#4945 - Financial Services - Professional Conduct

1. FIRST: identify what s.19 FSMA says:

   1. The key elements will give you easy marks!

2. Identify the investment (e.g. shares, a property, a piece of artwork)

3. Is there a specified investment under FSMA? See Part III RAO

   1. There may be more than one;

   2. Raise all the investments that may be a specified investment but probably wont – completeness = marks!

   3. Identify the relevant article and if applicable go through the requirements:

      1. With property mortgages go through the Article 61(3) requirements (A.88 for definition).

      2. For bonds – instruments creating indebtedness are under A.78.

IF YES…

4. Is the investments a specified activity under FSMA? See Part II RAO

   1. First, identify the activity (e.g. advising on the purchase of shares) and write it down

      1. If Article 53 applies then mention it must be in relation to a particular investment and it must be to advise on the merits of that investment. It must also be to a potential advisor. You must identify all 3 to get marks!

      2. If you are using a power of attorney then Article 21 may apply (dealing in investments as agent).

   2. NOTE: if a solicitor is advising on the general issues relating to shares (e.g. voting rights) then FSMA will not apply and no authorisation is required.

      1. BASICALLY: the advice cannot amount to a recommendation either to go for an investment, or not to go for an investment, or it will fall under FSMA.

IF YES…

5. Is the activity excluded under FSMA? See Part II RAO again

   1. Each activity will have specific exclusions so start there (the exclusion part of the article will say what general exclusions are available to it);

   2. If that doesn't work, look at more general exclusions from Article 66 onwards which apply to more than one activity;

      1. When discussing Article 67, mention if it is necessary for the solicitor to advise (i.e. where a solicitor can give advice if it is reasonably regarded as a necessary part of other services). Also mention this exclusion is subject to the condition of no separate remuneration.

      2. If a sale of body corporate - general exclusion of 50% of shares – a.70(2)(a)

   3. Mention all exclusions that may come up

   4. NOTE: if it is a 12 mark question then there probably won’t be an exclusion (may be for 8 mark question).

IF YES – FSMA does not apply and no authorisation is required.

IF NO…

6. Does the activity fulfil the basic conditions in s.327 FSMA and SRA Scope Rule 4?

   1. Section 327 FSMA:

      1. Is [the activity] carried out in the course of a profession? Always YES

      2. Is [the activity] incidental? You are looking to see if it is a small part of the overall work being offered by the firm.

         • If the firm doesn't advertise the regulated activities separately from the other activities it does and the regulated activity forms a small part of the overall work then incidental.

      3. Is the commission earned passed on to the client? The could easily be done if necessary.

   2. Scope Rule 4:

      1. Does the activity arise out of OR is complimentary to the non-regulated services being offered by the firm?

         • ARISE OUT OF - Look for logical flow of advice – i.e. if the solicitor is advising the client on a private injury matter and then gives advice on investment, this is NOT LOGICAL!

         • NOTE: other Code of Conduct Issues here – to advise on matters other than what you have been instructed on, you must satisfy Principle 4 (act in client’s best interests), O(1.4) (to have skills to carry out instructions) and O(1.5) (to provide competent service).

         • COMPLIMENTARY - Also repeat whether it is incidental (as above) for it to be complimentary and whether commission is passed on to the client.

           1. If the firm is holding itself out as carrying out regulated activities other than those allowed by the Scope Rules? Apply to the facts

   3. Do any other scope rules apply – consider all the Scope 5 Rules?

      1. These only come into play when a firm can satisfy Scope Rule 4 first.

      2. Rule 5(3) of the Scope Rules provide that a firm must not recommend an individual client to buy shares where the transaction would be made with a person acting in the course of carrying on the business of buying/selling shares or where the transaction would be made on the stock exchange.

IF YES…

• The activity is an EXEMPT REGULATED ACTIVITY –

  • If the work is carried out by the law firm, ensure the firm complies with any restrictions imposed on the firm in relation to this kind of exempt activity under the Scope Rules.

  • The firm must be authorised by the SRA and must comply with any relevant SRA Financial Services (Conduct of Business) Rules 2001 in relation to this activity.

IF NO…

• The firm must be AUTHORISED BY THE FSA and must COMPLY WITH THE FSA HANDBOOK in relation to this activity or refuse to carry out the activity.

• If the firm is not FSA authorised and still carries out the activity, the person carrying out the activity is likely to have breached s.19(1) FSMA which is a criminal offence.

Potential MCQ – Insurance Policies

Activity 2 in SGS 1: some solicitors in PP carry out exempt regulated activities (not as separate to other work). One solicitor believes a client should get a restrictive covenant insurance policy. The client asks the lawyer to get details of a number of policies and advise on the best one for the client. Explain the regulatory SRA Scope Rules and SRA Conduct of Business Rules to be satisfied in order to do this:

• This is an ‘insurance mediation activity’ (see definition in the GLOSSARY of the Code) – arrange deals in ‘investments’ (here, a contract of insurance).

  • Under Scope Rule 5(6) the firm must be on an FSA Register before it can carry out these activities. It also must have a compliance officer who is responsible for insurance mediation activities.

• SRACOB Rule 3 – the firm has to make relevant disclosures pursuant to Rule 3(2)-(3) if these haven’t already been given in the client care letter.

• Also must comply with SRACOB Rule 1.

Financial Promotions

The general prohibition is contained in s.21 FSMA.

1. Does the communication relate to an investment listed in Part II Schedule 1 FSMA (Financial Promotion) Order 2005 (FPO)? i.e. it is a controlled investment.

   1. Communication – includes causing a communication to be made – very broad definition

   2. Controlled investments – similar to ‘specified investments’

IF YES…

2. INVITATION - Does the communication ask someone to exercise their rights to buy, sell etc. that controlled investment? – s.21(8)(b)

   1. A communication which directly invites someone to take a step which will result in him engaging in an investment activity.

IF NO…

3. INDUCEMENT - Does the communication ask someone to enter, or offer to enter into, an agreement which constitutes a controlled activity (definition – Schedule 1 Part I FPO) – s.21(8)(a)

   1. There must be an element of persuasion – intended to ultimately lead to an agreement to engage…

   2. Controlled activity – much wider than the s.19(1) ‘regulated activities’ because the RAO exclusions are ignored.

IF YES TO (3) OR (2)…

4. Is a communication being made, or being caused to be made, by someone?

   1. Some active step has to be taken to make the communication.

   2. Advertising agencies and printers won’t fall foul if they are providing services for the distribution of financial promotions.

IF YES…

5. Are there any relevant exemptions in the FPO? – s.21(5)

   1. NOTE: distinguish between real time communications and non-real time communications and solicited/unsolicited communications to identify the relevant exemption(s).

      1. A real time communication is one made in the course of a personal visit/telephone call etc. – Article 7(1) FPO.

         • A non-real time communication is anything not real-time.

      2. Solicited communication is one that arises out of the express request of the recipient. Anything not out of request is unsolicited – Article 8 FPO.

   2. The most relevant exemptions:

      1. Article 19 – communications to investment professionals

      2. Article 34 – communications from government and central banks

      3. Article 55 – a real-time financial promotion will be exempt if the solicitor...