TRUE OR FALSE:
A solicitor who is in business and engages in a specified activity in relation to a specified investment, but under an exclusion, is not engaging in regulated activity
FALSE - XThe definition of regulated activity is indeed an activity of a specified kind that is carried on by way of business and relates to a specified investment or property of any kind. However, an exclusion operates by taking a given activity completely outside the definition: if an activity is excluded, it is not classed as a ‘regulated activity’ at all.
Compare the operation of s.327 FSMA. This is an exemption. Although the word is very similar to ‘exclusion’, the effect is different. Operating under an exemption means that the activity concerned is regarded as a ‘regulated activity’, but it is nonetheless allowed.
TRUE OR FALSE:
The SRA Financial Services (Conduct of Business) Rules (the ‘COB Rules’) require that a firm carrying out an exempt regulated activity for a client must confirm to the client that the firm is not authorised by the Financial Conduct Authority.
TRUE - One of the conditions for using the s.327 FSMA 2000 exemption is that the firm must not carry on any other regulated activities – it cannot be used by firms which are authorised to do so by the FCA. s.327 FSMA 2000 does not state that anyone has to be informed of this. But by the COB Rules, the SRA requires that the firm tell the client. This is what the COB Rules do, namely regulate the way in which firms undertake financial services under the professional exemption.
Which ONE or MORE of the following are questions that will help determine whether a communication made by you is a ‘financial promotion’?
A) Is the communication an invitation or inducement?
B) Does the communication fall within one of the exemptions?
C) Is the communication made in the course of business?
D) Is a communication being made?
E) Is there an investment activity?
F) Is there an exclusion?
CORRECT ANSWERS A, B, C, D & E - useful questions for determining whether a communication amounts to a ‘financial promotion’, but Option F is not.
The structure of the test for determining whether a communication is a ‘financial promotion’ is similar to that for determining whether an activity is a ‘regulated activity’, but for ‘financial promotions’ there are no exclusions that would prevent a communication that otherwise meets the definition from being one at all. There are, however, exemptions. Where these apply, a communication can amount to a ‘financial promotion’, yet not require approval by an authorised person.
Which of the following is NOT a ‘specified investment’ within the scope of the FSMA 2000 (Regulated Activities) Order 2001?
A) Shares
B) Unit Trusts
C) Interests in land
D) Regulated mortgages
E) Contracts of insurance
CORRECT ANSWERS C - it is not a ‘specified investment’.
Options A, B, D and E describe ‘specified investments’, which term also covers debentures, government securities, ISAs and sums of money held in bank and building society accounts. The list of what counts as a ‘specified investment’ is therefore long. But it does not include interests in land, or certain National Savings products.
A woman died recently leaving a will in which she appointed her son and her solicitor as her executors. The executors are now dealing with the administration of the estate which includes some shares in a private limited company, a small portfolio of quoted shares, a house and some £80,000 in cash. The solicitor calculates that there will be an inheritance tax bill of £100,000 that has to be paid in order to obtain the grant. The son asks the solicitor for advice on whether they should sell the private limited company shares, some of the quoted shares, or the house, in order to pay the tax. Neither the solicitor nor their firm are 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 whether the solicitor is permitted to provide all or any of the advice requested by the son?
A) The solicitor can advise on which shares to sell, by relying on the acting as a trustee/personal representative exclusion.
B) The solicitor can advise on whether to sell the house, by relying on the execution-only exclusion.
C) The solicitor can advise on which shares to sell, relying on the ‘professional/necessary’ exclusion.
D) The solicitor cannot advise on the sale of any of the assets because no exclusions apply.
E) The solicitor can advise on which shares to sell, by relying on the execution-only exclusion.
CORRECT ANSWER A -As the solicitor is one of the executors, they can rely on the trustee/PR exclusion.
Option B is partially correct in that it is possible for the solicitor to advise on the sale of the house, but the reasoning is wrong. The solicitor can advise because land is not a specified investment. No exclusion is needed.
