Financial services and regulation - Application of the Finan...

Learning Outcomes

This article provides a comprehensive overview of the legal framework for financial services and markets regulation under the Financial Services and Markets Act 2000 (FSMA) as it applies to solicitors in England and Wales. It explains the overarching structure, including the relationships between the FSMA, regulators, and solicitors’ professional responsibilities. It addresses the detailed statutory and professional boundaries of regulated and unregulated financial activities and sets out the rules regarding authorisation, exemption (especially for professional firms), and regulatory oversight. The discussion includes the specific constraints on solicitors regarding financial promotions, handling specified investments, consumer protections, and risk management at the boundary of legal and financial advisory work. It also explores the consequences of non-compliance, processes of investigation and enforcement by regulators, and the interface with anti-money laundering and anti-fraud obligations.

Understanding these issues is essential to safeguarding the interests of clients, complying with the law, and upholding professional and ethical standards in an evolving legal and financial regulatory environment, particularly where legal advice intersects with regulated financial business.

SQE1 Syllabus

• The regulatory framework for financial services in England and Wales, including the key roles of the Financial Conduct Authority (FCA), Prudential Regulation Authority (PRA), and the Solicitors Regulation Authority (SRA)
• The scope of regulated activities under FSMA 2000 and the Regulated Activities Order (RAO): meaning of regulated activity, specified investment, and “by way of business”
• The general prohibition on unauthorised regulated financial activities (section 19 FSMA); requirements for FCA/PRA authorisation or exemption
• Professional and statutory exemptions and exclusions relevant to solicitors’ practice, including the Designated Professional Body (DPB) exemption and the distinctions between exclusions and exemptions
• The statutory regime governing financial promotions (including s.21 FSMA and the Financial Promotion Order 2005), definitions and boundaries of controlled activities, and the available exemptions for solicitors
• Enforcement mechanisms, criminal and civil sanctions, SRA disciplinary processes, and implications for enforceability of client agreements in cases of breach
• Consumer protection context, transparency in costs and commissions, and the overlap between client care, anti-money laundering laws, and financial services regulation
• The interface and application of the anti-money laundering/POCA regime alongside FSMA

Test Your Knowledge

Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision.

1. What is the "general prohibition" under the Financial Services and Markets Act 2000?
2. Name three examples of regulated activities under FSMA 2000.
3. In what circumstances can a solicitor rely on a professional firms exemption to carry out a regulated activity?
4. What is a financial promotion and what are the consequences of breaching the rules on financial promotions?

Introduction

The Financial Services and Markets Act 2000 (FSMA) is the primary statute governing financial services regulation in the United Kingdom. It establishes a legal and regulatory framework stipulating that only those who are appropriately authorised or exempt may carry on certain financial business “by way of business” in relation to specific classes of “investments.” The FSMA 2000 underpins a single, unified regulatory regime, introducing consistency and rigor to the control of investment business, insurance, mortgages, and related activities. Solicitors must be especially alert to this regime’s relevance, as their legal work regularly overlaps with activities that may fall within the regulated perimeter, such as providing investment advice, arranging insurance, or introducing clients to financial product providers. Comprehending the interaction between FSMA, regulatory rules, and the duties of solicitors—together with an understanding of exemptions, exclusions, and appropriate client care—is necessary to ensuring not only compliance but also the maintenance of public trust in the profession.

Key Term: Financial Services and Markets Act 2000 (FSMA)
FSMA is the principal statute governing the regulation of financial services and markets in the UK, setting out who may carry on specific types of financial business, imposing authorisation requirements, and encompassing detailed rules for exclusion, exemption, conduct, enforcement, and client protection.

The Regulatory Structure

FSMA 2000 consolidated the previous regime into an integrated model for most financial services and investment business in England and Wales. Key features include:

• Creation of the Financial Conduct Authority (FCA): The FCA regulates conduct and consumer protection across the financial services sector. It is the primary regulator for most activities affecting solicitors’ practices (aside from certain prudential matters regulated by the PRA).
• Prudential Regulation Authority (PRA): The PRA is responsible for the prudential regulation of major financial institutions such as banks, insurers, and large investment firms, but does not usually regulate legal practices. However, solicitors practicing in closely related areas must be aware of PRA standards when working alongside or within such institutions.
• SRA and Professional Oversight: Where activities are caught by FSMA but fall within professional exemptions, oversight typically rests with the SRA. Solicitors remain subject to the SRA Code of Conduct, professional indemnity, and client protection rules.

