1 Financial Services 169 CHAPTER 17 Financial Services 17.1 Introduction Source material Financial services regulatory structure The general framework The need for authority Regulated activity Exemption for professional firms The SRA Financial Services (Conduct of Business) Rules Insurance mediation Financial promotions Examples 181 LEARNING OUTCOMES After reading this chapter you will be able to understand: the structure of financial services regulation how solicitors are regulated in carrying out financial services work INTRODUCTION From time to time, solicitors engage in financial services work. To do this, they must be sufficiently competent in that area of practice, and in some cases will need to comply with certain regulations imposed by the Financial Conduct Authority (FCA) and/or The Law Society and Solicitors Regulation Authority (SRA). Such work could arise: in conveyancing, if a client needs help in finding a mortgage and a supporting package, which could include a life insurance policy; in probate, when the executors sell off the deceased s assets; in litigation, if helping a successful client to invest damages just won; (d) in company work, in making arrangements for a client to buy or sell shares in a company, and also in arranging corporate finance; (e) in family work, if arrangements have to be made on a divorce in respect of endowment life policies and/or a family business; (f ) in tax planning or portfolio management, for a private client including trustees. Under Principle 4 of the Code of Conduct, a solicitor would be in breach of his duty to act in the client s best interests if he did not have sufficient expertise in the area concerned. Therefore, a trainee solicitor should not give investment advice to a client unless the trainee is an expert in that field. However, many activities in connection with investments are subject to regulation under the Financial Services and Markets Act 2000 (FSMA 2000) and, for example, to give advice on these, or even to make arrangements for clients to acquire or dispose of them, may require the
2 170 Legal Foundations solicitor to be authorised to carry out that activity. To do this without authority could involve the commission of a criminal offence. Thus you will, when handling a matter in which investments are involved, even if only peripherally, need to be doubly careful before advising and assisting such clients. You will need to ask yourself two questions: Have I got the necessary skill and knowledge? What am I permitted to do under the financial services regulations? 17.2 SOURCE MATERIAL The FSMA 2000 gained Royal Assent on 14 June It contains 433 sections and 22 Schedules. The regulatory regime for financial services came into force at midnight on 30 November The Financial Services Act 2012, which received Royal Assent of 19 December 2012, extensively amends the FSMA The provisions of that Act will come into force, or in some cases have already come into force, on such dates as the Treasury specifies in commencement orders. The substance of the provisions of the FSMA 2000 discussed below, however, has remained unchanged. The FSMA 2000 provides only a general framework, and the detail is in secondary legislation (eg, Orders in Council made by the Treasury). In order to understand the whole of the regulation, it is necessary to study the FSMA 2000 and the various Orders made by the Treasury, for example: Financial Services and Markets Act 2000 (Regulated Activities) Order 2001, SI 2001/544 (RAO 2001); Financial Services and Markets Act 2000 (Professions) (Non-Exempt Activities) Order 2001, SI 2001/1227; Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, SI 2005/ 1529 (FPO 2005); (d) Financial Services and Markets Act 2000 (PRA-regulated Activities) Order 2013, SI 2013/556. The regulation of financial services is a complex and detailed area. This chapter will serve only as an introduction to the regulatory framework. Further guidance may be sought from The Law Society. Materials on financial services work include: the SRA Financial Services (Scope) Rules 2001 (Scope Rules 2001); the SRA Financial Services (Conduct of Business) Rules 2001 (COB Rules 2001). These may be found on the SRA s website at <www.sra.org.uk> and form part of the SRA Handbook FINANCIAL SERVICES REGULATORY STRUCTURE The FSMA 2000 in effect established the Financial Services Authority (FSA) whose authority was vast and included the regulation of financial services. Following the financial crisis of 2007/08 and criticisms of the regulatory system at the time, the Government announced major reforms in the regulatory structure, including the abolition of the FSA in its current form. Three new regulatory bodies have been established under the Financial Services Act 2012: the Financial Conduct Authority (FCA), the Prudential Regulation Authority (PRA) and the Financial Policy Committee (FPC). The FCA and PRA have taken over the majority of the FSA s functions whilst the FPC (a committee of the Bank of England) will be responsible for monitoring the stability of the whole UK financial system and so will not of itself directly supervise firms. The new regulatory structure came into effect on 1 April 2013.
