SRA Handbook

SRA Financial Services (Scope) Rules 2001

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SRA Financial Services (Scope) 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, and for the purposes of section 332 of the Financial Services and Markets Act 2000 regulating the practices of:

• Authorised bodies and recognised sole practitioners in any part of the world,
• Registered European lawyers in any part of the United Kingdom, and
• Registered foreign lawyers in England and Wales,

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 FSA, if they can meet the conditions specified in section 327 of FSMA. As a designated professional body the Law Society is required to make rules governing the carrying on by firms of regulated activities. The purpose of these rules is to set out the scope of the regulated activities which may be undertaken by firms which are not regulated by the FSA.

1.2

These rules:

(a)

prohibit firms which are not regulated by the FSA from carrying on certain regulated activities;

(b)

set out the basic conditions which those firms must satisfy when carrying on any regulated activities;

(c)

set out other restrictions on regulated activities carried on by those firms.

Note

(i)

FSMA makes the FSA the single statutory regulator of financial services business. Under FSMA anyone carrying on regulated activities needs to be regulated by the FSA. Part XX of FSMA enables firms authorised and regulated by the SRA to be treated as exempt professional firms and to carry on activities known as exempt regulated activities provided that these firms are able to comply with the SRA Financial Services (Scope) Rules 2001 as these Rules set out the scope of the activities which may be undertaken.

Rule 2: Application

2.1

These rules apply only to firms which are not regulated by the FSA.

2.2

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.

Note

(i)

Any firm which undertakes regulated activities and cannot comply with the Part XX exemption must be authorised by the FSA and comply with the FSA's requirements.

Rule 3: Prohibited activities

3.1

A firm must not carry on, or agree to carry on, any of the following activities:

(a)

market making in investments;

(b)

buying, selling, subscribing for or underwriting investments as principal where the firm:

(i)

holds itself out as engaging in the business of buying such investments with a view to selling them;

(ii)

holds itself out as engaging in the business of underwriting investments of the kind to which the transaction relates; or

(iii)

regularly solicits members of the public with the purpose of inducing them, as principals or agents, to enter into transactions and the transaction is entered into as a result of the firm having solicited members of the public in that manner.

(c)

buying or selling investments with a view to stabilising or maintaining the market price of the investments;

(d)

acting as a stakeholder pension scheme manager;

(e)

entering into a broker funds arrangement;

(f)

effecting and carrying out contracts of insurance as principal;

(g)

establishing, operating or winding up a collective investment scheme;

(h)

establishing, operating or winding up a stakeholder pension scheme or a personal pension scheme;

(i)

managing the underwriting capacity of a Lloyds syndicate as a managing agent at Lloyds;

(j)

advising a person to become a member of a particular Lloyd's syndicate;

(k)

entering as provider into a funeral plan contract;

(l)

entering into a regulated mortgage contract as lender or administering a regulated mortgage contract (unless this is in the firm's capacity as a trustee or personal representative and the borrower is a beneficiary under the trust, will or intestacy);

(m)

entering into a regulated home purchase plan as provider or administering a regulated home purchase plan (unless this is in the firm's capacity as a trustee or personal representative and the home purchaser is a beneficiary under the trust, will or intestacy);

(n)

entering into a regulated home reversion plan as a provider or administering a regulated home reversion plan (unless this is in the firm's capacity as a trustee or personal representative and the reversion seller is a beneficiary under the trust, will or intestacy); or

(o)

entering into a regulated sale and rent back agreement as an agreement provider or administering a regulated sale and rent back agreement (unless this is in the firm's capacity as a trustee or personal representative and the agreement seller is a beneficiary under the trust, will or intestacy).

Note

(i)

The Treasury has made the Financial Services and Markets Act 2000 (Professions) (Non-Exempt Activities) Order 2001 which sets out those activities which cannot be provided by professional firms under the Part XX exemption. These activities are also restricted in Rules 3 and 5 of the SRA Financial Services (Scope) Rules 2001.

Rule 4: Basic conditions

4.1

A firm which carries on any regulated activities must ensure that:

(a)

the activities arise out of, or are complementary to, the provision of a particular professional service to a particular client;

(b)

the manner of the provision by the firm of any service in the course of carrying on the activities is incidental to the provision by the firm of professional services;

(c)

the firm accounts to the client for any pecuniary reward or other advantage which the firm receives from a third party;

(d)

the activities are not of a description, nor do they relate to an investment of a description, specified in any order made by the Treasury under section 327(6) of FSMA;

(e)

the firm does not carry on, or hold itself out as carrying on, a regulated activity other than one which is allowed by these rules or one in relation to which the firm is an exempt person;

(f)

there is not in force any order or direction of the FSA under sections 328 or 329 of FSMA which prevents the firm from carrying on the activities; and

(g)

the activities are not otherwise prohibited by these rules.

