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(^1) Q1 Part A)
- Is the firm of solicitors in business? a. Yes. By [DOING XYZ], we are providing a service to [CLIENT], therefore we are acting in the course of business. 2. Is there a specified investment? (Choose 2 relevant specified + 2 relevant unspecified) a. Specified investments are investments specified as such by the Regulated Activities Order (RAO), including: i. “Securities” 1. Shares 2. Shares in OEICs 3. Shares in Investment trusts 4. Bonds 5. Debentures 6. Gilts 7. Warrants (right to buy shares) 8. Units in unit trusts 9. Personal and stakeholder pensions 10. Stocks & shares ISA ii. “Relevant investments”
- ALL Insurance contracts
- Options for certain assets: a. Securities b. Foreign Currencies c. Precious metals d. Contractually based investments e. An option on an option of the above assets
- Futures
- Contracts for difference (i.e. equity derivates)
- Rights under a funeral plan scheme iii. “Contractually based investments”
- “Qualifying contracts of insurance” a. Whole life policies (not term life insurance) b. Endowment policies (often linked with “endowment mortgage”) c. Annuities
- Options (as above)
- Futures
- Contracts for difference (i.e. equity derivates)
- Rights under a funeral plan scheme iv. “Regulated mortgage contracts” (RMCs), i.e.:
- A loan;
- Secured by way of charge over land;
- Where at least 40% of that land is used as a dwelling by the borrower a. Typical homeowner mortgages are included, but buy-to-let mortgages, second mortgages, or mortgages to companies are generally not covered. v. Regulated home finance transactions
- Home reversion plans (equity release)
- Home purchase plans (Islamic finance) 1
- Sale & lease back plans vi. Consumer credit / hire agreements a. Unspecified investments i. Bank / building society accounts ii. Cash ISA iii. Land iv. Options over land v. National savings products (including premium bonds) vi. Commercial borrowing vii. Occupational pensions 3. Is there a specified activity? (Choose 3) a. Specified activities are those activities specified as such by the RAO. b. “The work undertaken by the firm in [REAL ESTATE] is likely to involve the following specified activities:” c. Investment-related Activities i. Arranging deals in investments (Art 25)
- This applies where a solicitor makes arrangements for another person to deal in a security and/or relevant investment.
- To deal means buying or selling for consideration.
- Arranging includes either: a. Bringing about deals (e.g. filling out stock transfer form); or b. Making arrangements with a view to deal (e.g. introducing the client to a stockbroker / financial advisor)
- APPLY ii. Advising on investments (Art. 53) 1. This applies where a solicitor advises a client on the merits of dealing in a particular investment, where investment means securities and/or relevant investments
- To deal means buying or selling for consideration.
- The advice must be specific; generic advice will not be caught.
- APPLY iii. Managing investments (Art. 37)
- This applies where a solicitor manages assets where: a. The assets are securities or contractually based investments ; b. The assets belong to someone else; AND c. Sole discretion is exercised by the firm, not the client (i.e. where the solicitor is a trustee of a discretionary trust / personal representative (executor or administrator of a will))
- APPLY iv. Safeguarding AND administering investments (Art. 40)
- This applies where a solicitor safeguards AND administers assets which: a. Are securities or contractually based investments; and b. belong to someone else
- Safeguarding means controlling the assets (i.e. possessing physical custody of the asset, e.g. obtaining share certificates)
- Administering means doing something else such as collecting income / dividends or proxy voting
f. Home Finance-related Activities i. Similar activities to the RMC activities for:
- Home reversion plans (equity release)
- Home purchase plans (Islamic finance)
- Sale & lease back plans g. Consumer Credit-related Activities, including: i. Credit broking activities ii. Debt related activities
- E.g. debt counselling – helping a client in debt work out next steps
- E.g. debt adjusting – Making arrangements for the repayment or satisfaction of debts in an amount or manner that differs from the original debt structure (e.g. consolidation)