3 Financial Services The Financial Conduct Authority (FCA) The FCA inherits most of the FSA s market regulatory functions, including responsibility for the conduct of business regulation of all firms (such as solicitors firms), including dualregulated firms (see ), and for the prudential regulation of firms (ie their safety and soundness) not regulated by the PRA (known as FCA-authorised or FCA-only firms). The FCA is set the following objectives in the FSMA 2000 (as amended): securing an appropriate degree of protection for consumers (the consumer protection objective); protecting and enhancing the integrity of the UK financial system (the integrity objective); promoting effective competition in the interests of consumers in the market, including for regulated financial services (the competition objective). It also shares a set of regulatory principles with the PRA and these are set out in s 3B of the FSMA The FCA has been given powers not previously granted to the FSA, including being able to require firms to withdraw or amend misleading financial promotions (see 17.10) with immediate effect and to block the launch of, or stop, a service or product. The FCA will, in due course, take over responsibility for the regulation of consumer credit and second charge mortgages secured over property, both currently regulated by the Office of Fair Trading. From 1 April 2013, the FCA took over the FSA s role relating to the regulation and supervision of the London Interbank Offered Rate (LIBOR), an internationally recognised interest rate benchmark used to set a range of financial transactions. This was against a background of widespread concerns about the operation of LIBOR among regulators and users of LIBOR, including attempts to manipulate it. LIBOR is now a specified benchmark (in fact, the only one at present) for the purposes of two new regulated activities in the RAO 2001 (see 17.6), namely providing information in relation to, and administering, a specified benchmark. The manipulation of LIBOR is also now a criminal offence under the FSMA The Prudential Regulation Authority (PRA) The PRA is a subsidiary of the Bank of England and is responsible for the authorisation, prudential regulation and general supervision of those firms which manage significant financial risks, namely banks, building societies, insurers, credit unions, certain investment firms and Lloyd s of London. These firms are known as PRA-authorised firms or dualregulated firms, as they will also be regulated by the FCA for conduct purposes (see ). The Financial Services and Markets Act 2000 (PRA-regulated Activities) Order 2013 sets out which regulated activities in the RAO 2001 (see 17.6) are PRA-regulated activities, and any firm with permission to carry out such activities will be designated a PRA-authorised firm. The activities include accepting deposits and effecting a contract of insurance and dealing with investments as principal THE GENERAL FRAMEWORK Businesses carrying on certain activities, known as regulated activities, will need to be authorised by the appropriate regulator, which in the case of a solicitors firm will be the FCA. The FSMA 2000 contains a special provision for professional firms which do not carry out mainstream investment business but may carry out a regulated activity in the course of carrying out their professional work, such as corporate work. If certain conditions are satisfied, such a firm will be exempt from having to obtain authority from the FCA, provided it is regulated and supervised by a professional body designated by the Treasury (a designated public body or DPB ). The Law Society has been so designated (this role is now undertaken by the SRA).