Notes

(i)

In order to comply with rule 4(a) you must ensure that the regulated activity in question arises out of, or is complementary to, other professional services to a particular client. The effect of this is that it is not possible to undertake a regulated activity in isolation for a client.

(ii)

In order to comply with rule 4(b) the exempt regulated activities cannot be a major part of the practice of the firm. The FSA considers that the following factors are relevant to this: the scale of regulated activity in proportion to other professional services provided; whether and to what extent activities that are regulated activities are held out as separate services; and the impression given of how the firm provides regulated activities, for example through its advertising or other promotion of its services.

(iii)

In order to comply with rule 4(c) you must account for any commission or other financial benefit to the client. Accounting to the client does not mean simply telling the client that the firm will receive commission. It means that the commission etc must be held to the order of the client and the client gives you informed consent to keep it. To comply with the rule you should, in advance of the arrangement and/or provision of the third party financial service:

(a)

inform the client of their rights to any commission etc;

(b)

inform the client that the arrangement and/or provision of the service is not dependant on their agreement to waive their right to any commission etc;

(c)

seek and record agreement from the client as to whether any commission etc should be passed to the client, retained by the firm to offset client fees, or retained by the firm with the client waiving their right to it.

Rule 5: Other restrictions

5.1

Packaged products (except personal pension schemes)

(a)

A firm must not recommend, or make arrangements for, a client to buy a packaged product except where:

(i)

recommending, or arranging for, a client to buy a packaged product by means of an assignment;

(ii)

the arrangements are made as a result of a firm managing assets within the exception to rule 5(4) below; or

(iii)

arranging a transaction for a client where the firm assumes on reasonable grounds that the client is not relying on the firm as to the merits or suitability of that transaction.

5.2

Personal pension schemes

(a)

A firm must not recommend a client to buy or dispose of any rights or interests in a personal pension scheme.

(b)

A firm must not make arrangements for a client to buy any rights or interests in a personal pension scheme except where the firm assumes on reasonable grounds that the client is not relying on the firm as to the merits or suitability of that transaction but this exception does not apply where the transaction involves:

(i)

a pension transfer; or

(ii)

an opt-out.

5.3

Securities and contractually based investments (except packaged products)

(a)

A firm must not recommend a client to buy or subscribe for a security or a contractually based investment where the transaction would be made:

(i)

with a person acting in the course of carrying on the business of buying, selling, subscribing for or underwriting the investment, whether as principal or agent;

(ii)

on an investment exchange or any other market to which that investment is admitted for dealing; or

(iii)

in response to an invitation to subscribe for an investment which is, or is to be, admitted for dealing on an investment exchange or any other market.

(b)

this rule does not apply where the client is:

(i)

not an individual;

(ii)

an individual who acts in connection with the carrying on of a business of any kind by himself or by an undertaking of which the client is, or would become as a result of the transaction to which the recommendation relates, a controller; or

(iii)

acting in his capacity as a trustee of an occupational pension scheme.

5.4

Discretionary management

(a)

A firm must not manage assets belonging to another person in circumstances which involve the exercise of discretion except where the firm or a manager or employee of the firm is a trustee, personal representative, donee of a power of attorney or receiver appointed by the Court of Protection, and either:

(i)

all routine or day to day decisions, so far as relating to that activity, are taken by an authorised person with permission to carry on that activity or an exempt person; or

(ii)

any decision to enter into a transaction, which involves buying or subscribing for an investment, is undertaken in accordance with the advice of an authorised person with permission to give advice in relation to such an activity or an exempt person.

5.5

Corporate finance

(a)

A firm must not act as any of the following:

(i)

sponsor to an issue in respect of securities to be admitted for dealing on the London Stock Exchange; or

(ii)

nominated adviser to an issue in respect of securities to be admitted for dealing on the Alternative Investment Market of the London Stock Exchange; or

(iii)

corporate adviser to an issue in respect of securities to be admitted for dealing on the PLUS Market.

5.6

Insurance mediation activities

(a)

Unless a firm is registered in the FSA Register it must not carry on any insurance mediation activities;

(b)

Any firm undertaking insurance mediation activities must appoint an insurance mediation officer whose details will be made known to the FSA and who will be responsible for the firm's insurance mediation activities.

