Guidance on investment business regulation for Funding Advisers for Small and Medium Enterprises (SMEs)

Transcription

1 Guidance on investment business regulation for Funding Advisers for Small and Medium Enterprises (SMEs) The SME Funding Adviser Scheme highlights a number of specialisms that firms may be offering to their clients. This guidance provides advice on whether such activities may be regulated investment business under the terms of the Financial Services and Markets Act 2000 (the Act). Firms may only conduct regulated investment business if they are subject to regulation by the Financial Services Authority (FSA), a Designated Professional Body (DPB), such as the Institute, or are appointed representatives of other FSA authorised firms. The guidance will assist firms in deciding if they have the appropriate type of authorisation or licence for the activities to be conducted. Only certain types of regulated work can be undertaken under a DPB licence. A very important point is that any regulated activity undertaken by a DPB licensed firm cannot be the only service provided to the client. It must be complementary to or arising out of other professional services provided to that client. Firms which hold a DPB licence are required to follow the DPB Handbook. Firms which are FSA authorised must ensure that they are in the correct category of authorisation for the business they conduct. The guidance is given under each of the specialisms identified in the SME Funding Adviser Scheme literature, form A2. If, having considered the information, a firm requires a DPB licence to conduct certain activities; the application form and a copy of the DPB handbook are available at Firms which require FSA authorisation should initially consider the information available on the FSA s website, Details of the Legislative Background are in Appendix A. Appendix B identifies the investments and activities which are subject to the legislation. There are a number of exclusions within the legislation which firms may use to conduct an activity without a DPB licence or FSA authorisation. There are also some activities which may appear to be investment business but are not covered by the legislation at all. The key exclusions are outlined in Appendix C.

2 Specialisms in the SME Funding Adviser Scheme For each of the specialisms, an introductory paragraph indicates aspects of regulation that may need to be considered. Where detailed guidance may be helpful, a table identifies some of the activities which may fall within that specialism and the degree of regulated status needed by a firm, if any, to conduct this type of activity. The table starts with unregulated activities that any firm can undertake, then adds activities that a DPB licensed firm can do and finishes with the activities that only an FSA authorised firm can undertake. o Asset Finance Asset finance is unlikely to involve a regulated activity. o Bank Loans and Overdraft including Small Firms Loan Guarantee Generally bank loans and overdrafts are not regulated under the Act, although the Consumer Credit Act may need to be considered. The only loan which falls under the regulation of investment business is a regulated mortgage contract. A mortgage contract is a regulated mortgage contract if, at the time it is entered into all three of the following criteria are met: the contract is one under which a person ("the lender") provides credit to an individual or to trustees ("the borrower"); the contract provides for the obligation of the borrower to repay to be secured by a first legal mortgage on land (other than timeshare accommodation) in the United Kingdom; and at least 40% of that land is used, or is intended to be used, as or in connection with a dwelling by the borrower or (in the case of credit provided to trustees) by an individual who is a beneficiary of the trust or by a person related to the borrower or beneficiary. The definition does not state what the borrowed money is used for. Usually it would be used to purchase a house, but the money could be used by an individual to invest in a business. Regardless of the use to which the money is put, if the loan meets the above criteria, it is a regulated mortgage. Firms which are involved in discussing finance should be aware that a lender may at some point suggest a regulated mortgage contract as being a suitable arrangement rather than, for example, a loan to a company directly. If the loan is to the company, but secured on a director s home, this would not be a regulated mortgage contract as it does not meet the first criteria as the loan is not to an individual.

3 Bank Loans and Overdraft including Small Firms Loan Guarantee (continued) Activities that any firm can do 1. Discussing with a client: the need for a mortgage, loan or overdraft, the merits of a particular overdraft or loan, provided the loan is not a regulated mortgage contract, the type of mortgage to obtain (endowment, repayment etc), which particular lender (which provides a range of mortgages) to go to. 2. Contacting a mortgage broker, who provides independent advice, to introduce a client for mortgage business. 3. Contacting a lender to introduce a client. (Note, the firm should ensure that in doing so, it does not implicitly recommend a specific regulated mortgage contract because, for example, the lender only has one mortgage product. The firm must not handle money relating to the mortgage. The firm should also consider if it would be complying with the Institute s ethical guidance by potentially limiting the client s choice if it makes such an introduction.) 4. Producing a cash flow forecast for a client to support a loan or mortgage application. 5. Providing a reference for a client to support a loan or mortgage application. (Firms should consider the Institute s helpsheet References on Clients Financial Status when providing references.) 6. Advising a client to redeem a loan or any type of mortgage contract. 7. Explaining the terms of a loan or any type of mortgage contract to a client. 8. Assisting the client to complete a loan or any type of mortgage contract application form. 9. Advising a client to take out a particular overdraft, loan or mortgage, which is not a regulated mortgage contract. 10. Acting as an intermediary between the client and the lender to put in place an overdraft, loan or regulated mortgage contract, but where no advice is given to the client if it is a regulated mortgage contract. Additional activities that a DPB licensed firm can do 11. Commenting on, agreeing or disagreeing with advice given by an FSA authorised person. Additional activities that an FSA authorised firm can do 12. Recommending a client to take out a specific regulated mortgage contract. o Business plans for bank and equity finance Providing plans and forecasts is not a regulated activity. The adviser will be providing a professional accountancy service in drawing up such plans. Where a client is issuing business plans which are in effect an invitation to invest in a company, this could be a financial promotion. This guidance does not cover financial promotions and firm may wish to consider the guidance available on the website at

