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SQE1 Professional Conduct > Financial Services > Flashcards

Financial Services Flashcards

1. FSMA 2. Financial Promotion

1
Q

Three components of a regulated activity (s.22, FSMA)

A
  1. Specified activity
  2. Relating to a specified investment
  3. Carried on by way of business
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2
Q

Four question test to determine whether you are carrying out a prohibited/non-exempt regulated activity

A

1) Is the investment ‘specified’?
2) Is the activity a ‘specified activity’ ?
3) Is the activity excluded under FSMA?
4) s.327 FSMA + SRA Scope Rules - Does the activity fulfil the
conditions?

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3
Q

Specified Activities

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

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5
Q

Safeguarding and administering investments (Art.40)

A

Mere safeguarding is not enough, must also administer.
* Safeguarding = physically possess the investments or hold a title to them

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6
Q

Managing investments (Art 37)

A

Exercising discretion relating to securities or contractually based investments.

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7
Q

Advising on merits of investments (Art.53)

A
  • Solicitors 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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8
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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9
Q

General exclusions under FSMA

A

1) Acting as trustee or personal representative (Art 66)

2) Regulated activities are a necessary part of the other services provided (Art 67)

3) Dealing with/selling shares in a company (Art 70)

4) Information provided is incidental to giving advice (Art 72C)

5) Solicitor refers client to an authorised person (Art 22)

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10
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.

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11
Q

Specified investments

A

Include:
- 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)
- Bonds
- Shares
- Insurance contracts: includes life assurance contracts, endowment policies, insurance against the risk of fire or destruction, mortgage protection policies and legal expenses insurance.

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12
Q

What investments are not classed as specified investments under FSMA?

A
  • Interests in land (except regulated mortgage contracts)
  • Certain national savings products
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13
Q

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

A

If a solicitor is a bare trustee, excluded if:
- Acting on beneficiary’s instructions;
AND
- Do not hold themselves out as someone buying/selling securities/investments.

If solicitor is a trustee/PR, excluded if:
1. Acting as a co-trustee/co-PR
OR
2. Beneficiary entered into the transaction

  • exclusion is disapplied for insurance contracts
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14
Q

When will a regulated activity be considered a necessary part of services provided?

A

If it would be impossible for other services to be provided without the dealing/arranging/advising.

  • ie. drafting contract to sell company shares.
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15
Q

When will a regulated activity not be considered a necessary part of services provided, and thus fall outside exclusion?

A
  1. Specified activity is paid for separately
    OR
  2. If it is a consumer credit-related activity

Exclusion disapplied for both insurance contracts and investment services.

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16
Q

When will information provided be considered incidental to giving advice (Art. 72C), and thus fall under general exclusion?

A

Where it is not advertised as a separate service, and merely a small portion of whole work done.

17
Q

When will a solicitor dealing with the buying/selling of company shares fall within general exclusion (Art.70)?

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.

18
Q

What criteria must be met for a deal arranged via authorised persons to fall under general exclusions (Art.22)?

A

1) (a) authorised person’s advice was what made client enter into the transaction; AND
(b) client is not seeking solicitors advice on merits.

OR

2) Solicitor recommended the client to an authorised person for independent advice.

  • Exclusion is disapplied for insurance contracts/investment services.
  • solicitor must account to client for any commission received.
19
Q

What does the designated body exemption entail?

A

Allows certain professional bodies, including firms authorised by the SRA to carry out exempt regulated activities.

20
Q

Conditions for law firm to carry out exempt regulated activity under s. 327 FSMA

A

1) Person is part of professional body (ie. SRA);

2) Not received any payment or other advantages in respect of regulated activities, unless client provides informed consent for the commission.

AND

3) Specified activity is accidental to the procession of professional services.

21
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 w/ client in writing
22
Q

Distinguishing between providing financial services are core activity or these merely being incidental:

A

Extent to which exempt regulated activities are advertised as separate services

Impression given by from in providing these.

Incidental only if it arises/connect to providing legal advice.

23
Q

Conditions for solicitor to carry out specified activity under SRA Scope Rules 2019

A
  • last step!

1) Activity arises out of non-regulated work;
OR
2) Is complementary to the provision of non-regulated work for
client (ie. naturally arises over course of legal work)

If these are met = activity is exempt

24
Q

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

A

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

25
Q

Definition of financial promotion

A

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

26
Q

Consequences of breach financial promotion prohibition

A

Criminal offence

27
Q

When is a firm likely to make a financial promotion?

A
  • when it seeks s to introduce clients to an authorised person.
  • where it mentions in its marketing brochures/website it is not allowed to provide mainstream investment advice itself BUT instead can introduce clients to authorised persons.
28
Q

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 UK
- affirm that proper systems are in place to prevent it from reaching UK recipients.

29
Q

Alternative ways to fall outside scope of financial promotion restriction is exemptions do not apply.

A
  1. communicated/made to an authorised person (FCA/PRA approved firm).

OR

  1. Contents have been approved by an authorised person before being communicated by the unauthorised person.
30
Q

What is a regulated activity (s.22, FSMA)?

A

activity carried on by way of business that relates to a specified investment.

31
Q

Why are financial services regulated?

A

Ensures adequate consumer protection from negligent advisers.

32
Q

Does a mortgage to fund the purchase of a buy-to-let property fall under the scope of FSMA?

A

No - not a specified investment.

  • property must be used as dwelling 40% of time to fall under definition of a “regulated mortgage” contract.
33
Q

Will the forwarding of a memorandum on behalf of a client selling their subsidiary to potential buyers amount constitute an unauthorised financial promotion (s.21, FSMA)?

A
  • not if an authorised person approved its contents (ie. client is authorised by FCA/PRA) or any of the relevant exemptions apply.
34
Q

When will advice on a specified investment not be considered “complementary” to the provision of professional services to an existing client?

A

where it concerns an entirely new legal matter. Unrelated to previous work conducted with client.

cf. “not incidental” - correct answer where solicitor is perhaps advising on existing matter, but advice forms main part of transaction.

35
Q

After how many working days following a suspicious report submission to the NCA can a solicitor proceed with the reported transaction?

A

7 working days

36
Q

When providing advice on regulated financial services, even if one of the exceptions appear satisfied, what must the activity always relate to?

A

Activities must arise out of, or be complementary to, the provision of a particular professional service to a particular client.

37
Q

Which investments would not constitute specified investments?

A
  • government bonds
  • land
  • investment property
  • National Savings product
  • Premium bond
38
Q

Where a solicitor is advising on a client on the offering of shares to the public without an approved prospectus, what must it do to avoid breaching FSMA?

A

ensure that offers are made directly to qualified investors.
* brings its conduct under one of the FSMA exceptions.
* Prospectus must be approved by FCA otherwise.

39
Q

How must a solicitor proceed after referring a client to an authorised person?

A

once they have referred the client, the solicitor can no longer act/assist in relation to the relevant regulated transaction.

SQE1 Professional Conduct (6 decks)

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