Equity Finance - Financial Services Regulation Flashcards
(23 cards)
What is the purpose of financial services regulation?
To ensure that those offering investment related services are authorised, qualified, and act to protect consumers from negligent advice and financial harm.
What legislation governs financial services?
- Financial Services and Markets Act - FSMA
- Regulated Activities Order - RAO
What is the general prohibition under FSMA?
No person may carry on a regulated activity in the UK unless they are authorised or exempt
What is consequence of breaching FSMA?
Criminal offence, with possible fine/imprisonment
What is the formula for a regulated activity under FSMA?
Regulate activity = Specified investment + Specified activity
Step 1?
Is the investment specified?
What are common specified investments?
- Shares
- Debt instruments like bonds
- Regulated mortgage contracts
Step 2?
Is the activity specified?
Examples of specified activities?
- Dealing in investments
- arranging deals in investments
- managing investments
- advising on the merits of investments
What is required for advice to be regulated?
The solicitor must give a recommendation or opinion to a specific client about buying, selling, or holding a specified investment
Is generic legal advice aught under this?
No - giving general information (e.g. rights attached to shares) or purely legal advice is not regulated
Step 3?
Are there any exclusions?
What is the purpose of exclusions in RAO?
To define situations where activities that might otherwise be regulated are excluded from regulation, allowing them to be carried out without authorisation
General exclusions?
- Excludes regulated activities that are necessary part of the solicitor’s professional legal services, provided they are not separately remunerated
- Activities done in connection with the sale or purchase of shares in a company, provided:
- The shares represent 505% or more of voting rights
- the object is to acquire day-to-day control
Step 4?
s327 FSMA and Scope Rule 2
What is the exemption under s327 FSMA?
Allows professional firms to carry out regulated activities without FCA authorisation if they meet certain conditions
What are the s327 FSMA conditions?
- The solicitor must be a member of a profession
- Must account for commissions unless consented to by the client
- the activity must be incidental to the legal services
- the activity must comply with the rules made by the firm’s designated professional body
What is incidental activity and how is it interpreted by the FCA?
- Activity must be a minor part of the firm’s overall services
- it must not be held out as a separate service
- it must arise naturally from the firm’s professional work
Example of an incidental activity for a Solicitor?
- Helping with the transfer of shares in a property-owning company as part of a property sale transaction
What does Scope Rule 2 require?
That the activity must arise out of or be complementary to legal services provided to a particular client
Example of a non-complementary activity?
Advising a client on personal pension investments when acting for them on a company sale - the investment advice does not arise from or complement the legal work
What happens if a Solicitor satisfied both s237 FSMA and Scope Rule 2?
The solicitor is carrying out an exempt regulated activity and does not require FCA authorisation
What happens if a solicitor does not satisfy FSMA exemptions?
The solicitor must:
- Be FCA authorised, or
- Not carry out the activity, doing so risks committing a criminal offence
