SRA Financial Services (Conduct of Business) Rules 2001

Version 10 of the Handbook was published on 1 July 2014. For more information, please click "History" above.

SRA Financial Services (Conduct of Business) Rules 2001

These rules, dated 18 July 2001, are made by the Solicitors Regulation Authority Board under sections 31, 79 and 80 of the Solicitors Act 1974, sections 9 and 9A of the Administration of Justice Act 1985 and section 83 of the Legal Services Act 2007, with the approval of the Legal Services Board under paragraph 19 of schedule 4 to the Legal Services Act 2007, regulating the practices of:

in carrying out regulated activities in, into or from the United Kingdom.

Part 1: RULES

Rule 1: Purpose
1.1

The Law Society is a designated professional body under Part XX of FSMA, and firms may therefore carry on certain regulated activities without being regulated by the FCA.

1.2

The SRA Financial Services (Scope) Rules 2001 set out the scope of the regulated activities which may be undertaken by firms which are not regulated by the FCA. These rules regulate the way in which firms carry on such exempt regulated activities.

Rule 2: Application
2.1

Where a firm is a licensed body, these rules apply only in respect of:

(a)

any reserved legal activity;

(b)

any other legal activity;

(c)

any other activity in respect of which the licensed body is regulated pursuant to Part 5 of the LSA.

2.2

Apart from rule 3 (status disclosure), these rules apply to:

(a)

firms which are not regulated by the FCA; and

(b)

firms which are regulated by the FCA but these rules only apply to such firms in respect of their non-mainstream regulated activities.

Rule 3: Status disclosure
3.1

This rule applies only to firms which are not regulated by the FCA.

3.2

A firm shall give the client the following information in writing in a manner that is clear, fair and not misleading before the firm provides a service which includes the carrying on of a regulated activity:

(a)

a statement that the firm is not authorised by the FCA;

(b)

the name and address of the firm;

(c)

the nature of the regulated activities carried on by the firm, and the fact that they are limited in scope;

(d)

a statement that the firm is authorised and regulated by the Solicitors Regulation Authority; and

(e)

a statement explaining that complaints and redress mechanisms are provided through the Solicitors Regulation Authority and the Legal Ombudsman;

3.3

Before a firm provides a service which includes the carrying on of an insurance mediation activity with or for a client, it must make the following statement in writing to the client in a way that is clear, fair and not misleading:

"[This firm is]/[We are] not authorised by the Financial Conduct Authority. However, we are included on the register maintained by the Financial Conduct Authority so that we can carry on insurance mediation activity, which is broadly the advising on, selling and administration of insurance contracts. This part of our business, including arrangements for complaints or redress if something goes wrong, is regulated by Solicitors Regulation Authority. The register can be accessed via the Financial Conduct Authority website at www.fca.org.uk/register."

Notes

(i)

Where the status disclosure relates to insurance mediation activities then the statement in rule 3(3) must be used. The status disclosure need not be tailored to the needs of the individual client. The disclosures may be provided alongside or integrated with other material provided to the client. These disclosures may be made in the firm's client care letter or in a separate letter.

(ii)

Outcome (8.5) in Chapter 8 of the SRA Code of Conduct is that your letterhead, website and e-mails must show the words "authorised and regulated by the Solicitors Regulation Authority" which will assist in meeting the requirements of rule 3(2).

(iii)

The provisions of rule 3(2)(d) and rule 3(3) reflect the requirements of the outcomes in Chapter 1 of the SRA Code of Conduct in respect of complaints handling.

Rule 4: Execution of transactions
4.1

A firm shall ensure that where it has agreed or decided in its discretion to effect a transaction, it shall do so as soon as possible, unless it reasonably believes that it is in the client's best interests not to do so.

Note

(i)

Principle 4 sets out your duty to act in the best interests of the client. Accordingly, in cases where there is any doubt on the point, firms should ensure that transactions are effected on the best terms reasonably available.

Rule 5: Records of transactions
5.1

Where a firm receives instructions from a client to effect a transaction, or makes a decision to effect a transaction in its discretion, it shall keep a record of:

(a)

the name of the client;

(b)

the terms of the instructions or decision; and

(c)

in the case of instructions, the date when they were received.

5.2

Where a firm gives instructions to another person to effect a transaction, it shall keep a record of:

(a)

the name of the client;

(b)

the terms of the instructions;

(c)

the date when the instructions were given; and

(d)

the name of the other person instructed.

Note

(i)

It is not necessary for the firm to make a separate record. Normal file notes or letters on the file will meet the requirements of this rule provided that they include the appropriate information. If instructions are given or received over the telephone, an appropriate attendance note would satisfy this rule.

Rule 6: Record of commissions
6.1

Where a firm receives commission which is attributable to regulated activities carried on by the firm, it shall keep a record of:

(a)

the amount of the commission; and

(b)

how the firm has accounted to the client.