4 172 Legal Foundations 17.5 THE NEED FOR AUTHORITY There are two main restrictions of most relevance to solicitors: carrying out a regulated activity; making a financial promotion. Section 19 of the FSMA 2000 provides that: No person may carry on a regulated activity in the UK unless authorised or exempt (the General Prohibition ). Authorised persons are persons with permission granted by the appropriate regulator (the FCA) under the FSMA A further offence is that of making an unauthorised financial promotion under s 21. Breach of either of these provisions could result in the commission of a criminal offence and/or any agreement made as a result being unenforceable REGULATED ACTIVITY The four tests In order to determine if an activity is regulated there are four tests: (d) Are you in business? Is there a specified investment? Is there a specified investment activity? Is there an exclusion? The particular activities and investments are specified by the Treasury in RAO 2001 (as amended) under the FSMA 2000, s 22. More recently, new investments such as mortgages and general insurance contracts have been specified in the Financial Services and Markets Act 2000 (Regulated Activities) (Amendment) Orders 2003 (SI 2003/1475 and SI 2003/1476 respectively) Specified investments These include: company stocks and shares (but not shares in the share capital of open-ended investment companies or building societies incorporated in the UK); debentures, loan stock and bonds; government securities, such as gilts; (d) unit trusts and open-ended investment companies (OEICs), which are similar to unit trusts, but use the structure of a company rather than a trust; (e) insurance contracts; (f ) mortgages; (g) home reversion/home purchase plans. Investments that will not be relevant include: interests in land; certain National Savings products Specified activities These include (but are not limited to): (d) (e) dealing as agent; arranging; managing; safeguarding; advising;
5 Financial Services 173 (f ) lending money on/administering a regulated mortgage contract. There are also specified activities that are very particular in their scope, such as establishing, operating or winding up a collective investment scheme or personal pension scheme Dealing as agent This involves buying, selling, subscribing for or underwriting the investments where you deal on behalf of a client (ie, rather than on your own account) and commit that client to transactions. For example, selling shares on behalf of a client pursuant to a financial order made on divorce Arranging Solicitors will have many clients whose transactions involve investments (eg, endowment policies in conveyancing, unit trusts and shares in probate, etc). The solicitor will very often be involved as the contact between the client and the life company, or the client and the stockbroker. It is in this context that the solicitor may be arranging. Arrangements are excluded where the solicitor merely introduces clients to a person authorised by the FCA (an authorised third person ATP) and the introduction is made with a view to the provision of independent advice to the client. However, this exclusion does not apply where the transaction relates to an insurance contract. If you do something more than just introduce the client in respect of the investment (eg, you help the client to complete an application form), you will be arranging Managing Managing requires active participation beyond the mere holding of investments and applies only to discretionary management (ie, involving the exercise of discretion). This investment activity will be most common in firms that undertake probate and trust work, where the solicitor is acting as trustee or personal representative Safeguarding Advising This involves safeguarding and administering investments belonging to a client. This is also particularly relevant for firms which undertake probate and trust work. This involves giving advice to a person in his capacity as an investor on the merits of his buying, selling, subscribing for, or underwriting an investment. Advice must be about a specific investment; generic advice is outside the scope of the FSMA Thus you can, if you have the knowledge, advise a client to invest in shares rather than gilts, but if you advise the client to buy shares in a particular company, say Tesco, this will be a regulated activity. If you do not have the requisite knowledge to provide generic advice, or if the client requires advice on a specified investment, you could refer him to a person authorised by the FCA (an ATP) with a view to the ATP providing that advice. Thus if a client wants advice on what shares to buy, you could refer him to an authorised stockbroker. It will be the stockbroker who advises the client under the FSMA The referral to the ATP would not amount to a specified activity.
