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SQE1 - Legal Services Bella > WS2 - Financial Services > Flashcards

WS2 - Financial Services Flashcards

1
Q

s19

What is the general prohibition under the Financial Services and Markets Act 2000?

A

No person may carry out a regulated activity in the UK unless they are authorised or exempt from authorisation

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2
Q

What is a regulated activity?

A

A specified activity in relation to a specified investment carried out in the course of business to which no exclusions apply.

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3
Q

What are the 4 question tests to determine if an activity is regulated?

A

1. Are you in business?
* To qualify as a regulated activity must be during the course of a business (e.g. a solicitor in that capacity, providing service to client)
2. Is there a specified investment?
* E.g. company stocks, shares, bonds, regulated mortgage contracts etc.

3. Is there a specified activity?
* E.g. dealing, arranging,managing, advising

4. Is the activity excluded / does s327 FSMA apply?

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4
Q

What are the five specified activities which are regulated?

A
  1. Advising on investments
  2. Dealing in investments as Agent
  3. Arranging deals in investments
  4. Managing investments
  5. Safeguarding and administering investments
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5
Q

What is advising?

A

Giving advice to an investor on the merits of buying, selling, subscribing for, or underwriting a particular investment

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6
Q

What is dealing as an agent?

A

Actually buying, selling, subscribing for, or underwriting a particular investment for another person. E.g. selling shares on behalf of a client

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7
Q

What is arranging?

A

Making arrangement for another person to buy, sell, subscribe for, or underwrite a particular investment

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8
Q

What is managing?

A

Managing assets or investments on behalf of the client. Solicitor must be actively involved in the management of the investment and must involve exercise of discretion

Exercising discretion relating to securities or contractually based investments.

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9
Q

Can a solicitor advice on merits of investments?

A

Solicitor can give generic advice without needing authorisation.

To fall within definition - advice requires an element of opinion and recommendation on a proposed action

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10
Q

When might a solicitor’s conduct amount to managing investments?

A

Requires activity involvement in managing the investment and exercise of discretion in doing so.

Not enough to simply “hold” investment on behalf of client.

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11
Q

What is safeguarding?

A

Protecting and administering assets belonging to another person.

Mere safeguarding is not enough, must also administer
Safeguarding = phyically possess the investment or hold a title to them

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12
Q

What are the six specified investments most relevant to a solicitor which are regulated?

A

1. Insurance contracts
* life assurance contracts, endowment policies, insurance against risk of fire, mortgage protection policies, legal expenses

2. Shares/securities

3. Debentures

4. Regulated mortgage contracts
* where 40% or more of the land is to be used as the residence of the borrower / their relative (not a buy to let / company property)

5. Pension schemes

6. Funeral plans

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13
Q

What are two things which are not specified investments?

A
  1. Interests in land (except regulated mortgage contracts)
  2. National savings products, e.g. Premium Bonds
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14
Q

When must the conduct be carried out to breach the general prohibition?

A

In the course of business

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15
Q

What are 5 exclusions that will render a specified activity in a specified investment not a regulated activity?

A
  1. Introducing
  2. Arranging or dealing through an authorised party (ATP)
  3. Acting as a trustee nominee, or personal representative
  4. The necessary exclusion
  5. Takeover
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16
Q

What is the Introducing exclusion that will render a specified activity in a specified investment not a regulated activity?

A

A solicitor may arrange/act as an agent with respect to specified investments if the client receives advice from an authorised person and the solicitor is merely assisting the client in acting on this advice, but has no further role

Arranging

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17
Q

In what two circumstances is the introducing exclusion that would render a specified activity in a specified investment not a regulated activity not available?

A
  1. Where the specified investment is an insurance contract
  2. Where the solicitor received payment/commission from the authorised person/any source other than the client
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18
Q

When does the Arranging or dealing through an authorised third party (ATP) exclusion apply?

A

Where an arrangment is based on advice of an ATP or where the ATP deals with the investment themselves.

Dealing / arranging

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19
Q

When might a solicitor’s find themselves dealing in investments as agent?

A

Whenever they buy, sell, subscribe for or underwrite an investment on their client’s behalf or commit client to that.

20
Q

When can you not rely on the ATP exclusion?

A

If a solicitor receives comission or other advantage for which it does not account to the client.

21
Q

What is the acting as a trustee nominee or personal representative exclusion?

A

Applies where a solicitor is acting as a trustee or personal representative and does receive renumeration for acting in that capacity.

Arranging
Managing
Safeguarding
Advising

22
Q

What is the necessary exclusion that will render a specified activity in a specified investment not a regulated activity

A

It is not a violation of the general prohibition to carry on an activity (other than managing) if the activity is reasonably regarded as a necessary part of providing legal services

If it would be impossible or the other services to be provided without the dealing/arranging/advising e.g. drafting contract to sell company shares

Dealing
Arranging
Advising
Safeguarding

23
Q

In what three circumstances is the necessary exclusion that would render a specified activity in a specified investment not a regulated activity not available?

A
  1. Where the activity is managing
  2. Where the activity relates to insurance policies and
  3. Where the activity is billed separately from the main legal advice
24
Q

What is the takeover exclusion that will render a specified activity in a specified investment not a regulated activity?

Activities carried on in connection with the sale of a body as a corporate

A

A solicitor can deal as agent, arrange, or advise with respect to a client who is buying/selling 50% or more of the voting shares of a company, or when the object of the transaction is taking control of the company

Dealing
Arranging
Advising

25
Q

What are the conditions for law firms to carry out exempt regulated activity under s327?

A

1) Person is part of a professional body (i.e. SRA)
2) Not received any payment or other advantages in respect of regulated activites, unless client provides informed consent for the commission
3) Specified activity is incidental

26
Q

Exemption for professional firms s327

What is the s327 exemption which means a regulated activity would not violate the general prohibition at all?