The objectives of the FCA—protecting consumers, enhancing market integrity, and promoting competition—are central to the legal regulation of financial services and have been designed to support public confidence and ensure effective redress and oversight for consumers.

Key Term: Financial Conduct Authority (FCA)
The FCA is the UK’s principal regulatory authority for financial markets and services, responsible for consumer protection, market integrity, and competition in the provision of financial services. It has broad investigatory, supervisory, and enforcement powers.

The General Prohibition and Regulated Activities

Section 19 FSMA sets out the “general prohibition”: it is an offence for any person to carry on, or purport to carry on, a “regulated activity” in the UK unless they are either authorised by the FCA (or PRA) or fall within a statutory exemption.

Key Term: general prohibition
Section 19 FSMA provides that no person may carry on a regulated activity in the UK unless authorised or exempt. Any breach is a criminal offence and may also affect the enforceability of any contract made in breach.

Key Term: regulated activity
A regulated activity is any activity specified in the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 (RAO), which relates to a “specified investment” and is carried on “by way of business,” subject to further exclusions and definitions.

Activities defined by the RAO include a wide range of financial services. Only those activities included in the Order, and conducted “by way of business,” fall within the regulatory perimeter.

Examples of Regulated Activities

Common regulated activities under the RAO include:

• Accepting deposits
• Effecting or carrying out contracts of insurance, including advising, arranging, assisting in administration, or dealing in insurance
• Dealing in investments as principal or agent (e.g., buying/selling shares, debentures, or bonds for a client)
• Arranging deals in investments or making arrangements with a view to another person buying, selling, subscribing for, or underwriting investments
• Managing investments, such as acting with discretion on behalf of a client (portfolio management)
• Operating a collective investment scheme
• Providing advice on investments
• Safeguarding and administering investments (custody services)
• Mortgage mediation and advice, and certain consumer credit activities

To be within the scope of the FSMA regime, the activity must not only be specified in the RAO but must also be carried on “by way of business.” This term is construed with regard to the nature, scale, and commercial context in which the activity is undertaken, so not all client-related financial dealings will be “by way of business” for FSMA purposes.

Key Term: specified investment
This includes shares, bonds, government securities (gilts), units in collective investment schemes (including some venture capital and property funds), rights under life or general insurance contracts, certain types of credit or mortgage contracts, options, and futures, among other financial instruments.

Key Term: legal activity
Under the Legal Services Act 2007, a legal activity means the provision of legal advice or representation in connection with the application of the law or resolution of legal disputes. Distinguishing between legal and financial activities is necessary for proper regulatory compliance.

The Authorisation Requirement

Carrying on a regulated activity “by way of business” in the UK without either direct authorisation or exemption is a criminal offence under s.19 FSMA. Authorisation requires application to, and approval by, the FCA or PRA, evidencing suitability, integrity, capital adequacy, professional competence, controls, and ongoing compliance. Authorisation is activity-specific; a firm must only carry out those regulated activities for which it has authorisation, and is subject to continuing FCA oversight, reporting, and supervisory requirements.

Authorised persons must also comply with the relevant conduct of business rules, client money requirements, complaint procedures, and transparency provisions. Failure to maintain compliance can lead to enforcement action, withdrawal of authorisation, and even criminal prosecution.

Key Term: financial services and markets act 2000 (fsma)
The FSMA is the principal legislative instrument regulating financial services and markets, setting out who may carry on regulated activities, the authorisation processes, and the sanctions for breach.

Worked Example 1.1

A solicitor’s firm is asked by a client to advise on the purchase of shares in a new technology company for long-term investment purposes. The firm is not FCA-authorised, and no DPB exemption applies.

Answer:
Advising a client on the merits of buying or selling shares, which are specified investments, is a regulated activity under the RAO. If the solicitor does not fall within an exclusion or professional exemption, providing such advice requires FCA authorisation. Acting outside authorisation breaches s.19 FSMA and is a criminal offence.

Exemptions and Exclusions

FSMA draws a clear distinction between “exclusions” and “exemptions.” Exclusions mean that the relevant activity, although on the face of it a regulated activity, is treated as outside the regulatory perimeter altogether. Exemptions (notably for professional firms) mean that the activities are currently regulated, but a person or firm is permitted to carry them out without the need for FCA authorisation, subject to compliance with other requirements.

• Exclusions are generally provided for activities that are not central to the business of arranging, dealing, or advising on investments. Examples include “necessary” or “incidental” acts in the course of general professional business, acting as a trustee or personal representative, or acting solely as an introducer.