Notes

(i)

Any financial benefit has to be dealt with in accordance with Outcome (1.15) in Chapter 1 of the SRA Code of Conduct. However, firms should bear in mind that in the case of commissions attributable to regulated activities, firms must also comply with the requirements of the SRA Financial Services (Scope) Rules 2001, rule 4 (c).

(ii)

The record could be a letter or bill of costs provided the information is clear.

Rule 7: Safekeeping of clients' investments
7.1

Where a firm undertakes the regulated activity of safeguarding and administering investments, the firm must operate appropriate systems, including the keeping of appropriate records, which provide for the safekeeping of assets entrusted to the firm by clients and others.

7.2

Where such assets are passed to a third party:

(a)

an acknowledgement of receipt of the property should be obtained; and

(b)

if they have been passed to a third party on the client's instructions, such instructions should be obtained in writing.

Rule 8: Packaged products - execution-only business
8.1

If a firm arranges for a client on an execution-only basis any transaction involving a retail investment product, the firm shall send the client written confirmation to the effect that:

(a)

the client had not sought and was not given any advice from the firm in connection with the transaction; or

(b)

the client was given advice from the firm in connection with that transaction but nevertheless persisted in wishing the transaction to be effected; and in either case the transaction is effected on the client's explicit instructions.

Rule 9: Insurance mediation activities
9.1

Where a firm undertakes insurance mediation activities for a client, it must comply with appendix 1 to these rules.

Rule 10: Retention of records
10.1

Each record made under these rules shall be kept for at least six years.

Note

(i)

The six years shall run from the date on which the relevant record has been made.

Rule 11: Waivers
11.1

In any particular case or cases the SRA shall have power to waive in writing any of the provisions of these rules, but shall not do so unless it appears that:

(a)

compliance with them would be unduly burdensome having regard to the benefit which compliance would confer on investors; and

(b)

the exercise of the power would not result in any undue risk to investors.

11.2

The SRA shall have power to revoke any waiver.

Rule 12: Commencement
12.1

These rules come into force on 1 December 2001.

12.2

From 31 March 2012 or the date on which an order made pursuant to section 69 of the LSA relating to the status of sole practitioners comes into force, whichever is the later, these rules shall have effect subject to the following amendment:

(a)

in the preamble the words "and recognised sole practitioners" shall be omitted.

12.3

These rules shall not apply to licensed bodies until such time as the Law Society is designated as a licensing authority under Part 1 of Schedule 10 to the Legal Services Act 2007 and all definitions shall be construed accordingly.

12.4

In these rules references in the preamble to the Rules being made under section 83 of the Legal Services Act 2007 shall have no effect until the Law Society is designated as a licensing authority under Part 1 of Schedule 10 to the Legal Services Act 2007."

Rule 13: Interpretation
13.1

The SRA Handbook Glossary 2012 shall apply and, unless the context otherwise requires:

(a)

all italicised terms shall be defined; and

(b)

all terms shall be interpreted,

in accordance with the Glossary.

Notes

(i)

Whether a transaction is execution-only will depend on the existing relationship between the client and the firm and the circumstances surrounding that transaction. Generally, a transaction will be execution-only if the client instructs the firm to effect it without having received advice from the firm. Even though this is the case, however, the transaction may still not qualify as execution-only because, in view of the relationship, the client may reasonably expect the firm to indicate if the transaction is inappropriate. In any event, a firm may be negligent (and possibly in breach of Principle 4) if it fails to advise on the appropriateness or otherwise.

(ii)

A transaction will also be execution-only if the firm has advised the client that the transaction is unsuitable, but the client persists in wishing the transaction to be carried out. In those circumstances it is good practice (and in some cases a requirement) for the firm to confirm in writing that its advice has not been accepted, and that the transaction is being effected on an execution-only basis.

(iii)

Where the transaction involves a retail investment product, there is a specific requirement to confirm in writing the execution-only nature of a transaction (see Rule 8 above).

13.2

These rules are to be interpreted in the light of the notes.

Part 2: APPENDIX

APPENDIX 1: Insurance Mediation Activities
1

Disclosure of information

(a)

Where a firm undertakes insurance mediation activities for a client, it must take reasonable steps to communicate information to the client in a way that is clear, fair and not misleading.

(b)

Where a firm recommends a contract of insurance (other than a life policy) to a client, the firm must inform the client whether the firm has given advice on the basis of a fair analysis of a sufficiently large number of insurance contracts available on the market to enable the firm to make a recommendation in accordance with professional criteria regarding which contract of insurance would be adequate to meet the client's needs.

(c)

If the firm does not conduct a fair analysis of the market, the firm must:

(i)

advise the client whether the firm is contractually obliged to conduct insurance mediation activities in this way;

(ii)

advise the client that the client can request details of the insurance undertakings with which the firm conducts business; and

(iii)

provide the client with such details on request.

(d)

The information referred to in paragraphs 1(2) and 1(3) above must be provided to the client on paper or on any other durable medium available and accessible to the client.

Notes

(i)

Paragraph 1(1) covers all communications with the client, including oral statements and telephone calls.