5.7

Regulated mortgage contracts

(a)

A firm must not recommend a client to enter as borrower into a regulated mortgage contract but can endorse a recommendation given by an authorised person with permission to advise on regulated mortgage contracts or an exempt person in relation to the giving of such advice.

5.8

Regulated home purchase plans

(a)

A firm must not recommend a client to enter as home purchaser into a regulated home purchase plan with a particular person but can endorse a recommendation given by an authorised person with permission to advise on regulated home purchase plans or an exempt person in relation to the giving of such advice.

5.9

Regulated home reversion plans

(a)

A firm must not recommend a client to enter as reversion seller or plan provider into a regulated home reversion plan with a particular person but can endorse a recommendation given by an authorised person with permission to advise on regulated home reversion plans or an exempt person in relation to the giving of such advice.

5.10

Regulated sale and rent back agreements

(a)

A firm must not recommend a client to enter as agreement seller or agreement provider into a regulated sale and rent back agreement with a particular person but can endorse a recommendation given by an authorised person with permission to advise on regulated sale and rent back agreements or an exempt person in relation to the giving of such advice.

Note

(i)

A firm which relies on the Part XX exemption cannot carry on insurance mediation activities unless they are on the FSA's Exempt Professional Firms (EPF) Register and appoint an insurance mediation officer. Firms wishing to be on this Register should notify the SRA (contactcentre@sra.org.uk and 0870 606 2555) and provide details of their insurance mediation officer. The EPF Register can be accessed on the FSA website - see www.fsa.gov.uk.

Rule 6: Effect of a breach of these rules

6.1

The SRA may exercise its statutory powers in respect of any firm which breaches these rules.

6.2

In determining whether or not there has been a breach of these rules the SRA will take account of whether the firm has given due regard to the guidance issued by the Law Society or the SRA on how to determine whether regulated activities are carried on in accordance with these rules.

6.3

A firm which breaches these rules may:

(a)

Be committing a criminal offence under section 23 of FSMA; and

(b)

Be made subject to an order by the FSA under section 329 of FSMA which could prevent the firm from carrying on any regulated activities.

Part 2: Repeal, commencement and transitional provisions

Rule 7: Repeal, commencement and transitional provisions

7.1

These rules repeal the Solicitors' Investment Business Rules 1995.

7.2

These rules come into force on 1 December 2001.

7.3

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 amendments:

(a)

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

7.4

The 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.

7.5

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 to Schedule 10 of the Legal Services Act 2007."

Rule 8: Interpretation

8.1

All italicised terms in these rules are to be interpreted in accordance with chapter 14 of the SRA Code of Conduct unless they are defined as follows:

agreement provider

has the meaning given by article 63J(3) of the Regulated Activities Order read with paragraphs (6) and (7) of that article;

agreement seller

has the meaning given by article 63J(3) of the Regulated Activities Order;

authorised person

has the meaning given in section 31 of FSMA;

broker funds arrangement

means an arrangement between a firm and a life office (or operator of a regulated collective investment scheme) under which the life office (or operator of the regulated collective investment scheme) agrees to establish a separate fund whose composition may be determined by instructions from the firm and in which it is possible for more than one client to invest;

client

in relation to any regulated activities carried on by a firm for a trust or the estate of a deceased person (including a controlled trust), means the trustees or personal representatives in their capacity as such and not any person who is a beneficiary under the trust or interested in the estate;

collective investment scheme

means (in accordance with section 235 of FSMA(Collective Investment Schemes)) any arrangements with respect to property of any description, including money, the purpose or effect of which is to enable persons taking part in the arrangements (whether by becoming owners of the property or any part of it or otherwise) to participate in or receive profits or income arising from the acquisition, holding, management or disposal of the property or sums paid out of such profits or income, which are not excluded by the Financial Services and Markets Act (Collective Investment Schemes) Order 2001 (SI 2001/1062);

contract of insurance

means (in accordance with article 3(1) of the Regulated Activities Order) any contract of insurance which is a long-term insurance contract or a general insurance contract;

contractually based investment

has the meaning given by article 3(1) of the Regulated Activities Order but does not include an investment which falls within the definition of a packaged product;

controller

has the meaning given in section 422 of FSMA;

employee

means an individual who is employed in connection with the firm's regulated activities under a contract of service or under a contract for services such that he or she is held out as an employee or consultant of the firm;

exempt person

means a person who is exempt from the general prohibition as a result of an exemption order made under section 38(1) or as a result of section 39(1) or 285(2) or (3) of FSMA and who, in engaging in the activity in question, is acting in the course of business in respect of which that person is exempt;