- E.g. debt collecting
- E.g. debt administration 4. Is the activity ‘excluded’? (Choose 3) – if YES FSMA does not apply! a. The RAO sets out exclusions to each activity ACTIVITY RELEVANT EXCLUSIONS INVESTMENT ACTIVITY EXCLUSIONS Art. 14: Dealing as Principal Art. 15: Absence of holding out o Excludes the activity of dealing as principal in securities and assignment of qualifying contracts of insurance, provided the solicitor: Has not held themselves out as providing a service of dealing in securities and contractually based investments (i.e. a stockbroker); and Is not a bare trustee. Art. 16: Dealing in contractually-based investments o Excludes the activity of dealing as principal in contractually based investments, provided an authorised provider is used (e.g. stockbroker, financial advisor, banks etc) Art. 66(1): Acting as a trustee, nominee or personal representative o Excludes the activity of dealing as principal providing: The solicitor is a trustee or PR (including bare trustee); and The solicitor has not held themselves out as providing a service of dealing in securities and contractually based investments. o Does NOT apply to insurance unless the solicitor receives NO REMUNERATION for the work. Art. 70(1): Regulated activities undertaken in connection with the sale of a body corporate. o Excludes the activity of dealing as principal, provided: The work relates to a share deal; and The transaction meets either the hard-edged test or the objective test. Hard-edged test: o The shares involved consist of 50% or more of the voting shares (including any shares already held by the buyer). Group together any connected people (i.e. spouse/blood/step relations of a director/manager).
The client is an execution-only client. AND The solicitor accounts to the client for any pecuniary reward. o This exclusion does NOT apply if the specified investment is a contract of insurance. Art. 33: Introducing o The activity of “arranging” is excluded if the client is introduced to: An authorised or exempt person … … for the provision of independent advice. o This exclusion is only suitable if the solicitor does not intend to complete any further work for the client. o Consequently, the solicitor may keep any pecuniary reward, provided this is disclosed to the client. o This exclusion does NOT apply if the specified investment is a contract of insurance. Art. 66(1): Acting as a trustee, nominee or personal representative o Excludes the activity of arranging, providing: The solicitor is a trustee or PR (including bare trustee); and The arrangements are for themselves, other trustees or beneficiaries; and The solicitor does not receive any additional remuneration for the arrangement (i.e. only paid at trustee rate for any work done) o Does NOT apply to insurance unless the solicitor receives NO REMUNERATION for the work. Art. 67(1): Professional / Necessary Exclusion o An exclusion is provided where the regulated activity (i.e. financial work) can be reasonably regarded as a necessary part of other services carried on in the course of a profession (i.e. our legal work). o ‘Necessary part’ means that it must not be possible for the solicitor to carry out their everyday duties without carrying out the regulated activity as well. However, the activity must be a minor part of the legal services as a whole E.g. dealing in shares when purchasing a flat as you’d have to buy shares in the management company o This exclusion is subject to the condition that there is no separate remuneration received by the solicitor to carry on the regulated activity i.e. must be billed as part of one matter. o This exclusion does NOT apply to insurance unless the solicitor receives NO remuneration for the work. Art. 70(1): Regulated activities undertaken in connection with the sale of a body corporate. o Excludes the activity of dealing as principal, provided: The work relates to a share deal; and The transaction meets either the hard-edged test or the objective test. Hard-edged test: o The shares involved consist of 50% or more of the voting shares (including any shares already held by the buyer). Group together any connected people (i.e. spouse/blood/step relations of a