6 174 Legal Foundations Example EXAMPLE You have recently managed to secure a large settlement in respect of your client s recent litigation matter. The client tells you that he wishes to invest this money in buying shares in a local company, and asks you which company he should invest in. Referring to the four-stage test described at , the client is seeking your advice in your capacity as a solicitor, so you are in business. Shares are a specified investment, and you have been asked to advise on the purchase of these shares advising is a specified investment activity. Therefore if you are to give this advice you need to take advantage of an exclusion or exemption (see below). If you provide this advice without relying on an exclusion or exemption, you will breach the general prohibition under s 19 of the FSMA 2000, which is a criminal offence Exclusions There are various exclusions set out in the RAO If an exclusion applies to a particular activity you are carrying out, you do not need to be authorised for that particular transaction. Those exclusions likely to be relevant to solicitors include: introducing (see ); using an ATP; acting for an execution-only client; (d) acting as trustee or personal representative; (e) the necessary exclusion; (f ) the takeover exclusion Authorised third persons the ATP exclusion If you do something more than merely introduce the client to an ATP (see ), you could be arranging or even dealing as the client s agent. However, these will be excluded under RAO 2001, arts 22 and 29 if the transaction is entered into with or through an ATP on the advice given to the client by the ATP. You cannot rely on this exclusion if you receive from any person other than the client any pecuniary reward (eg, commission) or other advantage, for which you do not account to your client, arising out of his entering into the transaction. This exclusion will not apply if the transaction relates to an insurance contract The execution-only client exclusion There is an exclusion similar to the ATP exclusion where the client, in his 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, if the client has sought such advice, the solicitor has declined to give it but has recommended that the client seek such advice from an authorised person). There is the same restriction in respect of commissions and contracts of insurance Trustees or personal representatives The exclusion applies to arranging, managing, safeguarding and advising fellow trustees and/ or beneficiaries. It also applies to lending money on, or administering a regulated mortgage contract. This exclusion has limitations. It is available to a solicitor acting as a trustee or PR, and not to a solicitor acting for a trustee or PR. However, the exclusion does apply if a member of the firm is a trustee or PR but the activity is actually carried out by other members of the firm. Note
7 Financial Services 175 that the exclusion does not apply if the solicitor is remunerated for what he does in addition to any remuneration he receives as trustee or personal representative, and for these purposes a person is not to be regarded as receiving additional remuneration merely because his remuneration is calculated by reference to time spent. For managing and safeguarding, the exclusion is also not available if the solicitor holds himself out as providing a service comprising managing or safeguarding. The Law Society s guidance provides that this exclusion will not apply to contracts of insurance Activities carried on in the course of a profession or non-investment business the necessary exclusion This applies to advising, arranging, safeguarding and dealing as agent. There is an exclusion if 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 course of that profession or business. However, the exclusion does not apply if the activity is remunerated separately from the other services. Examples of where this exclusion may apply include: in matrimonial work, arranging the sale or transfer of a joint endowment insurance; or in probate work, arranging for the sale of all the assets to pay IHT Activities carried on in connection with the sale of a body corporate the takeover exclusion This exclusion applies to arranging, advising and dealing as agent. It will apply to a transaction to acquire or dispose of shares in a body corporate (other than an OEIC), or for a transaction entered into for the purposes of such an acquisition or disposal, if: the shares consist of or include 50% or more of the voting shares in the body corporate; and the acquisition or disposal is between parties each of whom is a body corporate, a partnership, a single individual or a group of connected individuals. It is possible to add the number of shares being acquired by a person to those already held by him in order to determine whether the 50% limit has been achieved. Even if the above criteria are not met, eg the number of shares acquired is less than 50%, but the object of the transaction may nevertheless reasonably be regarded as being the acquisition of day-to-day control of the affairs of the body corporate, the exclusion still applies. This is an extremely valuable exclusion for the corporate department where a client is seeking to take over, or sell its interest in, a company, whether public or private. This exclusion does not apply to advising on, arranging, or dealing as an agent in respect of buying or selling contracts of insurance Summary table The table below summarises the specified activities to which the exclusions apply. Specified activity Dealing as agent Applicable exclusions ATP Execution-only Necessary Takeover
8 176 Legal Foundations Specified activity Arranging Advising Managing Safeguarding Applicable exclusions Introducing ATP Execution-only Necessary Acting as trustee/pr Takeover Necessary Acting as trustee/pr Takeover Acting as trustee/pr Necessary Acting as trustee/pr Example EXAMPLE You are approached by Mrs Patel, who owns 100% of the share capital in X Co Ltd. Mrs Patel wishes to sell 75% of these shares to her son. Referring to the four tests described at , the client is seeking your advice and assistance in your capacity as a solicitor, so you are in business. Shares are a specified investment, and in dealing with the matter you will be carrying out specified investment activities (eg advising and arranging). Therefore you need to rely on an exclusion or exemption to avoid breaching s 19 of the FSMA 2000 and committing a criminal offence. Here you are transferring more than 50% of X Co Ltd, and so can rely on the takeover exclusion described above. Therefore you may complete this work without breaching the general prohibition EXEMPTION FOR PROFESSIONAL FIRMS Introduction Under s 326 of the FSMA 2000, the Treasury can designate a professional body (a DPB), and has so designated The Law Society (this role will now be undertaken by the SRA). Under s 327, the general prohibition in s 19 of the FSMA 2000 will not apply to a regulated activity carried on by a firm of solicitors if the following conditions are met: (d) (e) 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; 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, ie services regulated by the SRA. the firm must carry out only regulated activities permitted by the DPB, ie the SRA. 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; the firm must not carry on any other regulated activities. Each of these criteria is discussed further below.