Designated Professional Bodies

A

If a solicitor provides a regulated activity incidentally to the provision of legal advice and does not receive compensation for this from anyone else without accounting to the client for it, it is exempted.

E.g. if the law firm does not carry out mainstream financial services work, but undertakes regulated activities - e.g. conveyancing, personal injury and trust work - can be exempt and doesn’t need to be regulated under FCA

27
Q

Exemption for professional firms s327

How is whether an activity is incidental determined for the purposes of the s327 exemption?

Designated Professional Bodies

A

By considering whether the activity is incidental:
1. To the work the firm does as a whole
2. To the client’s particular matter

Note incidental work must not be regulated but be professional - e.g. legal service in corporate work, drafting documents, probate work, winding up estate, general text advice

28
Q

Exemption for professional firms s327

What is important point regarding the client you act for a firm wishes to rely on the s327 exemption?

A

The professional service and the regulated activity must be supplied to the same client.

Therefore, in a probate matter, where the probate client is the executor, if you regularly give professional advice to a beneficiary under the will would not satisfy this test.

29
Q

Exemption for professional firms s327

What kind of firms cannot rely on the s327 exemption?

Designated Professional Bodies

A
  • It does not apply to activites contained in the SRA Financial Services (Scope) Rules.
  • If financial serices must not represent a major part of the firms work.
  • If the firm is authorised by the FCA - could not use s327 for other ‘non-mainstream activities’
30
Q

What are some activities in the SRA Financial Services (Scope) Rules to which the s327 exemption does not apply?

A
  1. Recommending a client to get rid of any rights under a personal pension scheme
  2. The firm entering into a regulated credit agreement as lender (except in relation to the firm’s fees)
31
Q

In order to provide incidental financial services under s327, what two special rules does the SRA impose on firms?

Designated Professional Bodies

A

Firms must:
1. Let clients know at the outset that the firm is regulated by the SRA and not the FCA
2. Confirm that the client is coming to the firm for this incidental service and has not sought or relied upon any advice from the firm in relation to the transaction

32
Q

What is the difference between an exemption and an exclusion?

A
  • An exemption is from the requirement to be authorised under the general prohibition, so all conduct would be excusable under this.
  • An exclusion goes to whether or not the conduct is a regulated activity and therefore caught by the general prohibition, but is not available in all circumstances.
33
Q

Even though they are very similar, what is the key advantage of the Designated Professional Bodies exemption over the necessary exclusion?

A

The Designated Professional Bodies exemption is available for managing, and for activities related to insurance policies, but the necessary exclusion cannot be used in these circumstances.

DPB will always be a better answer choice, but note the instances when it is not available.

34
Q

If a firm wishes to carry out activities in relation to insurance policies, what additional requirements does the SRA impose?

A
  1. Notify SRA that the firm is carrying out activities related to insurance policies
  2. Be put on a register or providers
  3. Appoint an insurance distribution officer
35
Q

What SRA principles does a solicitor have to consider?

A

1) Must act in the best interests of the client
2) Record of transaction
3) Record of commission
4) Safekeep of client’s investments
5) Retention of records

36
Q

When might client advice amount to advising on investments?

A

If solicitor gives advice on merits of buying, selling, subscribing for or underwriting in an investment.

37
Q

When will solicitors carrying out a specified activity whilst acting as a trustee/PR fall within scope of FSMA 200 general exclusions?

A

If solicitor is acting as a bare trustee
Excluded if
* Acting on beneficiary instructions and
* Do not hold themselves out as someone buying / selling securities investments

If solicitor is trustee / PR
Excluded if:
* Acting as a co-trustee/ co PR
* Beneficiary is entered into the transaction

Exclusion is disapplied for insurance contracts

38
Q

When will a solicitor dealing with buying / selling of company shares fall within the general exclusion?

A

Where transaction’s aim is for one body corporate to take over day-to-day control of another body corporate’s affairs.

Shares in transaction consist of or include 50% or more of voting shares.

39
Q

What information must be disclosed to a client before accepting a commission in respect of regulated activities?

A
  1. Inform client of their rights to any commission
    AND
  2. Will still provide the service even if they do not waive the commission

Record agreement with client in writing.

40
Q

What is the consequence of carrying out unauthorised activities (s.19(1) FSMA)?

A

Criminal offence!
* If summary offence - up to 6 months imprisonment and/or fine
* If indictable offence - up to 2 years imprisonment and/or fine.

41
Q

What is the definition of financial promotion?

A

Invitation or inducement to engage in investment activity communicated during course of business.

42
Q

What are the consequences of a breach of financial prohibition?

A

Criminal offence

43
Q

Can a firm rely on their s327 exemption to engage in financial provision?

A

No - these are two separate regimes.

44
Q

When is a firm likely to make a financial promotion?

A
  • When it seeks to introduce clients to an authorised person
  • Where it mentions in its marketing brochure / website it is not allowed to provide mainstream investment advice itself but can introduce clients to authorised persons
45
Q

What are exemptions to financial promotion restriction?

A
  1. Community to overseas party directed only at persons outside UK
  2. Unsolicited real time communication (except if it aims to promote overseas business)

Plus
* must be clear in communication that it is not intended to be directed / acted upon by persons in the UK
* affirm that proper systems are in place to prevent it from reaching UK recipients

46
Q

What are alternative ways to fall outside scope of financial promotion restrictions if exemptions do not apply?

A
  1. Communicated/made to an authorised person (FCA/PRA approved firm)
  2. Contents have been approved by an authorised person before being communicated by the unauthorised person
47
Q

Why are financial services regulated?

A

Ensures adequate consumer protection from negligent advisers.

SQE1 - Legal Services Bella (6 decks)

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