director/manager). o The buyer and seller must each be: individuals; a group of connected persons; a partnership; or a company. Objective test: o The object of the transaction may reasonably be regarded as to pass the day-to-day control of the body corporate Art. 37: Managing Investments Art. 38: Attorneys o The solicitor is exempt from the activity of “managing” if: They are acting under a power of attorney; and All day-to-day decisions relating to the investment are taken by an authorised individual / exempt person. Art. 66(1): Acting as a trustee, nominee or personal representative o Excludes the activity of “managing”, providing: The solicitor is a trustee or PR (including bare trustee); and The solicitor does not hold themselves out as somebody who manages investments; and The solicitor does not receive any additional remuneration for the management (i.e. only paid at their trustee rate for work done) o Does NOT apply to insurance unless the solicitor receives NO REMUNERATION for the work. Art. 40: Safeguarding AND administering Art. 66(1): Acting as a trustee, nominee or personal representative o Excludes the activity of “safeguarding and administering”, providing: The solicitor is a trustee or PR (including bare trustee); and The solicitor does not hold themselves out as somebody who safeguards and administers investments; and The solicitor does not receive any additional remuneration for the management (i.e. only paid at their trustee rate for work done) o Does NOT apply to insurance unless the solicitor receives NO REMUNERATION for the work. Art. 67(1): Professional / Necessary Exclusion o An exclusion is provided where the regulated activity (i.e. financial work) can be reasonably regarded as a necessary part of other services carried on in the course of a profession (i.e. our legal work). o ‘Necessary part’ means that it must not be possible for the solicitor to carry out their everyday duties without carrying out the regulated activity as well. However, the activity must be a minor part of the legal services as a whole E.g. dealing in shares when purchasing a flat as you’d have to buy shares in the management company o This exclusion is subject to the condition that there is no separate remuneration received by the solicitor to carry on the regulated activity i.e. must be billed as part of one matter.
o This exclusion does NOT apply to insurance unless the solicitor receives NO remuneration for the work. Art. 53: Advising on the Merits Art. 66(1): Acting as a trustee, nominee or personal representative o Excludes the activity of “advising”, providing: The solicitor is a trustee or PR (including bare trustee); and The advice is for themselves, other trustees or beneficiaries; and The solicitor does not receive any additional remuneration for the arrangement (i.e. only paid at trustee rate for any work done) o Does NOT apply to insurance unless the solicitor receives NO REMUNERATION for the work. Art. 67(1): Professional / Necessary Exclusion o An exclusion is provided where the regulated activity (i.e. financial work) can be reasonably regarded as a necessary part of other services carried on in the course of a profession (i.e. our legal work). o ‘Necessary part’ means that it must not be possible for the solicitor to carry out their everyday duties without carrying out the regulated activity as well. However, the activity must be a minor part of the legal services as a whole E.g. dealing in shares when purchasing a flat as you’d have to buy shares in the management company o This exclusion is subject to the condition that there is no separate remuneration received by the solicitor to carry on the regulated activity i.e. must be billed as part of one matter. o This exclusion does NOT apply to insurance unless the solicitor receives NO remuneration for the work. Art. 70(1): Regulated activities undertaken in connection with the sale of a body corporate. o Excludes the activity of dealing as principal, provided: The work relates to a share deal; and The transaction meets either the hard-edged test or the objective test. Hard-edged test: o The shares involved consist of 50% or more of the voting shares (including any shares already held by the buyer). Group together any connected people (i.e. spouse/blood/step relations of a director/manager). o The buyer and seller must each be: individuals; a group of connected persons; a partnership; or a company. Objective test: o The object of the transaction may reasonably be regarded as to pass the day-to-day control of the body corporate INSURANCE DISTRIBUTION EXCLUSIONS Insurance Distributions Exclusions for insurance distributions either do not apply, or will not apply unless the solicitor receives NO remuneration for the work (and thus making the exclusion highly impractical for the solicitor). MORTGAGE ACTIVITY EXCLUSIONS Arranging an Art. 29: Arranging deals with or through an authorised person
