Unit 2 Flashcards
(57 cards)
1
Q
What are the Financial Conduct Authority objectives?
A
1) Consumer Protection
2)Integrity Objective – Protecting integrity of UK financial system
3) Competition objective – Promotes effective competition in the interests of consumers in the market, including for regulated financial services.
2
Q
What is the Prudential Regulation Authority (PRA) responsible for?
A
Prudential regulation and general supervision of firms which manage significant financial risks.
3
Q
What are PRA regulated activities?
A
- Accepting deposits
- Effecting a contract of insurance
- Dealing with investments as principal.
4
Q
List PRA regulated firms / dual-regulated firms (as they’re also regulated by the FCA)
A
- Banks,
- Building societies,
- Insurers,
- Credit Unions
- Investment firms
- Lloyd’s of London.
5
Q
What are the 2 key restrictions of relevance to solicitors (in relation to engaging in financial work)?
A
1) Carrying out a regulated activity (The general prohibition)
2) Making a financial promotion (the financial promotion prohibition)
6
Q
What is 1) The general prohibition?
A
No person may carry on a regulated activity in the UK unless authorised or exempt.
7
Q
Is carrying out a regulated activity without authorisation or exemption a criminal offence?
A
Yes.
Penalty = Up to 2 years’ imprisonment or unlimited fine
Any agreement made without authorisation to do a regulated activity is unenforceable.
8
Q
Is it a criminal offence to make an unauthorised financial promotion?
A
Yes.
9
Q
What is a financial promotion?
A
Invitation/ inducement to engage in investment activity.
10
Q
What is the definition of a regulated activity?
A
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.
11
Q
To determine whether an activity what four tests are applied?
A
In order:
1) Are you in business?
2) Is there a specified investment or does the specified activity relate to information about a person’s financial standing or administering a benchmark?
3) Is there a specified activity?
4) Is there an exclusion?
12
Q
Does a solicitor giving advice qualify as being ‘in business’?
A
Yes.
13
Q
What constitutes a specified investment?
A
- Mortgages
- Debentures, loan stock & bonds
– Company stocks & shares (not shares in the share-capital of open-ended investment companies or building societies incorporated in the UK)
– Credit agreements
– Open-ended investment companies
– Government securities, i.e., gilts
– Deposits (accepting deposits not relating to sums in the course of a solicitors’ business)
– Insurance contracts (including life policies and annuities)
– Home reversion / home purchase plans
14
Q
What is the pneumonic related to specified investments?
A
My dad Called Charlie Ordered Gregg’s Delicious Italian Ham
15
Q
What investments are not specified investments?
A
– National savings products
– Interests in land
16
Q
What are the specified investment activities?
A
– Dealing as agent
– Arranging
– Managing
– Safeguarding
– Advising
– Lending money on / administering a regulated mortgage contract
– Establishing, operating or winding up a collective investment scheme or personal pension scheme.
17
Q
What is the pneumonic for specified investment activities?
A
My Dad Asked Someone About Lemons
18
Q
What do the first 3 tests determine?
A
Whether or not it’s a regulated activity. If ALL tests are ticked, then it is a regulated activity.
19
Q
What is the fourth part of the test?
A
Are there any exclusions?
20
Q
Effect of exclusions =
A
An act which would otherwise be a regulated activity is no longer regarded as one.
E.g., is an exclusion applies to a particular activity a solicitor is carrying out, the solicitor does not need to be authorised for that particular transaction.
21
Q
What exclusions are relevant to solicitors?
A
1) Introducing
2) Using an authorised third party – ATP exclusion
3) Acting for an execution-only client
4) Acting as a trustee or personal representative
5) The professional / necessary exclusion
6) The takeover exclusion / body corporate exclusion
22
Q
What is the pneumonic for exclusions?
A
I Trust Ex Professional Tax Accountants
23
Q
What is the introducing exclusion?
A
- Only applies to the activity of arranging.
- Solicitor must simply introduce the client to an authorised person and then have no further role in this aspect of the client’s matter.
- If solicitor retains any ongoing role, i.e., acting as a means of communication between the client and authorised person, the exclusion cannot be relied upon.
24
Q
What is the authorised third party exclusion?
A
- Applies to the activities of dealing as agent and arranging.
- The exclusion applies where the transaction is to be entered into based on the advice of an ATP, i.e., a person authorised by the FCA. Here the solicitor can retain an ongoing role in the transaction, but it is clear the financial advice is being provided by the ATP.
- Solicitor cannot rely on this exclusion if the solicitor receives any pecuniary reward (i.e., commission) or advantage from anyone, for which the solicitor does not account to the client.