• Exemptions allow certain professional firms (e.g. solicitors) to carry on some regulated activities provided they meet stringent, strictly policed conditions relating to the ancillary nature of the activity and proper client disclosure and consent.

Activity not regulated: If an exclusion applies, such as merely introducing a client to an authorised person without giving advice or handling client money, FSMA does not apply.

Professional Firms Exemption: The DPB Exemption

Section 327 FSMA allows solicitors’ firms to conduct certain regulated activities without direct FCA authorisation, provided:

• The activity arises out of, or is ancillary to, the provision of legal or other professional services to a particular client.
• The regulated activity is carried out in a manner that is incidental to the firm’s main business.
• The firm does not receive separate remuneration in respect of the regulated activity, unless third-party commissions or financial benefits are properly disclosed and accounted for to the client.
• The activity is permitted for the specific class of professional body of which the firm is a member (for solicitors, this is the SRA).
• The activity is not one specified as prohibited or “non-exempt” under FSMA or secondary legislation.

Key Term: designated professional body (DPB) exemption
The DPB exemption, in s.327 FSMA, allows solicitors and other approved professional firms to conduct regulated activities without FCA authorisation, so long as the activity is both incidental to their legal services and subject to compliance with SRA and FCA conduct and reporting requirements.

Key Term: incidental
Within this context, “incidental” means that the regulated activity is a minor and subordinate part of the client engagement. It must not be advertised as a core or standalone service, and must not be held out to the public as a principal activity.

The SRA Financial Services (Scope) Rules and Conduct of Business Rules describe further the limits on the scope of regulated activities permitted under the DPB exemption, including requirements to account to the client for any third-party commissions and to ensure adequate training and competence.

The DPB exemption is particularly relevant where solicitors are engaged in conveyancing, probate, company sales, pension advice, insurance-related work, or estate administration. Law firms must continually be alert to the risk of crossing beyond the “incidental” boundary—if FSMA activities become a main or separate business offering, FCA authorisation is required.

• Firms must keep records of all regulated activities conducted under the DPB exemption, ensure any commissions are accounted for, avoid holding themselves out as financial advisers, and comply with all relevant professional and statutory conduct rules.

Other Common Exclusions

Several exclusions remove certain activities from regulation under FSMA:

• Introducing: Simply introducing a client, for no consideration or benefit, to an FCA-authorised adviser, without further advice, opinion, or involvement, generally counts as an excluded activity and is not caught by the regulatory regime.
• Trustee or Personal Representative Exclusion: Where a solicitor is acting purely in a fiduciary capacity and does not separately charge for investment-related activities, such activity may be excluded from the regulatory scope.
• Takeover Exclusion: Advising on, or arranging, the sale or acquisition of shares in a private company—especially when the transaction involves more than 50% of the voting shares (and provides effective control)—may fall within the takeover exclusion and be outside FSMA authorisation requirements.

Key Term: exclusion
An exclusion means that an otherwise regulated activity is deemed by the RAO not to be regulated, so FSMA does not apply and authorisation is not required. Exclusion is determined by close analysis of the factual circumstances and the relevant RAO provisions.

• The “necessary” exclusion can also arise where an act is necessarily incidental in the course of another main professional service and is not itself separately remunerated.

Worked Example 1.2

A solicitor is acting for a client on the sale of a controlling (80%) interest in a private company, providing transactional advice and arranging the transfer of shares.

Answer:
This transaction will normally benefit from the takeover exclusion, as the advice concerns a transfer of more than 50% of voting shares, i.e., the transfer of control of a company. No FCA authorisation or DPB exemption is required, provided that the solicitor’s services are not otherwise regulated by FSMA for a different reason.

Financial Promotions

The FSMA 2000 regime also strongly regulates any “financial promotion”—defined as any invitation or inducement made, in the course of business, to engage in investment activity. Section 21 FSMA makes it a criminal offence for an unauthorised person or firm to communicate a financial promotion, save where the communication is approved by an FCA-authorised person or a relevant exemption under the Financial Promotion Order (FPO) applies.

Key Term: financial promotion
A financial promotion is any invitation or inducement to engage in investment activity, made in the course of business, by any form of communication (written, verbal, digital, etc.), that seeks to persuade a person to enter into or deal in an investment.

• The “controlled activities” and “controlled investments” concepts, as set out in the FPO 2005, substantially mirror—but are not identical to—the regulated activities and specified investments concepts under the RAO.
• Communicating, or approving the content of, a financial promotion is itself a regulated activity, subject to criminal and civil enforcement.

