Financial services and regulation - How the framework applies to solicitors' firms

Learning Outcomes

After reading this article, you will be able to explain how the financial services regulatory framework applies to solicitors' firms in England and Wales. You will understand the distinction between regulated and exempt activities, the roles of the SRA and FCA, and the key compliance requirements for legal practices. You will also be able to identify the main ethical and legal duties relevant to financial services work in a solicitors' firm for SQE1 purposes.

SQE1 Syllabus

For SQE1, you are required to understand how the financial services regulatory framework applies to solicitors' firms. Focus your revision on:

  • the scope and application of the Financial Services and Markets Act 2000 (FSMA) to legal practice
  • the distinction between regulated activities and exempt professional activities
  • the roles of the SRA and FCA in regulating financial services work by solicitors
  • the SRA Principles and their relevance to financial services compliance
  • the requirements for client money management under the SRA Accounts Rules
  • the practical compliance structures and risk management expected in solicitors' firms

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 difference between a regulated activity and an exempt regulated activity for a solicitors' firm?
  2. Which regulator is responsible for authorising most financial services activities in England and Wales?
  3. What are the main compliance steps a solicitors' firm should take to avoid breaching the FSMA when providing financial services?
  4. Name two SRA Principles that are especially relevant when handling client money in the context of financial services.

Introduction

Solicitors' firms in England and Wales frequently encounter financial services issues, whether advising on investments, handling client funds, or arranging transactions. The regulatory framework governing these activities is complex, involving both statutory law and professional rules. For SQE1, you must be able to identify when a solicitors' firm is carrying out a regulated activity, when exemptions apply, and what compliance structures are required.

The Financial Services Regulatory Structure

Solicitors' firms are subject to both general financial services regulation and specific professional requirements. The main statutory framework is the Financial Services and Markets Act 2000 (FSMA), which is enforced by the Financial Conduct Authority (FCA). In addition, the Solicitors Regulation Authority (SRA) sets professional standards and rules for solicitors and firms.

Key Term: Financial Conduct Authority (FCA)
The FCA is the main regulator for financial services in the UK, responsible for authorising and supervising firms that carry out regulated activities.

Key Term: Solicitors Regulation Authority (SRA)
The SRA is the professional regulator for solicitors and law firms in England and Wales, setting rules and principles for legal practice.

Key Term: SRA Principles
The SRA Principles are mandatory ethical standards that apply to all solicitors and firms, including requirements to act with integrity, independence, and in the best interests of clients.

Key Term: Financial Services and Markets Act 2000 (FSMA)
The FSMA is the main statute regulating financial services in the UK, setting out which activities require FCA authorisation and the exemptions available.

Key Term: regulated activity
A regulated activity is a financial service or transaction specified in the FSMA and related orders that can only be carried out by an authorised or exempt person.

Regulated Activities and Exemptions

Under the FSMA, it is a criminal offence to carry on a regulated activity in the UK unless authorised by the FCA or exempt. Regulated activities include advising on investments, arranging deals in investments, managing investments, and certain insurance or mortgage activities.

Key Term: exempt regulated activity
An exempt regulated activity is a regulated activity that a professional firm (such as a solicitors' firm) can carry out without FCA authorisation, provided it meets specific conditions and is supervised by a designated professional body.

Solicitors' firms can rely on the "designated professional body exemption" (DPB exemption) if:

  • the regulated activity is incidental to the provision of legal services to a particular client
  • the firm does not receive any third-party reward (such as commission) unless it accounts for it to the client
  • the activity is permitted by the SRA's Scope Rules and Conduct of Business Rules
  • the firm is not otherwise authorised by the FCA for other regulated activities

If these conditions are not met, the firm must obtain FCA authorisation or refrain from carrying out the activity.

Worked Example 1.1

A client asks a solicitor to advise on the purchase of shares in a private company. The solicitor gives specific advice about which shares to buy. The firm is not FCA authorised but is regulated by the SRA.