- Does not apply to insurance contracts.
25
What is the execution-only client exclusion?
* Applies to activities of dealing as agent and arranging.
* Applies where the client, in their capacity as an investor, is not seeking and has not sought advice from the solicitor as to the merits of the client’s entering into the transaction (or the client has sought advice & solicitor has declined to give it but has recommended that the client seek such advice from an authorised person).
* Asking the solicitor to do the formal steps and act as an intermediary (i.e., client has gone elsewhere and asks solicitor to complete the formal steps).
* I.e., where the advice on the investment does not come from the solicitor.
26
What is the acting as a trustee or personal representative exclusion?
* Applies to arranging, managing, safeguarding and advising fellow trustees and/or beneficiaries. Applies to lending money on, or administering a regulated mortgage contract.
NOTE – This exclusion is available to a solicitor acting as a trustee or PR (and not to a solicitor acting for a trustee or PR).
27
Additional points on acting as a trustee or PR exclusion =
* Exclusion applies if a member of the firm is a trustee or PR but the activity is actually carried out by the other members of the firm.
* Does not apply if the solicitor is remunerated for what they do.
* For managing / safeguarding, the exclusion is not available if the solicitor holds themselves out as providing a service comprising managing or safeguarding.
* Does not apply to contracts of insurance & taking up or pursuing insurance distribution.
28
What is the professional/necessary exclusion?
* Exclusion where the activity is performed in the course of carrying on any profession or business and may reasonably be regarded as a necessary part of other services provided in the court of that profession or business, i.e., where it is not possible for the other services to be provided unless the regulated activity is also provided.
* E.g., when acting on the acquisition of a company, giving advice on the merits of buying it and arranging for the acquisition of its shares / In probate work, arranging for the sale of all the assets to pay Inheritance Tax.
* Applies to advising, arranging, safeguarding and dealing as agent.
29
For what activity does the professional / necessary exclusion not apply?
If the activity consists of taking up or pursuing insurance distribution, the exclusion is not available.
30
What is the takeover exclusion / body corporate exclusion?
* Exclusion applies to transactions to acquire or dispose of shares in a body corporate (other an OEIC), or for a transaction entered into for the purposes of an acquisition or disposal, if:
(a) The shares consist of or include 50% or more of the voting shares in the body corporate; and
(b) The acquisition or disposal is between parties each of whom is a body corporate, a partnership, a single individual or a group of connected.
* Exclusion applies to arranging, advising, dealing as agent.
31
What is the s 327 exemption for professional firms?
S 327 = there is an exemption from having to obtain authority from the FCA where the firm is regulated and supervised by a designated professional body (e.g., SRA).
I.e., if s 327 applies, firms authorised by the SRA can carry out regulated activities (exempt regulated activities) without being regulated by the FCA is the firm can meet the conditions set out in s 327 FSMA 2000.
32
What are the conditions for s 327 professional firm exemption to apply?
1) Pecuniary or other advantage – the firm must not receive from a person other than its client any pecuniary or other advantage arising out of the activity for which it does not account to its client AND
2) Incidental – The manner of providing 'any service in the course of carrying on the activities must be incidental to the provision by the firm of professional services.
3) Permitted regulated activities only – the firm must only carry out regulated activities permitted by the DPB;
4) Not prohibited – the activities must not be prohibited by an order made by the treasury, or any direction made by the FCA under s 328 or s 329.
5) The firm must not carry on ay other regulated activities.
33
What are the tests to determine whether the activity is 'incidental'?
1) Specific Test
2) General Test
34
What is the specific test?
– The relevant regulated activity must arise out of, or be complementary to, the provision of a particular or specific professional service to a particular client.
– Firm cannot, therefore, carry out a regulated activity in isolation for a client; the regulated activity must ‘arise out of’ or be complementary to some other service being provided by the firm.
– ‘Other service’ – must be a non-regulated activity and a ‘professional’ activity.
– ‘Professional service’ must be the primary service and the regulated activity must be ‘incidental’ or subordinate’ to the provision of the professional service.
35
What is the general test to determine whether the activity is 'incidental'?
– The activities carried out by the firm which would otherwise be regulated cannot be a major part of the firm's activities.
36
What further factors play into the general test?
Further factors are:
(a) The scale of regulated activity in proportion to the other professional services provided.
(b) Whether and to what extent the exempt regulated activities are held out as separate services; and
(c) The impression given of how the firm provides those activities, e.g., through advertising its services.
37
Under "Permitted regulated activities only" condition, what is the scope if activities that firms can carry out under the professional exemption?