Section 21 FSMA and the FPO must be carefully considered whenever a solicitor’s communication goes beyond the provision of legal advice and ventures into encouraging a client to enter a specific investment, insurance, or related contract.

Financial Promotion Exemptions

The FPO provides various exemptions to allow specified communications in controlled circumstances, most relevant to legal practice:

• One-off communications: Personalised, non-real-time communications (including responses to a specific client enquiry) may be exempt, provided they are not part of a series of communications aiming to induce investment activity across multiple persons.
• Communications to existing clients for exempt activities: Communications to clients in connection with business which itself is exempt (e.g., under the DPB exemption) or excluded under FSMA are generally permitted.
• Promotions to sophisticated or high-net-worth investors: These may be exempt where the promotion is restricted to clients who meet the required test for experience or financial standing, provided evidence is properly retained.
• Communications approved by an authorised person: An unauthorised firm may seek approval from an FCA-authorised person for a promotion, but the approving party assumes full regulatory liability for the promotion’s compliance with FCA rules.

Solicitors’ firms operating under the DPB exemption may also use the financial promotion exemptions for one-off or incidental communications.

Worked Example 1.3

A solicitor’s firm, not FCA-authorised, sends an email newsletter to its client base encouraging them to invest in a new class of shares in a specific, unquoted company.

Answer:
Unless the communication benefits from an FPO exemption (e.g., is strictly a one-off for a particular investor, or limited to sophisticated clients), the sending of such a newsletter would constitute an unauthorised financial promotion. Approval by an authorised person is required, failing which both the individual solicitor and the firm are at risk of criminal prosecution and regulatory discipline.

Additional Controls and Risks

The breadth of the definition of “financial promotion” means routine communications—such as the inclusion of a new investment offering in a client update, discussing investment returns in a probate report, or referencing investment opportunities on a firm’s website—may bring unwelcome regulatory risk. It is particularly important not to cross the boundary between factual or legal explanation and actual inducement to engage in an investment transaction. A high level of awareness and compliance with both FSMA and SRA client care requirements is necessary when engaged in any cross-over between legal advice and financial product communication.

Key Term: controlled activity
Within the FPO regime, a controlled activity includes arranging, dealing in, advising on, or managing investments (among other activities), and is generally analogous to regulated activity under the RAO, but without the benefit of RAO exclusions.

Enforcement and Consequences of Breach

FSMA provides the FCA and PRA with extensive powers of investigation and enforcement, including the authority to:

• Demand the production of documents, information, and require interviews
• Enter premises and require the freezing of assets
• Impose fines, public censures, variation or withdrawal of authorisation, and management bans
• Injunct or prohibit unauthorised regulated activity or financial promotions and commence criminal proceedings

Breach of section 19 (general prohibition) or section 21 (financial promotion) is a criminal offence punishable by up to two years’ imprisonment and/or an unlimited financial penalty. Agreements and arrangements entered into in contravention of these provisions may be unenforceable, and any property or money received may need to be returned to the client or another party. In addition, breaches may trigger SRA investigation and disciplinary measures, including referral to the Solicitors Disciplinary Tribunal (SDT) and adverse findings for professional misconduct. The SDT and the courts may impose severe sanctions, including removal from practice, suspension, or significant fines.

Key Term: enforcement
Enforcement encompasses the FCA’s (and PRA’s) powers to monitor, investigate, sanction, or prosecute breaches of financial services law, as well as the associated professional and disciplinary consequences for legal practitioners. Exam Warning:
Conduct by solicitors outside their authorisation, or which strays outside the scope of exclusions or the DPB exemption, may result in criminal conviction, regulatory sanction by both the FCA and SRA, and the risk of unenforceable client agreements. Awareness, documentation, and active systems for compliance are all necessary.

Solicitors must also be attentive to issues such as holding out, conflicts of interest, improper fees or commissions, and the misuse or misapplication of client funds, as these may also raise FSMA and professional conduct risks.

Worked Example 1.4

A solicitor, acting as a personal representative for an estate, arranges the purchase of life insurance for the estate, provides instructions on policy terms, and receives a commission from the insurer, accounting for it to the estate.

Answer:
Provided the advice and arrangement are genuinely incidental to the administration of the estate, not separately remunerated, and in compliance with the DPB exemption, the solicitor may be acting lawfully (subject to SRA record-keeping and conduct standards). Any commission received must be accounted to the estate, and the solicitor must not hold out as an insurance intermediary.

