Regulation of Financial Services Flashcards
(25 cards)
Draw the FSMA decision tree
Cross reference
What is the S19 general prohibition in FSMA?
It is a criminal offence to carry out a regulation activity unless you are either authorised or exempt
Step 1 FSMA Tree: what is a specified investment? Give 6 examples
Rights under a contract of insurance
Shares in a company
Instruments created or acknowledging indebtedness
Government and public securities
Rights under a pension scheme
Regulated mortgage contracts
What conditions must be met in order for something to constitute a ‘regulated mortgage contract’?
Contract is one under which a person provides credit to an individual or to trustees
Secured by a mortgage on land
At least 40% of that land is used for
[Essentially any which way - for a residential property]
Covers: typical home buyer’s mortgage
Does not cover: loan to buy an office, loans to companies
Step 2: What constitutes a specified activity?
Dealing in investments as principal or agent
Arranging deals in investments
Managing investments
Advising on the merits of investments
What two requires must exist for someone to be considered to be ‘advising on the merits’ of investments
Giving advice requiring an element of opinion and a recommendation as to a course of action
Would have to be regarding a specific investment - e.g. to buy XYZ shares
Why does it matter whether there is an exclusion available?
Excluded activities can be carried on without the need for authorisation from the FCA
Name the three exclusions that are most relevant to the work of a solicitor
Regulated activities that are a necessary part of other services carried on in the course of a profession
Regulated activities in connection with the sale of a body corporate
Authorised persons
A solicitor generally can escape FSMA regulation at Step 3 of the decision tree. Why?
It is very common that when a solicitor is helping to conduct a specified activity for a client (e.g. dealing in investments etc) it is
a) carried on in the course of carrying on a profession or business which does not otherwise consist of the carrying on of regulated activities in the UK
b) is a necessary part of other services provided in the course of that profession or business
When will the necessary part exclusion under Step 3 NOT apply?
If the specified activity is remunerated separately from the other services
What is considered a necessary part of other services?
Not specified in RAO
Standard procedure re investments to refer to a financial advisor
Common example: transferring shares in a leasehold flat when you must have one share in a management company
Step 3: What is the body corporate exception?
A solicitor will not be dealing / arranging / advising as long as:
They are dealing in shares of 50% or more in a company
or they take the shareholder over the 50% threshold
object of the transaction might reasonably be regarded as being the acquisition of day-to-day control of the affairs of the body corporate
Transfer must be between two companies
Step 3: What is the authorised person exception?
It will not count as dealing in investment as agent for a client if transaction is entered into as agent for client with / through an authorised person, provided that:
- Transaction is entered into on advice of the authorised person
- It is clear that the client is not seeking and has not sought advice from the solicitor as to the merits of entering into the transaction
Step 3: When does the authorised person exception not apply?
If the transaction relates to a contract of insurance
If the solicitor receives a commission for which he does not account to the client
Step 4: What happens if both S327 FSMA and SRA Scope Rule 2 are satisfied?
Activity is an exempt regulated activity - can be carried out by law firm
Step 4: What happens if both S327 FSMA and SRA Scope Rule 2 are NOT satisfied?
Firm must be authorised by the FCA and must comply with the FCA Handbook
Step 4: What are the four conditions in S327 FSMA?
Must be a member of a profession
Must not get paid / commission, unless they account to the client for the commission
Specified activity must be incidental to main services
Must comply with any rules set by the designated professional body.
Step 4: How must commission be treated?
You must hold any commission to the client’s order
You can only keep it if the client gives informed consent
Step 4: How is ‘incidental’ interpreted?
Regulated activities cannot be a major part of the practice of the firm
Consider:
- Scale of activity compared to other services
- Whether / to what extent activities regarded as regulated activities are held out as separate services
- Impression given of how the firm provides regulated activities
Step 4: What is in SRA Scope Rule 2?
-You must fulfil FSMA s327
-Activities arise out of / are complementary to provision of service [e.g. consider: does the activity arise out of work solicitor is already doing for client? what prompted it?]
What two restrictions should you be particularly aware of if you are acting for a client selling shares?
restriction on financial promotions
Requirement for an approved prospectus where shares are going to be offered to the public
What restriction is there on financial promotions?
An unauthorised person cannot communicate a financial promotion unless an authorised person has approved its contents or a relevant exemption applies
What are three key exemptions to the restrictions on financial promotions?
Sale of a body corporate - to acquire 50% or more of shares / day-to-day control of company
Investment professionals - someone already authorised by FCA
High net worth - companies: called up share capital of not less than £5 million, or £500,000 if it has more than 20 members
individuals: certified high net worth individuals / sophisticated investor
Who must approve a prospectus?
FCA
