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The regulation of financial services in the UK is primarily governed by the Financial Services and Markets Act 2000 (‘FSMA’), which has been updated by the Financial Services Act 2012.
The primary aim of these regulations is to ensure that banks and other financial entities maintain robust management practices. This is to prevent poor investment decisions and the undertaking of excessive risks.
Given that solicitors often engage with financial services, they might find themselves within the scope of these financial services regulatory frameworks.
As the central bank of the United Kingdom, the Bank of England sets the country's monetary policy. Additionally, it houses the Prudential Regulation Authority, which is tasked with the regulation and supervision of financial services firms, ensuring their stability and compliance with prudential norms.
The Financial Conduct Authority (FCA) is responsible for overseeing the conduct of all financial services firms in the UK. Operating independently yet accountable to HM Treasury, the FCA collaborates closely with the Prudential Regulation Authority. Its primary strategic goal is to ensure the smooth functioning of relevant financial markets, which encompasses:
The FCA implements varying levels of protection based on the complexity of financial products, with more intricate products necessitating comprehensive disclosures and risk warnings.
The authority undertakes measures to maintain the integrity and stability of the UK’s financial system.
While the Prudential Regulation Authority primarily handles the initial authorisation of financial services firms, the FCA is in charge of regulating the conduct of these firms and their staff post-authorisation. A significant function of the FCA involves granting 'approved person' status to individuals, including some solicitors, who perform specific roles within regulated financial services firms.
According to the Financial Services and Markets Act 2000, engaging in regulated activities related to the UK’s financial markets is strictly restricted to those who have either received authorisation or are exempt from needing such authorisation. This mandate is commonly referred to as the General Prohibition.
In this context, a regulated activity entails a defined activity connected to a specific investment, conducted within a business context, and not subject to any specific exclusions. The Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 outlines the precise activities and investments that are classified as regulated activities under this law.
Undertaking a regulated activity without the requisite authorisation or applicable exemption constitutes a legal violation.
While the majority of a solicitor's activities are not encompassed by the regulations of the Financial Services and Markets Act, the Regulated Activities Order describes a broad array of specified activities.
Solicitors must exercise caution in the following areas to avoid inadvertently conducting regulated activities:
This includes providing specific advice to an investor or prospective investor (or their representative) regarding the merits of purchasing, selling, subscribing for, or underwriting a particular investment. It's important to note that this does not extend to general advice on investment strategies, such as the overall advisability of investing in shares.
Facilitating arrangements for someone else to buy, sell, subscribe for, or underwrite a specific investment.
Engaging in transactions like buying, selling, subscribing for, or underwriting investments on behalf of a client.
Handling another individual's assets in a way that involves making discretionary decisions.
Protecting and managing assets belonging to someone else.
Under the Regulated Activities Order, there are 25 distinct categories of specified investments subject to regulation.
For solicitors, the most pertinent types include:
Involving agreements that provide insurance coverage.
This encompasses equity stakes in corporations and various forms of financial securities.
These are debt instruments issued by companies.
Agreements related to the financing of property purchases.
Financial arrangements designed for retirement savings.
Pre-arranged and pre-funded services for funerals.
It's important to note that interests in land and certain national savings products, such as Premium Bonds, do not fall under the category of specified investments. Therefore, solicitors can engage in activities related to these without requiring authorisation under the Financial Services and Markets Act.
The enforcement of regulations under the Financial Services and Markets Act is contingent on whether the activity is conducted as part of a business operation. If a solicitor engages in a specified activity involving a specified investment, it only falls under the general prohibition if it's carried out in a professional, business context.
This typically means the activity is performed as part of their legal services for a client, as opposed to something they do personally.
Suppose a solicitor is playing golf with a neighbour and during the game, the neighbour inquires about the prospects of investing in a new technology startup. If the solicitor shares their thoughts on the investment during this informal interaction, it wouldn't be considered a business activity. As the advice is given in a personal, non-professional context, it falls outside the purview of the general prohibition outlined in the Financial Services and Markets Act.
The Regulated Activities Order specifies several exclusions which, when applicable, mean solicitors' involvement in certain activities and investments do not breach the General Prohibition. These exclusions are essential for solicitors to navigate financial regulations effectively.
This exclusion applies when a solicitor aids a client in acquiring or divesting a controlling share (over 50%) in a company, or where the goal is to gain control over a company's daily operations.
Sara, a legal advisor specialising in corporate acquisitions, assists a client in purchasing 65% of a company's voting shares, intending to gain control of the company. This transaction falls under the takeover exclusion, exempting Sara from conducting a regulated activity.
Solicitors can conduct advisory, arrangement, management, and safeguarding activities in their capacity as trustees, nominees, or personal representatives without violating the General Prohibition.
Solicitors can refer clients to authorised financial advisors or assist clients in acting upon such advisors' recommendations. This applies provided the solicitor doesn’t receive payments from sources other than the client and doesn’t involve insurance contracts.
Tom, a solicitor specialising in estate planning, refers his client to a financial advisor for investment guidance. Tom then assists the client in executing transactions based on the advisor's recommendations, strictly acting on advice and not independently advising on investments. This scenario illustrates compliance with the exclusion for collaboration with authorised persons.
Solicitors may engage in activities related to specified investments if they are incidental to the legal advice they provide and are a necessary part of their legal services. This exclusion is not valid for activities billed separately or related to insurance policies.
Linda, a family law solicitor, advises her client on a divorce settlement, which incidentally involves discussions about the division of shared investments. Since these investment-related activities are incidental to her primary legal advice and are not billed separately, they are excluded from being considered regulated activities.
Under the Financial Services and Markets Act 2000, there's an exemption for incidental financial services provided by members of certain Designated Professional Bodies, including those under the Solicitors Regulation Authority (SRA) affiliated with the Law Society.
This exemption applies when a solicitor offers a financial service as an integral part of legal advice provision without receiving separate compensation for this service.
This exemption is quite similar to the incidental activities exclusion but comes into play in situations where that exclusion might not apply, such as in cases involving insurance policy advice.
Laura, a solicitor in a firm overseen by the SRA but not authorised by the Financial Conduct Authority, is advising a client, Theo, on a complex divorce settlement. Theo is set to receive a substantial financial settlement and seeks Laura's advice on potential investments, particularly in technology startups and mutual funds. …
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