Financial services and regulation - Appropriate sources of information on financial services

Learning Outcomes

This article outlines the primary sources of information relevant to financial services regulation in the UK, specifically for solicitors preparing for SQE1. After reading this article, you should be able to identify the main legislative acts, regulatory handbooks, and professional body rules governing financial services activities undertaken by solicitors. This knowledge will assist you in locating relevant guidance and understanding the regulatory environment when advising clients on matters involving financial services, ensuring compliance with professional obligations.

SQE1 Syllabus

For SQE1, a working knowledge of the sources foundational to financial services regulation is essential. You will need to identify where to find authoritative rules and guidance when dealing with situations involving financial services activities, even if conducted under exemption.

You should focus your revision on:

  • The primary legislation governing financial services (FSMA 2000).
  • Key regulatory handbooks and rulebooks (FCA Handbook, PRA Rulebook).
  • Specific SRA rules applicable to solicitors undertaking financial services work.
  • The hierarchy and application of these sources in practice.

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 principal UK statute governing financial services regulation?
    1. Financial Services Act 2012
    2. Companies Act 2006
    3. Financial Services and Markets Act 2000
    4. Solicitors Act 1974
  2. Which regulatory body's handbook provides detailed rules on the conduct of business for most firms, including solicitors relying on exemptions?
    1. Prudential Regulation Authority (PRA)
    2. Solicitors Regulation Authority (SRA)
    3. Financial Conduct Authority (FCA)
    4. Legal Services Board (LSB)
  3. Which SRA rules specifically govern the financial services activities that solicitors' firms can carry out under the professional firms' exemption?
    1. SRA Accounts Rules
    2. SRA Financial Services (Conduct of Business) Rules
    3. SRA Principles
    4. SRA Financial Services (Scope) Rules

Introduction

When advising clients on matters that intersect with financial services, solicitors must manage a complex regulatory environment. Identifying the correct sources of information is fundamental to providing competent advice and ensuring compliance with legal and professional obligations. This article examines the appropriate sources of information relating to the regulation of financial services relevant to solicitors in England and Wales. Understanding these sources is critical for applying the correct rules and principles in practice, particularly when determining the scope of permitted activities and the conduct required when undertaking them.

Primary Legislative and Regulatory Sources

The UK's financial services regulatory framework is built upon primary legislation supplemented by detailed rules and guidance issued by regulatory bodies.

Financial Services and Markets Act 2000 (FSMA 2000)

The foundational statute is FSMA 2000. This Act establishes the overall regulatory architecture, including the general prohibition on carrying out regulated activities without authorisation (s 19) and the restrictions on financial promotions (s 21). It grants powers to the Treasury to specify which activities and investments are regulated via secondary legislation, most notably the Regulated Activities Order 2001 (RAO). FSMA 2000 also provides the framework for exemptions applicable to professional firms, such as solicitors (s 327).

Key Term: Financial Services and Markets Act 2000 (FSMA 2000)
The primary UK statute establishing the regulatory framework for financial services, defining regulated activities and investments, and outlining the powers of regulatory bodies like the FCA and PRA.

Secondary Legislation (Statutory Instruments)

FSMA 2000 delegates power to HM Treasury to make detailed orders specifying the scope of regulation. Key statutory instruments include:

  • Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 (RAO): Defines the specific activities and investments that fall under the regulatory regime.
  • Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (FPO): Details the rules surrounding financial promotions.
  • Financial Services and Markets Act 2000 (Professions) (Non-Exempt Activities) Order 2001: Specifies activities excluded from the professional firms' exemption (s 327).

Consulting these Orders is essential to determine whether a specific activity requires authorisation or falls within an exemption.

Regulatory Handbooks and Rulebooks

While legislation provides the framework, the detailed operational rules are contained within the handbooks and rulebooks issued by the primary regulators, the FCA and the PRA.

Financial Conduct Authority (FCA) Handbook

The FCA Handbook is a comprehensive source of rules and guidance applicable to FCA-authorised firms and, importantly, to firms undertaking specific activities even if not directly authorised (such as solicitors relying on exemptions for certain activities). It covers conduct of business standards, client protection measures, and rules relating to specific market sectors. Solicitors must be aware of relevant parts of the FCA Handbook, especially when dealing with consumer credit activities or insurance distribution.

Key Term: FCA Handbook
A detailed compilation of rules and guidance issued by the Financial Conduct Authority, setting out regulatory requirements for firms conducting financial services business in the UK.

Prudential Regulation Authority (PRA) Rulebook

The PRA Rulebook applies primarily to PRA-authorised firms (banks, insurers, major investment firms), focusing on prudential requirements like capital adequacy and risk management to ensure financial stability. While less directly relevant to most solicitors' firms than the FCA Handbook, understanding its existence helps complete the regulatory picture.

