Financial services and regulation - Distinction between regulated and unregulated activities

Learning Outcomes

After studying this article, you will be able to distinguish between regulated and unregulated financial activities under UK law, identify when Financial Conduct Authority (FCA) authorisation is required, and explain the main exemptions and exclusions relevant to solicitors and professional firms. You will also be able to apply these principles to typical SQE1 scenarios and avoid common pitfalls relating to unauthorised financial services work.

SQE1 Syllabus

For SQE1, you are required to understand the distinction between regulated and unregulated financial activities, especially as it applies to solicitors and law firms. Focus your revision on:

  • the scope and meaning of regulated activities under the Financial Services and Markets Act 2000 (FSMA)
  • the general prohibition on unauthorised regulated activities
  • the main exclusions and exemptions for professional firms (including the SRA Scope Rules)
  • the consequences of carrying out regulated activities without authorisation
  • identifying when FCA authorisation is required and when an activity is unregulated

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. Give an example of a regulated activity and an unregulated activity relevant to solicitors.
  3. What is the main exemption that allows solicitors to carry out certain regulated activities without FCA authorisation?
  4. What are the risks of carrying out a regulated activity without authorisation or exemption?

Introduction

Understanding the difference between regulated and unregulated activities is essential for any solicitor involved in financial services work. The Financial Services and Markets Act 2000 (FSMA) sets out a strict regime: certain activities are regulated and require authorisation from the Financial Conduct Authority (FCA), while others are unregulated and can be carried out freely. For the SQE1 exam, you must be able to identify which activities fall into each category, know the main exemptions for professional firms, and recognise the consequences of breaching the rules.

Regulated Activities and the General Prohibition

The FSMA creates a clear boundary: only authorised or exempt persons may carry on regulated activities in the UK. This is known as the general prohibition.

Key Term: general prohibition
The rule that no person may carry on a regulated activity in the UK unless they are authorised by the FCA or exempt.

A regulated activity is defined as a specified activity relating to a specified investment, carried on by way of business. The details are set out in the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 (RAO).

Key Term: regulated activity
An activity of a specified kind, relating to a specified investment, carried on by way of business, and subject to FCA regulation.

Carrying on a regulated activity without authorisation or exemption is a criminal offence and can result in prosecution, fines, and unenforceable contracts.

Specified Activities and Investments

The RAO lists the activities and investments that are regulated. Common examples relevant to solicitors include:

  • dealing in investments (buying or selling shares or bonds)
  • arranging deals in investments
  • managing investments
  • advising on investments
  • safeguarding and administering investments
  • insurance distribution activities

Key Term: specified investment
A financial product or asset listed in the RAO, such as shares, bonds, insurance contracts, or regulated mortgages.

Land and most general business advice are not specified investments, so activities relating solely to land or general legal advice are not regulated under FSMA.

The "By Way of Business" Test

For an activity to be regulated, it must be carried on by way of business. This means the activity is part of the firm's commercial operations, not a one-off or personal matter.

Unregulated Activities

Unregulated activities are those that do not meet all the criteria above. Examples include:

  • giving general legal advice on business structure or contracts
  • advising on land transactions (unless also advising on investment products)
  • providing tax or accounting advice (unless it involves recommending specific investments)

Solicitors can carry out unregulated activities without FCA authorisation, but must be careful not to stray into regulated territory.

Exclusions and Exemptions

There are important exclusions and exemptions that allow professional firms to carry out some regulated activities without FCA authorisation.

Exclusions

Exclusions remove certain activities from the scope of regulation, even if they would otherwise be regulated. Key exclusions for solicitors include:

  • introducing a client to an authorised person (e.g., a financial adviser), provided the solicitor has no further involvement
  • acting as a trustee or personal representative, provided no extra remuneration is received
  • activities that are a necessary part of providing legal services (the "necessary" exclusion), but not if the activity is separately remunerated

Key Term: exclusion
A rule that removes an activity from being regulated, even if it would otherwise fall within the definition.

Key Term: exemption
A rule that allows a person or firm to carry on a regulated activity without FCA authorisation, provided certain conditions are met.

The Professional Firms Exemption (s.327 FSMA)

The main exemption for solicitors is the "designated professional body" (DPB) exemption under s.327 FSMA. This allows solicitors to carry out certain regulated activities without FCA authorisation if:

  • the activity is incidental to the firm's professional services
  • the firm does not receive any reward from a third party for the activity unless it is accounted for to the client
  • the activity is permitted by the SRA Scope Rules
  • the activity is not prohibited by Treasury order or FCA direction
  • the firm does not carry on other regulated activities

This exemption is subject to strict conditions and is policed by the SRA, which has its own rules (the SRA Scope Rules and Conduct of Business Rules) governing how exempt regulated activities are carried out.

Worked Example 1.1

A solicitor is acting for a client in the sale of a business. The client asks the solicitor to arrange insurance for the transaction. The solicitor arranges the insurance and receives a commission from the insurer, which is not disclosed to the client.

Answer: The solicitor may rely on the professional firms exemption to arrange the insurance, but must account to the client for any commission received. Failing to do so breaches both the exemption and SRA rules.

Worked Example 1.2

A law firm provides advice to a client on buying shares in a private company and recommends a specific investment. The firm is not FCA authorised and does not rely on any exemption.

Answer: Advising on investments is a regulated activity. Without FCA authorisation or a valid exemption, the firm is breaching the general prohibition and may be committing a criminal offence.

Consequences of Breaching the Rules

Carrying on a regulated activity without authorisation or exemption is a criminal offence. The FCA can prosecute, and any contracts made in breach may be unenforceable. The SRA may also take disciplinary action against solicitors who breach the rules.

Exam Warning

Carrying on a regulated activity without authorisation or exemption is a strict liability offence. It is not a defence to say you did not know authorisation was required. Always check whether an activity is regulated and whether an exclusion or exemption applies.

Summary Table: Regulated vs Unregulated Activities

Activity TypeFCA Authorisation Required?Example
Advising on investmentsYes (unless exempt)Recommending shares or bonds
Arranging insurance for a clientNo (if DPB exemption applies and SRA rules followed)Arranging title insurance in conveyancing
General legal adviceNoDrafting contracts, advising on land
Introducing to an authorised personNo (if no further involvement)Referring to a financial adviser

Key Point Checklist

This article has covered the following key knowledge points:

  • The FSMA creates a general prohibition: only authorised or exempt persons may carry on regulated activities.
  • Regulated activities are defined by specified activities, specified investments, and the "by way of business" test.
  • Exclusions and exemptions allow some activities to be carried out without FCA authorisation.
  • The professional firms exemption (s.327 FSMA) is the main exemption for solicitors, but strict conditions apply.
  • Carrying on a regulated activity without authorisation or exemption is a criminal offence and may result in unenforceable contracts and disciplinary action.

Key Terms and Concepts

  • general prohibition
  • regulated activity
  • specified investment
  • exclusion
  • exemption
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Pleased to share that I have successfully passed the SQE1 exam on 1st attempt. With SQE2 exempted, I’m now one step closer to getting enrolled as a Solicitor of England and Wales! Would like to thank my seniors, colleagues, mentors and friends for all the support during this grueling journey. This is one of the most difficult bar exams in the world to undertake, especially alongside a full time job! So happy to help out any aspirant who may be reading this message! I had prepared from the University of Law SQE Manuals and the AI powered MCQ bank from PastPaperHero.

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Senior Associate at Trilegal