9 Financial Services The firm must not receive from a person other than its client any pecuniary or other advantage If the firm wishes to take advantage of the exemption under s 327 then it must account for any such pecuniary advantage to its client Incidental There are two incidental tests: a specific test and a general test. The specific test relates to the particular client concerned. Under the Scope Rules 2001, the relevant regulated activity must arise out of, or be complementary to, the provision of a particular professional service to a particular client. The firm could not, therefore, carry out a regulated activity in isolation for a client; the relevant regulated activity must arise out of or be complementary to some other service being provided by it. This other service must not be a regulated activity but must be a professional, ie legal, service (eg, in corporate work, giving legal advice, drafting documents or dealing with a regulatory matter; or in probate work, winding up the estate or giving tax advice). It follows that the professional service being provided to the client should be the primary service, and the regulated activity should be incidental or subordinate to the provision of the professional service. Note also that both the professional service and the regulated activity must be supplied to the same person. Thus, in a probate matter, where the probate client is the executor, advice to a beneficiary under the will would not satisfy this test. To satisfy the general test of being incidental, the activities carried out by the firm which would otherwise be regulated cannot be a major part of the firm s activities. For example, a firm will be ineligible if its income from investment business is half or more of its total income. Further factors are: the scale of regulated activity in proportion to other professional services provided; whether and to what extent the exempt regulated activities are held out as separate services; and the impression given of how the firm provides those activities, for example through advertising its services The firm must carry out only regulated activities permitted by the DPB The role of setting out rules concerning the exemption for professional firms, once occupied by The Law Society, now falls to the SRA. Accordingly, the SRA has published the SRA Financial Services (Scope) Rules 2001 (see below) and the SRA Conduct of Business (COB) Rules 2001 for this purpose (see 17.8). Firms must comply with the requirements prescribed by these rules at all times when seeking to use this exemption. For example, under the SRA Financial Services (Scope) Rules 2001: a solicitor may not recommend, or arrange, for a client to buy or subscribe for a packaged retail investment product (ie, financial products which the Government perceives as ones in respect of which ordinary investors require the most protection, such as certain life policies, unit trusts, and shares in open-ended investment companies). However, a solicitor may advise the client to dispose of a packaged retail investment product, or give negative advice (ie, advise the client not to purchase a packaged retail investment product). There are also restrictions, for example, on advising an individual to acquire certain specified investments (eg, to buy quoted shares), recommend that a client enter into regulated mortgage contracts, or recommend/make arrangements for the client to buy/dispose of rights or interests in a personal pension scheme; discretionary management is allowed only in prescribed circumstances, for example where the firm, partner or employee is a trustee/pr and an ATP is used when buying an
10 178 Legal Foundations investment. This means that if a solicitor is the trustee of a trust and wishes to acquire some shares, the solicitor will need to be advised by an ATP; if a firm wishes to undertake insurance mediation (see 17.9), it must appoint a compliance officer and be registered on the FCA Register. For more detail on the above, please consult the Scope Rules 2001, which may be found on the SRA s website at <www.sra.org.uk> and in the SRA Handbook The activities must not be prohibited by Treasury order or the FCA The Treasury has set out, in the FSMA 2000 (Professions) (Non-Exempt Activities) Order 2001, a list of activities that cannot be provided by professional firms under the s 327 exemption. The activities that are most relevant to solicitors are incorporated into the SRA Financial Services (Scope) Rules The FCA also has power, under s 328, to issue directions (in writing) limiting the application of the exemption in respect of different classes of persons or different descriptions of regulated activities