Option C is wrong because the advice is not a necessary part of the legal services being provided by the solicitor. A decision is required on which specified investments should sold. This is not a case in which all the assets have to be sold.
Option D is wrong because, as above, the advice on the shares would be covered by the trustee/PR exclusion and the house is not a specified investment.
Option E is wrong because the exclusion does not apply to the specified activity of advising. Advice has been sought from the solicitor.
A solicitor has been advising a client in respect of the sale of the client’s majority shareholding in a private limited company. The deal duly completes and results in the solicitor’s firm holding the sale proceeds in its client bank account. On the day of completion, the client tells the solicitor that as he will be travelling abroad for the next few weeks, he will need the solicitor to arrange for some of the sale proceeds to be transferred to a stockbroker, with whom the client holds an account, in order that the stockbroker can reinvest small amounts in each of 20 different quoted companies. The companies are listed in an email from the client to the solicitor in which the client makes it clear that they are not asking the solicitor to advise on the merits of the investments.
Has the solicitor committed an offence under s19 Financial Services and Markets Act 2000?
A) No, because the takeover exclusion applies to both the sale and the reinvestment.
B) No, because the takeover exclusion applies to the sale and the execution-only exclusion applies to the reinvestment.
C) No, because the solicitor has not engaged in a specified activity.
D) Yes, because no exclusions apply on the facts.
E) Yes, because the takeover exclusion applies to the sale, and the solicitor’s actions in respect of the reinvestment do not amount to a regulated activity.
CORRECT ANSWER B - The solicitor is in business and both the quoted shares and the private company shares are specified investments. The solicitor is engaging in a specified activity – advising in respect of the sale and arranging in respect of the reinvestment (Option C is wrong). The takeover exclusion applies to the sale because it concerns a majority shareholding. The solicitor is acting as a go-between with the stockbroker on the reinvestment and the client has not sought advice from the solicitor so the execution-only exclusion would apply. (Options D and E are therefore wrong.)
Option A is wrong because the reinvestment does not involve majority shareholdings.
A firm of solicitors provides services to a major client under the s.327 FSMA 2000 exemption for professional firms. The firm’s partners are worried because an associate in the firm has just delayed the client’s transaction on the basis that immediately proceeding with it would not be in the client’s best interests. The partners accept that this was reasonable, but they are concerned that if the client responds to the delay by asking questions, the client might find out that the firm is not authorised by the Financial Conduct Authority (FCA) and then ask for details of the firm’s complaints process.
Which of the following statements best describes the firm’s position in relation to the SRA Financial Services (Conduct of Business) Rules (the ‘COB Rules’)?
A) The COB Rules do not apply where a firm operates under the exemption for professional firms.
B) The COB Rules do not appear to have been broken in respect of the delay, as the client’s best interests can be taken into account.
C) The COB Rules stipulate that the client should now be informed that the firm is not regulated by the FCA.
D) The COB Rules do not appear to have been broken in respect of the complaints process, as the requirement to inform clients of such a process appears instead in the SRA Codes of Conduct.
E) The COB Rules appear to have been broken in respect of the need to record clients’ instructions to carry out transactions.
CORRECT ANSWER B - The COB Rules (specifically: as to ‘best execution’) provide that a firm must carry out transactions for clients as soon as possible unless it reasonably believes that it is in the client’s best interest not to do so. The facts strongly indicate that the reason for delay was on these grounds.
Option A is wrong, because it is precisely where the firm operates under the exemption for professional firms that the COB Rules do apply.
Option C is wrong. The firm should already have made its non-authorisation by the FCA known to the client in accordance with the COB Rules on ‘status disclosure’.
Option D is wrong. It is true that the SRA Codes describe client information obligations in respect of complaints handling, but the COB Rules also require the firm to explain its complaints procedure to the client. This is again within the ambit of ‘status disclosure’.
Option E is wrong. Whilst COB Rules on transactions do require that client instructions and instructions to third parties are recorded, we are told only that a transaction has been delayed. We are not told anything that suggests a problem in respect of the recording of instructions. It may or may not in fact be the case, but as the scenario stands Option E is not the best answer.
