Financial services and regulation - Relevant exemptions for solicitors

Learning Outcomes

After studying this article, you will be able to identify when solicitors can rely on exemptions from FCA authorisation under the Financial Services and Markets Act 2000 (FSMA), especially the s.327 professional exemption. You will understand the conditions for exempt regulated activities, the SRA Scope and Conduct of Business Rules, and key exclusions relevant to legal practice. You will be able to apply these rules to SQE1-style scenarios.

SQE1 Syllabus

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

• the general prohibition under FSMA 2000 and its application to solicitors
• the s.327 professional exemption and its conditions
• the SRA Financial Services (Scope) Rules and Conduct of Business Rules
• relevant exclusions for solicitors under the Regulated Activities Order 2001
• the practical implications of these exemptions and exclusions in client scenarios.

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 main condition that allows a solicitor to carry out certain regulated activities without FCA authorisation?
2. Which SRA rules must a solicitor comply with when relying on the s.327 professional exemption?
3. Give an example of a regulated activity that is excluded from the s.327 exemption for solicitors.
4. What must a solicitor do if they receive a commission from a third party in connection with an exempt regulated activity?

Introduction

Solicitors sometimes encounter financial services work when advising clients, especially in areas like conveyancing, probate, or corporate transactions. The Financial Services and Markets Act 2000 (FSMA) regulates a wide range of financial activities. Generally, only those authorised by the Financial Conduct Authority (FCA) may carry out regulated activities. However, solicitors can rely on specific exemptions and exclusions to avoid the need for FCA authorisation, provided strict conditions are met.

Understanding these exemptions is essential for SQE1, as breaching FSMA can result in criminal liability and invalidate client transactions.

The General Prohibition

Section 19 FSMA states that no person may carry on a regulated activity in the UK unless they are authorised or exempt. Breaching this rule is a criminal offence.

Key Term: general prohibition
The rule under FSMA 2000 that prohibits carrying on regulated activities unless authorised by the FCA or exempt.

Regulated Activities and Specified Investments

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

Key Term: regulated activity
An activity specified in the RAO 2001, relating to a specified investment, carried on by way of business.

Specified investments include shares, debentures, insurance contracts, mortgages, and more. Land is not a specified investment.

Key Term: specified investment
A financial product or instrument listed in the RAO 2001, such as shares, insurance contracts, or mortgages.

Exemptions for Solicitors – The s.327 Professional Exemption

Section 327 FSMA allows members of designated professional bodies, including solicitors regulated by the SRA, to carry on certain regulated activities without FCA authorisation, provided strict conditions are met.

The main conditions are:

• The activity must arise out of, or be ancillary to, the provision of a particular professional service to a particular client.
• The activity must be incidental to the main legal services provided.
• The solicitor must not receive any reward or advantage from a third party (other than the client) unless it is fully accounted for to the client.
• The activity must not be prohibited by Treasury order or FCA direction.
• The solicitor must not carry on any other regulated activities except those permitted by the SRA.

Key Term: s.327 professional exemption
An exemption under FSMA 2000 allowing solicitors to carry out certain regulated activities without FCA authorisation, if strict conditions are met.

SRA Scope and Conduct of Business Rules

To use the s.327 exemption, solicitors must comply with the SRA Financial Services (Scope) Rules and the SRA Financial Services (Conduct of Business) Rules.

• The Scope Rules set out which activities are permitted and which are prohibited.
• The Conduct of Business Rules require solicitors to provide clients with clear information about their regulatory status, keep records of transactions and commissions, and act in the client's best interests.

Key Term: SRA Scope Rules
SRA rules specifying which regulated activities solicitors may carry out under the s.327 exemption.

Key Term: SRA Conduct of Business Rules
SRA rules governing how solicitors must conduct exempt regulated activities, including disclosure and record-keeping.

Excluded Activities

Some activities are excluded from the s.327 exemption and require FCA authorisation. These include:

• Activities not incidental to legal services (e.g., running a financial services business).
• Activities prohibited by Treasury order (e.g., advising on pension transfers).
• Activities where the solicitor receives a commission from a third party and does not account to the client.

Exclusions under the Regulated Activities Order

The RAO 2001 contains further exclusions relevant to solicitors, such as:

• The "introducing" exclusion: simply introducing a client to an FCA-authorised person, with no further involvement.
• The "professional/necessary" exclusion: where the regulated activity is a necessary part of legal services.
• The "takeover" exclusion: advising on or arranging the sale of shares amounting to a takeover (50% or more of voting shares).
• The "trustee/personal representative" exclusion: acting as a trustee or personal representative, provided no extra remuneration is received.

Key Term: exclusion
A provision in the RAO 2001 that removes certain activities from the scope of regulation, even if they would otherwise be regulated activities.

Practical Application and Compliance

Solicitors must ensure that any regulated activity they undertake is genuinely incidental to legal work for a particular client. They must not hold themselves out as providing financial services generally. Any commission or reward from a third party must be disclosed and accounted for to the client.

Worked Example 1.1

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

Answer: The solicitor cannot rely on the s.327 exemption unless the commission is fully accounted for to the client. Failing to disclose and account for the commission breaches both FSMA and SRA rules.

Worked Example 1.2

A solicitor refers a client to an independent financial adviser (IFA) for investment advice. The solicitor receives a referral fee from the IFA and does not inform the client.

Answer: The solicitor cannot rely on the "introducing" exclusion if they receive a reward from the IFA and do not account for it to the client. This is a breach of both FSMA and SRA rules.

Worked Example 1.3

A solicitor is asked by a client to advise on the purchase of shares in a private company. The client will acquire 60% of the voting shares. The solicitor is not FCA-authorised.

Answer: The solicitor can rely on the "takeover" exclusion, as the transaction involves more than 50% of the voting shares. No FCA authorisation is required for this activity.

Exam Warning

If a solicitor carries out a regulated activity that is not genuinely incidental to legal work, or fails to comply with SRA rules, they may commit a criminal offence and the client transaction may be unenforceable.

Revision Tip

When answering SQE1 questions, always check:

• Is the activity a regulated activity?
• Is there an applicable exclusion or exemption?
• Are all conditions of the exemption met, including SRA rules?

Summary

Key Point Checklist

This article has covered the following key knowledge points:

• The general prohibition under FSMA 2000 prevents solicitors from carrying on regulated activities unless authorised or exempt.
• The s.327 professional exemption allows solicitors to carry out certain regulated activities if they are incidental to legal work and SRA rules are followed.
• Solicitors must comply with the SRA Scope and Conduct of Business Rules when relying on the exemption.
• Key exclusions under the RAO 2001 include the introducing, professional/necessary, takeover, and trustee/personal representative exclusions.
• Solicitors must disclose and account for any commission or reward from third parties to the client.
• Breaching these rules can result in criminal liability and invalidate client transactions.

Key Terms and Concepts

• general prohibition
• regulated activity
• specified investment
• s.327 professional exemption
• SRA Scope Rules
• SRA Conduct of Business Rules
• exclusion