The firm must not carry on any other regulated activities. The exemption for professional firms under s 327 cannot be used by firms which are authorised by the FCA. For example, a firm could be authorised by the FCA concerning defined regulated activities. Such a firm could not use s 327 for any other non-mainstream regulated activities THE SRA FINANCIAL SERVICES (CONDUCT OF BUSINESS) RULES When do the Rules apply? The SRA Financial Services (Conduct of Business) Rules 2001 (COB Rules 2001) apply only when the firm is carrying out an exempt regulated activity; they do not apply if the firm is not carrying out a regulated activity at all Status disclosure (COB Rules 2001, r 3) A firm must provide clients with certain information concerning the status of the firm. For example, the firm must confirm to the client that it is not authorised by the FCA, and explain that complaints and redress mechanisms are provided through the SRA and the Legal Ombudsman. Any information that is provided under r 3 must be given in a manner that is clear, fair and not misleading Best execution (COB Rules 2001, r 4) A solicitor must act in the best interests of his clients (Principle 4 of the Code of Conduct). Therefore, the firm must carry out transactions for clients as soon as possible and on the best terms available Transactions (COB Rules 2001, r 5) The firm must keep records of: instructions from clients to carry out transactions; and instructions to third parties to carry them out Commissions (COB Rules 2001, r 6) Under the COB Rules 2001, r 6, the firm must keep records of commissions received in respect of regulated activities and how those commissions were dealt with.
11 Financial Services Execution-only clients (COB Rules 2001, r 8) Where a firm acts for an execution-only client (see ) and the investment concerned is a packaged retail investment product, it must send a letter to the client confirming that he or she is not relying on the advice of the solicitor, and the firm must keep a copy of this letter. This rule would apply, for example, when the packaged retail investment product is a contract of insurance. Here the execution only exclusion would not apply, and therefore the solicitor would have to rely on the exemption for professional firms (see 17.7) (and thus comply with the COB Rules) INSURANCE MEDIATION The Government decided to extend regulation to all general insurance selling and administration in order to comply with the Insurance Mediation Directive (2002/92/EC) approved by the European Parliament on 30 September A firm will be carrying out insurance mediation where it carries out (or agrees to carry out) the following activities in relation to contracts of insurance: (d) advising; arranging; acting as agent; assisting in the administration and performance of such contracts, in particular in the event of a claim. Contracts of insurance are defined widely, and include life policies, buildings insurance, after-the-event legal insurance, and pension policies. Thus, whatever the type of insurance policy involved, if a solicitor assists a client to obtain one, even if all he does is to introduce the client to an insurance broker, the solicitor will be carrying out a specified activity. Similarly, if a solicitor is involved in an insurance claim against an insurance company, this will also be caught. All of these activities involve insurance mediation. Given that the main exclusions will almost certainly not apply to insurance mediation, the firm will have to rely on the exemption for professional firms under s 327 (see 17.7), seek authorisation from the FCA, or rely on the limited exceptions available for insurance mediation activities (which are beyond the scope of this book). EXAMPLE You are acting for Mr George on purchasing a commercial property. Your client needs to obtain defective title insurance. You offer to arrange this for your client. Using the four tests described at , you are providing this service to your client and so are in business. Contracts of insurance are a specified investment and arranging is a specified investment activity. Therefore you need to rely on an exclusion or exemption to avoid breaching s 19 of the FSMA 2000 and committing a criminal offence. However, none of the exclusions applies to contracts of insurance. Therefore, in order to arrange the insurance, you must use the professional firms exemption under s 327. Here, arranging the insurance is incidental to your dealing with the property transaction. If your firm can comply with the other conditions outlined above (eg the COB and Scope Rules) then you will be able to arrange the defective title insurance without breaching the general prohibition.