4 o Business start-up (e g friends and family) There can be many elements to business start up advice, most of which are not regulated. However, where advice is given to an individual to invest in a company, this is a regulated activity. 1. Advising on the establishment of a new company. Activities that any firm can do 2. Arranging for the issue of new shares. 3. Providing company secretarial services. 4. Providing administrative services on the issue of shares by the company, but not advising any individual shareholders. 5. Arranging for the transfer of shares for no financial consideration, such as between family members. Additional activities that a DPB licensed firm can do 6. Advising an individual to buy (or sell) shares in a company where the shares are not traded on a public market, nor is there any intention to trade them on a public market. 7. Arranging for the sale or purchase of shares. Additional activities that an FSA authorised firm can do None o Corporate finance A range of activities may come under the auspices of corporate finance. Raising finance and restructuring may be involved and the guidance given under bank loans and overdrafts may be pertinent if loans or mortgages are considered rather than issuing share capital. Firms may also be asked to advise generally on the issue of shares and advising the issuer is not a regulated activity. Advising on the purchase of shares is a regulated activity. Corporate finance will often involve acquisitions or management buyouts, which will be structured to secure control of the target company concerned. In many of these situations, the sale of a body corporate exclusion can be used (where the objective of the transaction is to secure control) and the activity will not then be regulated. Another key aspect to consider is that advice to purchase shares (which are traded, or where there is an intention that they will be traded, on a public market) can only be given by a firm which is FSA authorised. Activities that any firm can do 1. Arranging for the issue of shares 2. Company secretarial services 3. Advising company A on a cash take-over bid which company A is making for company B. 4. Arranging a takeover by company A of company B.

5 5. Advising the shareholders in company A as to whether to accept an offer for their shares in a takeover situation.* 6. Advising on the issue of shares by a company. This may include a rights issue, restructuring or the establishment of a new company. 7. Providing administration services on the issue of shares by a company (but not arranging for the sale by bringing the company and the purchasers together). 8. Advising a company on becoming a public company (but not advising any individual shareholders). 9. Advising a company to do a share buy back. 10. Advising the purchasing team in a management buy-out.* 11. Arranging the purchase of shares in a buy out on behalf of the management buy-out team.* 12. Advising the shareholders of the target company* 13. Arranging the sale of the shares on behalf of the vendor* Additional activities that a DPB licensed firm can do 14. Arranging for a person to subscribe for shares (but not giving advice in respect of shares which are traded on a public market, or where there is an intention to trade them on a public market). 15. Advising shareholders to buy or sell shares which are not traded on a public market, nor is there an intention to trade them on a public market. 16. Advising shareholders as to whether to take up an offer in a rights issue where the shares are not traded on a public market, nor is there an intention to trade them on a public market. 17. Advising shareholders to sell shares, whether or not traded on a public market. Additional activities than an FSA authorised firm can do 18. Recommending the purchase of a specific publicly tradable share. 19. Advising a shareholder to take up an offer in a rights issue from a publicly quoted company. * the example given here relates to a take-over situations where the purchaser is intending to acquire day to day control of the company through the purchase of shares. The specific provisions of the exclusions used are complex and reference should be made to Schedule 5 to Part 3 of the DPB Handbook for more information ( The examples in this section do not necessarily apply where there is a purchase of a minority interest. This can be undertaken by a DPB licensed firm, o Invoice Discounting & Factoring It is extremely unlikely that any activity relating to invoice discounting and factoring will be regulated.

6 o Grants Advising and assisting a client in an application for a grant is not a regulated activity. o Leasing and Hire Purchase Advising and assisting a client in setting up leasing and hire purchase arrangements is not a regulated activity. o Share valuations Providing a valuation is not a regulated activity, although going on to suggest whether it would be advisable to sell or invest based on that valuation, would be regulated. o Small Scale Equity Issues (e. g. Business Angels) Advice on obtaining equity finance without making a public offering may involve regulated activities. Although the issue of shares by a company is not regulated, advice to shareholders to sell shares and arranging for the sale of shares is regulated. Advice to the business angel to purchase shares is also a regulated activity. Advertising for investment in companies is regulated under the Financial Promotions Order, which is not dealt with in this guidance. However, specific guidance is provided on the exemptions available under this Order for advertising to high net worth individuals and companies on the website, Activities that any firm can do 1. Advising the company on the options available to raise finance, including discussion on the possibilities of business angels and venture capitalists investing. 2. Advising on and arranging for the issue of shares. Additional activities that a DPB licensed firm can do 3. Advising a shareholder on the sale of shares. 4. Advising on the purchase of shares which are not traded on a public market, nor is there an intention to trade them on a public market. Additional activities than an FSA authorised firm can do 5. Recommending the purchase of a specific publicly tradable share.