1) A solicitor or firm must not carry on any activity that is specified in an order made by the treasury under s 327(6). Activities include recommending to a client to dispose of any rights the client has under a personal pension scheme and advising a client to become a member of a particular Lloyd’s syndicate, creating or underwriting a contract of insurance.
2) If a firm wants to undertake insurance distribution activities, it needs to notify the SRA, be registered in the Financial Services Register and have appointed an insurance distribution officer who will be responsible for such activities.
38
When do the SRA Financial Services (Conduct of Business) Rules apply?
Only apply where the firm is acting under an exemption (carrying out a regulated activity)
39
What is status disclosure under COB rules?
* Firm must confirm to the client that it is not authorised by the FCA and explain the complaints and redress mechanisms are provided through the SRA and the Legal Ombudsmen.
* Any information provided under these rules must be given in a manner that is clear, fair and not misleading.
40
What is best execution under COB rules?
* 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.
41
What are the transaction rules under COB rules?
The firm must keep record of:
(a) Instructions from clients to carry out transactions; and
(b) Instructions to third parties to carry them out.
42
What are the COB rules for comissions?
Firm must keep a record of commissions recieved in respect of regulated activities and how those commissions were dealt with.
43
Under COB rules to acting under execution-only clients what must the solicitor do where the investment concerned is a retail investment product?
– Send a letter to the client confirming that the client is not relying on the advice of the solicitor.
– The firm must keep a copy of this letter.
44
What are the COB rules for Insurance Distribution activities?
1) All information about insurance distribution must be communicated to clients in a clear, fair and not misleading way.
2) Any information about remuneration received in relation to a contract of insurance must be provided to the client before the conclusion of the initial contract.
45
What is the key exemption for a solicitor to be able to carry out consumer credit activity? (Exemption 327)
– An agreement will be regarded as an exempt agreement if all of the following conditions apply:
1) Number of repayments does not exceed 12;
2) Payment term does not exceed 12 months; and
3) Credit is provided without interest or other charges.
46
What is the financial promotions prohibition?
A solicitor who is not authorised by the FCA will be unable to make a financial promotion (i.e., ‘communicate an invitation or inducement to engage in investment activity’) unless its contents are approved by an authorised person.
47
What are the 4 tests for determining whether something is a financial promotion?
(a) Are you in business?
(b) Are you making an invitation/Inducement?
(c) In connection with an investment?
(d) In connection with an investment activity?
48
Do all communications come within the scope of the prohibition?
Yes. Both real time and non-real time.
49
What are real time communications?
Any communication made in the course of a personal visit, telephone conversation.
50
What are non-real time communications?
Letters, emails, brochures etc.
51
When is a real time communication solicited?
* A real-time communication is solicited where it is made in the course of a personal visit, telephone call or other interactive dialogue, if that call, visit or dialogue:
(a) Was initiated by the recipient (e.g., the client) of the communication; or
(b) Takes place in response to an express request from the recipient of the communication.
52
What are the exemptions for the prohibition of financial promotions?
1) Real-time promotions (Artcile 55)
2) Non-real time promotions (Article 55A)
3) One-off promotions Article 28)
4) Introducers (Article 15)
53
What is the real-time promotion exemption? (Article 55)
(a) If made to a client who has, prior to the communication being made, engaged the solicitor to provide professional services; and
(b) Where the controlled activity to which the communication relates is exempt because of the exemption for professional firms, or is excluded from being a regulated activity by the ‘necessary’ exclusion; and
(c) Where the controlled activity to which the communication relates would be undertaken for the purposes of, and be incidental to, the provision of professional services to or at the request of the client.
Effect = if the activity is excluded from being a regulated activity by an exclusion other than the ‘necessary’ exclusion.
54
What is the one-off promotion exemption for financial promotion prohibition?
Article 28:
The solicitor believes on reasonable grounds:
(a) That the client understands the risks associated with engaging in the investment activity to which the financial promotion relates; and
(b) That, at the time of the communication, the client would expect to be contacted by the solicitor in relation to that investment activity.
55
Is the acquisition of land a specified investment?
NO.
55
What is the introducers exemption to financial promotion prohibition?
A solicitor may make any real-time communication in order to introduce a client to an ATP, provided:
(a) The solicitor is not connected to (a close relative of) the ATP;
(b) The solicitor does not receive other than from the client any pecuniary reward or other advantage arising out of making the introduction; and
(c) The client is not seeking and has not sought advice from the solicitor as to the merits of engaging in investment activity (or, if the client has sought such advice, the solicitor has declined to give it, but has recommended that the client seeks such advice from an authorised person).
56
Does the takeover exclusion apply where the transferee (i.e., one receiving) acquires over 50% shares?
Yes.