12 180 Legal Foundations FINANCIAL PROMOTIONS Financial Services and Markets Act 2000, s 21 As a result of the FSMA 2000, s 21, a solicitor who is not authorised by the FCA will be unable to make a financial promotion (ie, communicate an invitation or inducement to engage in investment activity ) unless its contents are approved by an authorised person. The structure of the definitions is similar to that for regulated activities, with the Treasury having power by order to specify which investments and activities are controlled. Broadly, the definitions are much the same, although not quite identical. The result is that you can use almost the same tests as for regulated activities, namely: (d) Are you in business? Are you making an invitation or inducement? In connection with an investment? In connection with an investment activity? Notice, however, that the exclusion test is not applicable. Thus, although you may be carrying out an activity which is not regulated, it may be controlled and subject to the restrictions on financial promotions. The result is that almost anything you may say or write in connection with many transactions could be construed as a financial promotion. Thus if a solicitor advises PRs to sell the deceased s assets, this could be an invitation to deal in investments if, for example, the estate included shares or gilts. All communications are caught, both real-time and non-real-time. A real-time communication is any communication made in the course of a personal visit, telephone conversation or other interactive dialogue. A non-real-time communication is any other communication, eg, letters s, or brochures. Therefore communications to the other side (eg, letters) and communications to advisers (eg, a fax to a broker) are included just as much as communications to clients. 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: was initiated by the recipient (eg, the client) of the communication; or takes place in response to an express request from the recipient of the communication (see FPO 2005, art 8) Exemptions There are then some exemptions set out in the FPO Many of these are in terms similar to the exclusions for regulated activities. These include: trustees, PRs (FPO 2005, arts 53/54); takeover of body corporate (FPO 2005, art 62) Exemption for exempt professional firms There are two exemptions designed specifically for firms claiming the special exemption under the FSMA 2000 for exempt regulated activities (see 17.7). These deal with real-time and non-real-time promotions Real-time promotions (FPO 2005, art 55) A solicitor who carries on exempt regulated activities may make a real-time promotion, for example during a meeting or a telephone conversation: if made to a client who has, prior to the communication being made, engaged the solicitor to provide professional services; and
13 Financial Services 181 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 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. The effect is that if the activity is excluded from being a regulated activity by an exclusion other than the necessary exclusion, art 55 does not apply Non-real time promotions (FPO 2005, art 55A) This applies to letters, s, brochures, websites, etc, where the solicitor carries on exempt regulated activities, provided the promotion contains certain specific statements One-off promotions (FPO 2005, arts 28/28A) One-off, non-real-time communications and solicited real-time communications are exempt under the FPO 2005, art 28 if certain conditions are satisfied. Basically the communication must be one that is personal to the client. One-off, unsolicited real-time communications are exempt under art 28A, provided the solicitor believes on reasonable grounds: that the client understands the risks associated with engaging in the investment activity to which the financial promotion relates; and that, at the time of the communication, the client would expect to be contacted by the solicitor in relation to that investment activity Introducers (FPO 2005, art 15) You may make any real-time communication in order to introduce a client to an ATP, provided: you are not connected to (eg, a close relative of ) the ATP; you do not receive other than from the client any pecuniary reward or other advantage arising out of making the introduction; and the client is not seeking and has not sought advice from you as to the merits of his engaging in investment activity (or, if the client has sought such advice, you have declined to give it, but have recommended that the client seeks such advice from an authorised person) EXAMPLES EXAMPLE 1 Question You are approached Mr McParlane and Mr Ferguson. Between them and Mr Smith they own 100% of the share capital in Y Co Ltd, the company they founded. Mr McParlane owns 40% of the share capital, Mr Ferguson owns 40% and Mr Smith owns the remaining 20%. The shares carry equal voting rights. They inform you that Mr McParlane wishes to retire from the business, and Mr Ferguson wishes to buy out his interest in the company. They want you to act for both of them in negotiating and arranging this transfer. You decline to act for both of them due to the conflict of interest between them (see Chapter 13), but agree to act for Mr McParlane in the sale of his shares to Mr Ferguson. Your firm is not authorised by the FCA. Can you act for Mr McParlane without breaching s 19 of FSMA 2000?