7 Legislative Background Appendix A There are a number of Statutory Instruments (SIs) which deal with what is regulated. There are two main SIs to consider: the Financial Services and Markets Act 2000 Regulated Activities Order - SI 2001/No544, which identifies the investments and activities which are regulated and includes various exemptions; and the Financial Services and Markets Act (Professions) (Non-Exempt Activities) Order - SI 2001/1227, which identifies specific activities which cannot be undertaken under a DPB licence. This guidance does not provide cross references to the legislation which has been heavily amended since it came into force. Nor are the examples provided exhaustive, so firms may wish to refer to the DPB Handbook (available on the Institute website, for further information. The legislation is available from

8 Regulated Investments and Regulated Activities Appendix B The activities are wide ranging, although in some instances, activities may be excluded from regulation by the detailed wording of the legislation. Regulated investments Deposits Rights under contracts of insurance (general insurance, life and pensions contracts) Shares Instruments creating or acknowledging indebtedness (e.g. debentures) Government and public securities Instruments giving entitlement to investments (e.g. warrants) Certificates representing certain securities Units in a collective investment scheme Rights under a stakeholder pension scheme Options Futures Contracts for differences Lloyds syndicate capacity and syndicate membership Funeral plan contracts Regulated mortgage contracts (In 2006, home reversion schemes and home purchase plans will become regulated) Rights to or interests in investments Regulated activities Effecting and carrying out contracts of insurance Dealing in investments as principal Dealing in investments as agent Arranging deals in investments (including some introductions) Arranging regulated mortgage contracts Managing investments Assisting in the administration and performance of a contract of insurance (e.g. claims handling for a client) Safeguarding and administering investments Sending dematerialised instructions Establishing (operating or winding up) a collective investment scheme Establishing (operating or winding up) a stakeholder pension scheme Advising on investments Advising on regulated mortgage contracts Advising on Lloyd's membership, managing Lloyd's syndicates underwriting capacity and arranging deals in contracts of insurance written at Lloyd s Entering as provider into a funeral plan contract Entering into a regulated mortgage contract as a lender Agreeing to carry on a specified activity

9 Key exclusions in the legislation Appendix C Generic advice The legislation does not regulate the provision of generic advice, where there is a general discussion with a client about different types of investments, but not a recommendation or discussion on the merits of a particular, identifiable investment. For example, a recommendation to invest in shares would be generic advice; a recommendation to invest in particular shares would be specific. Introduction for independent financial advice. Any firm can make an introduction to a suitably authorised firm for a client to obtain independent financial advice. This exclusion can be used where the introduction is made with a view to the client obtaining advice on any investment except any involving or potentially involving an insurance contract (which includes general insurance and life and pensions contracts). Arranging with an FSA authorised person An unauthorised/unlicensed firm can make arrangements for a client to buy or sell an investment through an FSA authorised firm provided: o they do not themselves give advice on the merits of the transaction, o the transaction is on the advice of an FSA authorised person, and o the client has not requested any advice or if they have, they been advised to seek advice from an FSA authorised person. This exclusion cannot be used in respect of insurance contracts (which includes general insurance and life and pensions contracts) and the firm must account to the client for any commission which arises out of the transaction. Professional firms exclusion A firm can arrange a deal in investments or give advice, provided: the service may reasonably be regarded as a necessary part of other professional services; the service is not remunerated for this work separately from the other services; and the business or profession does not otherwise consist of regulated activities. This exclusion cannot be used in respect of insurance contracts (which includes general insurance and life and pensions contracts). However, firms should be careful to ensure that they can justify the use of this exclusion and that the service may reasonably be regarded as a necessary part of other professional services.

10 Sale of a body corporate exclusion This is a fairly complex exclusion which applies to advising on and arranging transactions in respect of shares. However, it can be widely used, particularly in the acquisition of companies. Advice, arranging a deal or dealing as agent regarding the sale or purchase of a body corporate is not a regulated activity, but only if: the object of the transaction may be reasonably regarded as the acquisition of day to day control over the affairs of the body corporate; or the shares (together with ones already held) are 50% or more of the voting rights and the transaction is between two parties each of whom is a body corporate, a partnership, a single individual or a group of connected individuals. The first test relates to day to day control and can only be used where the firm is satisfied that it is acting for a person (which could be a group of disparate persons) who is seeking to acquire day to day control. Where a group of persons are acting together, it may be difficult to establish that they seek to possess a controlling interest (i.e. day to day control). A group of persons must be acting in concert to meet the test. The firm does not need to act for all of the potential shareholders, provided those it collectively represents are seeking to acquire control. The second test is more straight forward although the definition of a group of connected persons may need to be considered: A group of connected individuals means: a in relation to the vendor, a single group of persons each of whom is: i) a director or manager of the body corporate; ii) a close relative of any such director or manager; or iii) a person acting as trustee for any person falling within paragraphs i) or ii). b in relation to the acquirer, a single group of persons each of whom is: i) a person who is or is to be a director or manager of the body corporate; ii) a close relative of any such person; or a person acting as trustee for any person falling within paragraphs i) or ii). Further explanation on both tests is provided in the DPB Handbook at