o The buyer and seller must each be: individuals; a group of connected persons; a partnership; or a company. Objective test: o The object of the transaction may reasonably be regarded as to pass the day-to-day control of the body corporate Advising on an RMC Art. 66(1): Acting as a trustee, nominee or personal representative o Excludes the activity of “advising”, providing: The solicitor is a trustee or PR (including bare trustee); and The advice is for themselves, other trustees or beneficiaries; and The solicitor does not receive any additional remuneration for the arrangement (i.e. only paid at trustee rate for any work done) Art. 67(1): Professional / Necessary Exclusion o An exclusion is provided where the regulated activity (i.e. financial work) can be reasonably regarded as a necessary part of other services carried on in the course of a profession (i.e. our legal work). o ‘Necessary part’ means that it must not be possible for the solicitor to carry out their everyday duties without carrying out the regulated activity as well. However, the activity must be a minor part of the legal services as a whole E.g. dealing in shares when purchasing a flat as you’d have to buy shares in the management company o This exclusion is subject to the condition that there is no separate remuneration received by the solicitor to carry on the regulated activity i.e. must be billed as part of one matter. Entering into an RMC as lender Art. 66(1): Acting as a trustee, nominee or personal representative o Excludes the activity of “entering into an RMC as lender”, providing: The solicitor is a trustee or PR (including bare trustee); and The advice is for themselves, other trustees or beneficiaries; and The solicitor does not receive any additional remuneration for the arrangement (i.e. only paid at trustee rate for any work done) Administering an RMC Unlikely to come up – see page 32 o Slide 94 – Using an authorised person o Slide 95 – Acting for an authorised person CONSUMER CREDIT ACTIVITY EXCLUSIONS Consumer Credit Activities Unlikely to come up – see page 33 o Slide 97 – Legal profession
Q1 Part B) – Section 327 Exemption
- The solicitor must not receive any benefit from a third party for their services which they do not account to the client for.
- The specified activity must be incidental to the provision of the professional service. Split into two tests: a. General test – “the income the firm earns from regulated activity work must not make up more than 50% of its income”. Assuming this is met, then: b. Specific test – Relates to work for the particular client. The regulated activity must be complementary and subordinate to the legal work i. E.g. in real estate work – giving legal advice, drafting documents and undertaking conveyancing requires you to be involved with regulated mortgage contracts.
- Scope Rules a. Prohibitions – Solicitors are PROHIBITED from: i. Dealing in investments as principal; and ii. Insurance distribution activities in relation to insurance-based investment products (i.e. “with profit” endowment policies) b. Restrictions i. For securities and contractually based investments , there are restrictions on recommending individual clients to buy quoted shares, pensions, unit trusts etc. ii. In circumstances where the solicitor has discretionary management (e.g. discretionary trust):
- The solicitor must take advice from an authorised / exempt person before buying investments
- The routine / day-to-day decisions must be taken by an authorised / exempt person iii. Regarding personal pensions :
- The solicitor cannot advise a client to dispose of such rights
- (NB. Personal pensions are also securities so the solicitor also cannot recommend that the client buys these investments) iv. Insurance Distribution Activities :
- The firm must have a compliance officer and register with the FCA before undertaking any insurance distribution activities.