14 182 Legal Foundations Answer You are advising Mr McParlane as a solicitor, so you are in business. Shares are a specified investment, and in dealing with the sale you would be taking part in a specified investment activity (arranging or advising). Therefore you need to take advantage of an exclusion or exemption. Can you use the takeover exclusion? This applies to a transaction to acquire or dispose of shares in a body corporate. Although the transfer of shares does not include 50% or more of the voting shares in the company, the transfer will give Mr Ferguson more than 50% of the voting shares; therefore the exclusion will apply. You can act for Mr McParlane without breaching the general prohibition and committing a criminal offence. EXAMPLE 2 Question Answer Review the example given at Would it have made any difference if the client was dealing with the property purchase himself, and just came to you to arrange the defective title insurance? Yes. You are still in business, and carrying out a specified investment activity (arranging) in relation to a specified investment (a contract of insurance). None of the exclusions apply to contracts of insurance. However, here the professional firms exemption is not available as the work you have been instructed to do is not incidental to your provision of legal work. SUMMARY Regulated activity In order to determine if an activity is regulated there are four tests: (1) Are you in business? (2) Is there a specified investment? (3) Is there a specified investment activity? (4) Is there an exclusion? Specified investments (1) These include: shares (but not shares in the share capital of an open-ended investment company or building society incorporated in the UK); debentures; gilts; (d) unit trusts and OEICs; (e) contract of insurance; (f ) mortgages. (2) Investments that will not be relevant include: interests in land; National Savings products. Specified activities These include: (1) dealing as agent; (2) arranging; (3) managing;
15 Financial Services 183 (4) safeguarding; (5) advising. Exclusions These include: (1) introducing; (2) ATP; (3) execution-only; (4) trustee/pr; (5) necessary; (6) takeover. Exempt regulated activities (1) A firm not authorised by the FCA should pay attention to: FSMA 2000; RAO 2001; any rules made by the FCA; (d) SRA Scope Rules (2) Conditions set out in the FSMA 2000, the RAO 2001 and the Scope Rules 2001 overlap. (3) The main conditions for claiming this exemption are: the activity must arise out of, or be complementary to, the provision of a particular professional service to a particular client; the manner of provision by the firm of any service in the course of carrying out the activities is incidental to the provision by the firm of professional services; the firm must account to the client for any reward or other advantage which the firm receives from a third party; (d) the Scope Rules do not prohibit the firm using the exemption. (4) Packaged retail investment products. Generally, you are not allowed to recommend or arrange for a client to buy or subscribe for a packaged retail investment product, for example: certain life policies; unit trusts; OEICs. (5) There are also restrictions on advising an individual to acquire certain specified investments (eg, shares in publicly quoted companies). Conduct of Business Rules (1) The SRA COB Rules 2001 apply only when the firm is carrying out an exempt regulated activity; they do not apply if the firm is not carrying out a regulated activity at all. (2) The SRA COB Rules 2001 cover: best execution; records of transactions; records of commissions; (d) letters to execution-only clients. Financial promotions (1) There are four questions: Are you in business?
16 184 Legal Foundations Do you make an invitation or inducement? Is there a specified investment? (d) Is there a specified investment activity? (2) There are two special exemptions for professional firms: real-time promotions; non-real-time promotions. (3) Other exemptions include: one-off promotions; introducers; trustees, PRs; (d) takeover of body corporate.