Answer: Advising on the merits of buying specific shares is a regulated activity. However, if the advice is incidental to legal work for that client and the firm complies with the SRA's rules (including accounting for any commission), the DPB exemption may apply. If the advice is not incidental or the firm receives undisclosed commission, FCA authorisation would be required.

SRA Principles and Financial Services Work

The SRA Principles apply to all work carried out by solicitors, including financial services. Key principles include:

  • acting with integrity and honesty
  • acting in the best interests of each client
  • maintaining public trust and confidence in the profession
  • acting with independence and avoiding conflicts of interest

Firms must ensure that any financial services work is delivered in a way that upholds these principles. This includes being transparent about the scope of advice, disclosing any referral arrangements, and not misleading clients about the firm's regulatory status.

Worked Example 1.2

A firm refers a client to a financial adviser and receives a referral fee, which it does not disclose to the client.

Answer: The firm is in breach of the SRA Principles (integrity, transparency, and acting in the client's best interests) and the SRA's Conduct of Business Rules. The DPB exemption would not apply, and the firm may also be in breach of the FSMA.

SRA Accounts Rules and Client Money

When handling client money in the context of financial services, solicitors' firms must comply with the SRA Accounts Rules. Key requirements include:

  • keeping client money separate from office money
  • paying client money promptly into a client account
  • only withdrawing client money when properly due
  • keeping accurate records and performing regular reconciliations

Breaches of the Accounts Rules can result in disciplinary action by the SRA and loss of public trust.

Worked Example 1.3

A solicitor receives funds from a client to invest in a property transaction. The solicitor pays the money into the firm's office account and uses it to pay business expenses before the transaction is completed.

Answer: This is a breach of the SRA Accounts Rules and the SRA Principles. Client money must be kept separate and only used for the client's matter. The solicitor and the firm may face disciplinary action.

Compliance Structures in Solicitors' Firms

To ensure compliance with financial services regulation, solicitors' firms should implement:

  • clear policies and procedures for identifying regulated activities
  • regular risk assessments and compliance reviews
  • staff training on the boundaries of legal and financial advice
  • systems for recording and disclosing referral fees and commissions
  • robust client due diligence and anti-money laundering checks

Firms must also appoint a Compliance Officer for Legal Practice (COLP) and a Compliance Officer for Finance and Administration (COFA) to oversee compliance with SRA rules.

Exam Warning

Failing to distinguish between regulated and exempt activities, or providing financial advice beyond the DPB exemption, can result in criminal liability under the FSMA and disciplinary action by the SRA. Always check whether an activity is regulated and whether the exemption applies.

Enforcement and Consequences

The SRA and FCA have wide enforcement powers. Breaches may result in:

  • written warnings or reprimands
  • financial penalties
  • conditions or suspension of practising certificates
  • referral to the Solicitors Disciplinary Tribunal (SDT)
  • criminal prosecution for unauthorised regulated activities

Non-compliance can also lead to negligence claims, loss of client trust, and reputational damage.

Key Point Checklist

This article has covered the following key knowledge points:

  • The FSMA prohibits solicitors' firms from carrying on regulated activities unless authorised or exempt.
  • The DPB exemption allows certain regulated activities if they are incidental to legal services and SRA rules are followed.
  • The SRA Principles and Accounts Rules apply to all financial services work in solicitors' firms.
  • Firms must have compliance structures, risk assessments, and clear policies for financial services work.
  • Breaches can result in disciplinary action, criminal liability, and reputational harm.

Key Terms and Concepts

  • Financial Conduct Authority (FCA)
  • Solicitors Regulation Authority (SRA)
  • SRA Principles
  • Financial Services and Markets Act 2000 (FSMA)
  • regulated activity
  • exempt regulated activity
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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.

Saptarshi Chatterjee

Saptarshi Chatterjee

Senior Associate at Trilegal