Consumer Protection, Client Care and Ancillary Obligations

Besides statutory compliance, solicitors engaged in any activity at, or beyond, the edge of the regulated perimeter must ensure they meet strict standards of client care, informed consent, transparency, and professional competence under the SRA Principles and Code of Conduct.

• Solicitors must disclose all fees, commissions, and financial benefits received from regulated activity, unless the client has provided informed consent to alternative arrangements.
• They must carry out appropriate client due diligence, apply anti-money laundering controls, and maintain the integrity of client accounts, especially in high-risk transactions or in areas of practice vulnerable to financial crime.
• Solicitors are required to take reasonable steps to assess the competence of themselves and their staff in financial services work, not act outside their area of specialism, and refer clients to appropriately authorised or specialist advisers where appropriate.
• Detailed and accurate records of all regulated and potentially regulated financial activity must be kept, covering advice, communications, client instructions, and the reasons behind decisions not to act or to refer a client.

Additional obligations concerning publicity, transparency, and marketing under the SRA Transparency Rules apply to all public information regarding fees, referral arrangements with third parties, or the regulated or unregulated nature of services provided.

Key Term: client care
Client care encompasses the professional duties owed by solicitors to their clients, including transparency, proper handling of client money, informed consent, management of conflicts of interest, adherence to best interests, and competent, timely service.

Worked Example 1.5

A solicitor is handling a business sale where the buyer’s purchase is being funded by a regulated mortgage. The solicitor advises on the legal and procedural aspects of the mortgage documentation, but not on the merits of the mortgage product, and introduces the buyer to an FCA-authorised mortgage broker.

Answer:
Provided the solicitor confines their advice to legal matters and the introduction is to an authorised broker (without additional advice or arrangement), no regulated activity arises and there is no need for FCA authorisation. Any referral fee or commission received must be disclosed to the client and accounted for as required by the SRA rules.

Application of FSMA Frameworks to Typical Solicitors’ Work

Solicitors should continually monitor whether their work involves or borders upon regulated activities. Common areas where FSMA issues arise include:

• Estate administration: Where shares, bonds, or investments must be realised, legal advice regarding the legal process is unregulated, but giving a view on whether to buy or sell particular holdings constitutes investment advice and may be regulated unless covered by an exclusion or exemption.
• Conveyancing and mortgages: While legal advice on property transactions remains unregulated, arranging insurance (such as defective title indemnity) or introducing clients for mortgage advice can trigger regulation, unless appropriately managed under the DPB exemption or the introducing exclusion.
• Company and business sales: Transfers involving a controlling interest in a company are generally outside the regulated perimeter, but legal advice on investment products or arrangements, or acting as an intermediary, may be regulated.
• Tax planning, pensions, and trust advice: Investment advice, or the arrangement of pension products and schemes, is captured by FSMA unless provided by reference to a relevant exclusion or the DPB exemption.

Key Term: anti-money laundering
Legislation, such as the Proceeds of Crime Act 2002 and the Money Laundering Regulations 2017, places positive obligations on solicitors to identify and report suspicions of money laundering, particularly in connection with specified investments, property transactions, and client account management.

Summary

Key Point Checklist

This article has covered the following key knowledge points:

• The Financial Services and Markets Act 2000 is the primary statute regulating the conduct of financial services and markets in England and Wales, and applies to a range of legal practice scenarios.
• The “general prohibition” under s.19 FSMA requires FCA or PRA authorisation to carry on regulated activities unless a specified exclusion or exemption (such as the DPB exemption) applies.
• Regulated activities are defined by the RAO and must be “by way of business” and relate to a specified investment to come within scope.
• Solicitors can only rely on the DPB exemption for regulated activity that is genuinely incidental to legal practice, is not separately remunerated, and provided the solicitor complies with SRA and FCA rules on disclosure and client protection.
• Making a financial promotion is generally restricted to FCA-authorised persons unless a relevant exemption applies. The regime is complex and applies to a broad array of communications.
• Unauthorised regulated activity or financial promotion is a criminal offence. Agreements in breach risk being unenforceable, with return of client funds, and can give rise to SRA disciplinary action, loss of reputation, and even imprisonment.
• At all times, solicitors must observe stringent standards of client care, record-keeping, anti-money laundering compliance, and transparency in handling client affairs.

Key Terms and Concepts

• financial services and markets act 2000 (fsma)
• financial conduct authority (fca)
• general prohibition
• regulated activity
• specified investment
• legal activity
• designated professional body (DPB) exemption
• incidental
• exclusion
• financial promotion
• controlled activity
• client care
• anti-money laundering
• enforcement