Key Term: PRA Rulebook
The set of rules and guidance issued by the Prudential Regulation Authority, primarily governing the prudential regulation of significant financial institutions in the UK.

Solicitors Regulation Authority (SRA) Rules and Guidance

For solicitors operating under the s 327 exemption, the SRA provides specific rules and guidance within the SRA Standards and Regulations.

SRA Financial Services (Scope) Rules

These rules define the extent of the regulated activities that solicitors' firms can undertake when relying on the s 327 exemption. They specify permitted activities and also incorporate prohibitions designated by Treasury Orders, essentially outlining the boundaries within which exempt professional firms must operate. Consulting these rules is critical to ensure a firm does not carry out activities requiring FCA authorisation.

Key Term: SRA Financial Services (Scope) Rules
SRA rules defining the specific regulated activities that firms authorised by the SRA can conduct under the FSMA 2000 s 327 exemption.

SRA Financial Services (Conduct of Business) Rules

When carrying out exempt regulated activities under the s 327 exemption, solicitors' firms must comply with these specific conduct rules. They cover aspects such as status disclosure to clients (clarifying the firm is not FCA-authorised), record-keeping, handling commissions, and specific requirements for insurance distribution activities.

Key Term: SRA Financial Services (Conduct of Business) Rules
SRA rules setting out the standards of conduct required for SRA-authorised firms when carrying out exempt regulated activities under the FSMA 2000 s 327 exemption.

Other SRA Guidance

The SRA periodically issues guidance notes, warning notices, and case studies relevant to financial services. These provide practical interpretation and clarification of the rules and highlight areas of regulatory focus or concern, such as involvement in high-risk investment schemes or proper client due diligence. Staying updated with SRA publications is essential for maintaining compliance.

Worked Example 1.1

A solicitor is advising a client on the purchase of a business. As part of the transaction, the client needs advice on arranging a commercial loan secured against the business assets. The solicitor's firm relies on the s 327 exemption.

Where should the solicitor look first to determine if advising on and arranging this specific type of loan falls within the firm's permitted activities under the exemption?

Answer: The solicitor should first consult the SRA Financial Services (Scope) Rules. These rules detail the regulated activities permitted under the s 327 exemption for SRA-regulated firms and incorporate relevant prohibitions. This will clarify whether advising on and arranging this commercial loan requires FCA authorisation or can be done under the exemption.

Other Relevant Sources

Depending on the context, other sources might be relevant.

Case Law and Regulatory Decisions

Decisions from courts (e.g., interpreting FSMA provisions) and regulatory bodies (e.g., FCA enforcement decisions, Financial Ombudsman Service decisions) offer clarity on how rules are applied and interpreted in practice. These can clarify ambiguities and illustrate expected standards.

Professional Body Guidance

The Law Society often publishes practice notes and guidance on financial services matters relevant to solicitors, offering practical advice on compliance and best practice.

Worked Example 1.2

A solicitor's firm, operating under the s 327 exemption, is carrying out insurance distribution activities incidental to its conveyancing work. A client complains about the information they received regarding an indemnity policy.

Which specific SRA rules directly govern the conduct requirements for providing this insurance advice?

Answer: The SRA Financial Services (Conduct of Business) Rules contain specific provisions (currently in Part 3) relating to the conduct required when undertaking insurance distribution activities under the exemption. These rules cover communication standards, information disclosure, and remuneration transparency.

Revision Tip

When faced with a financial services issue, always start by identifying the specific activity and investment involved. This allows you to work through the relevant legislation (FSMA 2000, RAO) and rules (FCA Handbook, SRA Scope/Conduct Rules) effectively to determine authorisation requirements and conduct obligations.

Key Point Checklist

This article has covered the following key knowledge points:

  • The primary legislative source is the Financial Services and Markets Act 2000 (FSMA 2000), supplemented by Statutory Instruments like the Regulated Activities Order (RAO) and the Financial Promotion Order (FPO).
  • Detailed rules and guidance are found in the FCA Handbook (relevant for conduct) and the PRA Rulebook (relevant for prudential regulation of major institutions).
  • Solicitors operating under the s 327 exemption must comply with the SRA Financial Services (Scope) Rules to determine permitted activities.
  • Conduct when carrying out exempt regulated activities is governed by the SRA Financial Services (Conduct of Business) Rules.
  • Case law, regulatory decisions (FCA, FOS), and professional body guidance (Law Society) provide further interpretation and practical advice.
  • Staying updated with publications from the SRA and FCA is essential for ongoing compliance.

Key Terms and Concepts

  • Financial Services and Markets Act 2000 (FSMA 2000)
  • FCA Handbook
  • PRA Rulebook
  • SRA Financial Services (Scope) Rules
  • SRA Financial Services (Conduct of Business) Rules
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