(ii)

Indicative behaviours arising in respect of Chapter 6 (Your Client and Introductions to third parties) of the SRA Code of Conduct provides that you ought not in connection with regulated activities have any arrangement with other persons under which you could be constrained to recommend to clients or effect for them (or refrain from doing so) transactions in some investments but not others, or with some persons but not others, or through the agency of some persons but not others; or to introduce or refer clients or other persons with whom the firm deal to some persons but not others. However, these provisions do not apply to arrangements in connection with regulated mortgage contracts, general insurance contracts or pure protection contracts.

(iii)

Paragraphs 1(2) and 1(3) apply to contracts of insurance other than life policies. Firms who are not authorised by the FCA are not allowed to recommend the buying of life policies, but they can make recommendations and advise on other contracts of insurance.

(iv)

Reference to a durable medium in paragraph 1(4) is to a form that allows for the storage of information to be reproduced without changes. This includes floppy disks, CD-roms, DVDs and hard drives where emails are stored.

2

Suitability

(a)

Before a firm recommends a contract of insurance (other than a life policy) the firm must take reasonable steps to ensure that the recommendation is suitable to the client's demands and needs by:

(i)

considering relevant information already held;

(ii)

obtaining details of any relevant existing insurance;

(iii)

identifying the client's requirements and explaining to the client what the client needs to disclose;

(iv)

assessing whether the level of cover is sufficient for the risks that the client wishes to insure; and

(v)

considering the relevance of any exclusions, excesses, limitations or conditions.

(b)

Where the firm recommends a contract of insurance that does not meet the needs of the client because there is no such contract available in the market, this should be disclosed to the client.

3

Demands and needs statement

(a)

Where a firm recommends a contract of insurance (other than a life policy) or arranges a contract of insurance, the firm must, before the contract is finalised, provide the client with a written demands and needs statement that:

(i)

sets out the client's demands and needs on the basis of the information provided by the client;

(ii)

where a recommendation has been made, explains the reason for recommending that contract of insurance;

(iii)

reflects the complexity of the insurance contract being proposed; and

(iv)

is on paper or on any other durable medium available and accessible to the client.

(b)

Where a firm arranges a contract of insurance on an execution-only basis, the demands and needs statement need only identify the contract of insurance requested by the client, confirm that no advice has been given and state that the firm is undertaking the arrangement at the client's specific request.

(c)

The requirement in paragraph 3(1) to provide the client with a written demands and needs statement before the contract is finalised will not apply in the following circumstances:

(i)

where the firm acts on the renewal or amendment of a contract of insurance other than a life policy if the information given to the client in relation to the initial contract is still accurate and up-to-date. If the information previously disclosed has changed, the firm must draw the attention of the client to the matters which have changed before the renewal or amendment takes place;

(ii)

where the information is provided orally at the request of the client;

(iii)

where immediate cover is required;

(iv)

where the contract is concluded by telephone; or

(v)

where the firm is introducing the client to an authorised person or an exempt person and taking no further part in arranging the contract of insurance;

save that in (b), (c) and (d) above the information contained in the written demands and needs statement must be provided to the client immediately after the conclusion of the contract of insurance.

Notes

(i)

Reference to a durable medium in paragraph 3(1)(d) is to a form that allows for the storage of information and allows the information to be reproduced without changes. This includes floppy disks, CD-Roms, DVDs and hard drives where emails are stored.

(ii)

Paragraph 2 and 3(1) apply to contracts of insurance other than life policies. Firms who are not authorised by the FCA are not allowed to recommend the buying of life policies, but they can make recommendations and advise on other contracts of insurance.

4

Exclusion for large risks

(a)

Paragraphs 1 - 3 above do not apply where a firm carries on insurance mediation activities for commercial clients in relation to contracts of insurance covering risks within the following categories:

(i)

railway rolling stock, aircraft, ships (sea, lake, river and canal vessels), goods in transit, aircraft liability and liability of ships (sea, lake, river and canal vessels);

(ii)

credit and suretyship, where the policyholder is engaged professionally in an industrial or commercial activity or in one of the liberal professions, and the risks relate to such activity;

(iii)

land vehicles (other than railway rolling stock), fire and natural forces, other damage to property, motor vehicle liability, general liability, and miscellaneous financial loss, in so far as the policyholder exceeds the limits of at least two of the following three criteria:

(A)

balance sheet total: €6.2 million;

(B)

net turnover: €12.8 million;

(C)

average number of employees during the financial year: 250.

5

Notification of establishment and services in other Member States

If a firm wishes to exercise the right conferred by Article 6 of the Insurance Mediation Directive to establish a branch or provide cross-border services in another EEA state, an appropriate application must be made directly to the FCA. The Rules under the FCA's Supervision Manual, SUP 13, Exercise of Passport Rights by UK firms, contain details of the applicable process. A firm proposing to provide such services must comply with the applicable provisions of the Act, as laid down in the FCA's Professional Firms' Sourcebook Chapter 7 as amended from time to time.