Corporate & Finance
- Shares / bonds - Warranty & Indemnity Insurance - Advising / arranging the sale or purchase of shares / bonds - Advising / arranging a contract of insurance - Consumer credit related activities o Introducing lender and borrower - Debt related activities o Debt counselling o Debt adjusting o Debt collection o Debt administration / enforcement - Home finance activities o Home reversion plans (equity release) o Home purchase plans 1. Buy/sell shares and bonds 2. Transfer/ issue shares/bonds 3. Negotiate terms of sale / purchase 4. Negotiate / obtain insurance 5. Consider what to do with proceeds of sale 6. Advise on IPO/Placing 7. Advise on takeover
(Islamic finance) o Sale & rent back Family - Regulated mortgage contracts
- Insurance policies (life assurance) - Pension - Shares - Land 1. Advising on entering / varying RMC 2. Advising on a contract of insurance 3. arranging 4. Transfer / assigning interest in house and other assets 5. Advise whether to accept assignment of product (eg endowment) rather than cash 6. Transfer shares in family company 7. Obtain a pension valuation 8. Assist with a new mortgage and life cover
Q
COB Rules If a firm is undertaking a regulated activity (i.e. no exclusions apply) and wishes to rely on the s. 327 exemption, compliance with the COB rules is necessary. Rule 2 – Status Disclosure o The firm must disclose the following in writing in a manner that is clear, fair and not misleading, before carrying out a regulated activity or in good time before the conclusion of a contract of insurance A statement that the firm is authorised by the SRA and not the FCA The name and address of the firm The nature of the regulated activities and that they are limited in scope And a statement explaining that complains and redress mechanisms are provided through the SRA and Legal Ombudsman o Additionally, before providing a service to a client which includes any insurance distribution activity with or for a client, and in good time before the conclusion of a contract of insurance, you must state that you are an ancillary insurance intermediary and make a standard-form statement in writing to the client. Rule 3 – Execution of Transactions o The firm must carry out transactions for the client as soon as possible unless it reasonably believes it is in the clients best interests not to do so. o Transaction means purchase, sale, subscription or underwriting of a particular security . Rule 4 – Records of Transactions o Where a firm receives instructions from a client to effect transaction or makes a decision to effect a transaction in its discretion, it shall keep a record of: The name of the client; The terms of the instructions or decisions; and The date when the instructions were received. o Where a firm gives instructions to another person to effect a transaction, the firm shall keep record of: The name of the client; The terms of the instructions or decisions; The date when the instructions were received; and The name of the other person instructed. o Transaction means purchase, sale, subscription or underwriting of a particular security . Rule 5 – Record of Commissions o Where a firm receives commission which is attributable to regulated activities carried on by the firm, the firm must keep record of: The amount of commission received; and How the firm has accounted to the client for that commission. Rule 6 – Safekeeping of clients’ investments (see p. 60 manual) Rule 7 – Retail Investment Products (execution-only business) Rule 8 – Retention of Records Rule 9 – Insurance Distribution Activities
Introductions and Referrals
- The client is likely to need advice on the suitability of [the proposed mortgage contract]. When referring the client to a [mortgage adviser]: 1. The solicitor must comply with Principles: 3, to act with independence and 7 – to act in your client’s best interests 2. Additionally, the solicitor must comply with the SRA code of conduct for solicitors. Para 5 deals with introductions and referrals. There are similar provisions in the code of conduct for firms. In essence, a solicitor may introduce clients to third parties and have referral arrangements, providing: The client is informed of any financial or other interest which the solicitor or the business or employer has in referring the client to another person (5.1(a)) The clients are informed of any fee sharing arrangement that is relevant to their matter (5.1(b)) The fee sharing agreement must be in writing (5.1(c)) And the solicitor does not receive payments relating to a referral in respect of clients who are the subject of criminal proceedings (5.1(d)) 3. As to whether the solicitor can keep any commission Solicitors must not make any secret profits 1.2 of the code provides that solicitors must not abuse their position by taking unfair advantage of clients or others. 4.1 provides that a solicitor must properly account to clients for any financial benefit received as a result of their instructions, except where they have agreed otherwise. Financial benefits include referral / introduction fees, but also cover any other payments. However, some FSMA rules require pecuniary rewards to be accounted for to the client (such as under the authorised person exclusion and the s. 327 exemption). In these cases, for a solicitor to benefit from these FSMA provisions, they must account to the client for any pecuniary reward therefore FSMA would prevail. 4. Referrals to Separate Businesses owned by the firm Solicitors should ensure that they do not represent any separate business as being regulated by the SRA (8.10(c)) A solicitor can only refer, recommend, or introduce a client to the separate business or divide, or allow to be divided, a client’s matter between his regulated business and the separate business where the client has given informed consent (5.3) 5. Introductions Any client introduced must not have been acquired in a way which would breach the SRA’s regulatory arrangements if the person acquiring the client were regulated by the SRA (5.1(e))