FSA

means the Financial Services Authority;

FSA Register

means the record maintained by the FSA as required by section 347 of FSMA and including those persons that carry on, or are proposing to carry on, insurance mediation activities;

FSMA

means the Financial Services and Markets Act 2000;

funeral plan contract

has the meaning given in article 59 of the Regulated Activities Order;

general insurance contract

is any contract of insurance within Part 1 of Schedule 1 to the Regulated Activities Order;

general prohibition

has the meaning given in section 19(2) of FSMA;

home purchaser

has the meaning given by article 63F(3) of the Regulated Activities Order;

individual pension contract

means a pension policy or pension contract under which contributions are paid to:

(i)

a personal pension scheme approved under section 630 of the Income and Corporation Taxes Act 1988, whose sole purpose is the provision of annuities or lump sums under arrangements made by individuals in accordance with the scheme; or

(ii)

a retirement benefits scheme approved under section 591(2)(g) of the Income and Corporation Taxes Act 1988, for the provision of relevant benefits by means of an annuity contract made with an insurance company of the employee's choice;

insurance mediation activity

means any of the following activities specified in the Regulated Activities Order which is carried on in relation to a contract of insurance or rights to or interests in a life policy:

(i)

dealing in investments as agent;

(ii)

arranging (bringing about) deals in investments;

(iii)

making arrangements with a view to transactions in investments;

(iv)

assisting in the administration and performance of a contract of insurance;

(v)

advising on investments;

(vi)

agreeing to carry on a regulated activity in (a) to (e) above;

insurance mediation officer

means the individual within the management structure of the firm who is responsible for an insurance mediation activity;

investment

means any of the investments specified in Part III of the Regulated Activities Order;

investment trust

means a closed-ended company which is listed in the UK or another member state and:

(i)

is approved by the Inland Revenue under section 842 of the Income and Corporation Taxes Act 1988 (or, in the case of a newly formed company, has declared its intention to conduct its affairs so as to obtain approval); or

(ii)

is resident in another member state and would qualify for approval if resident and listed in the UK;

investment trust savings scheme

means a dedicated service for investment in the securities of one or more investment trusts within a particular marketing group (and references to an investment trust savings scheme include references to securities to be acquired through that scheme);

ISA

means a scheme of investment satisfying the conditions prescribed in the Individual Savings Account Regulations 1998 (S.I. 998/1870);

life office

means a person with permission to effect or carry out long-term insurance contracts;

life policy

means a long-term insurance contract other than a pure protection contract or a reinsurance contract, but including a pension policy;

long-term care insurance contract

has the meaning given in article 1 of the Financial Services and Markets Act 2000 (Regulated Activities) (Amendment)(No 2) Order 2003;

long-term insurance contract

has the meaning given in Part II of Schedule 1 to the Regulated Activities Order;

market making

means where a firm holds itself out as willing, as principal, to buy, sell or subscribe for investments of the kind to which the transaction relates at prices determined by the firm generally and continuously rather than in respect of each particular transaction;

non-registered European lawyer

means a member of a profession covered by the Establishment of Lawyers Directive 98/5/EC who is based entirely at an office or offices outside England and Wales and who is not a solicitor, registered European lawyer or registered foreign lawyer;

occupational pension scheme

means any scheme or arrangement which is comprised in one or more documents or agreements and which has, or is capable of having, effect in relation to one or more descriptions or categories of employment so as to provide benefits, in the form of pensions or otherwise, payable on termination of service, or on death or retirement, to or in respect of earners with qualifying service in an employment of any such description or category;

opt-out

means a transaction resulting from a decision by an individual to opt-out of or decline to join a final salary or money-purchase occupational pension scheme of which he or she is a current member, or which he or she is, or at the end of a waiting period will become, eligible to join, in favour of an individual pension contract or contracts;

packaged product

means a life policy, a unit or share in a regulated collective investment scheme, or an investment trust savings scheme whether or not held within an ISA or PEP, or a stakeholder pension scheme;

partner

means a person who is or is held out as a partner in a partnership;

partnership

means an unincorporated body in which persons are or are held out as partners and does not include a body incorporated as an LLP;

pension contract

means a right to benefits obtained by the making of contributions to an occupational pension scheme or to a personal pension scheme, where the contributions are paid to a regulated collective investment scheme;

pension policy

means a right to benefits obtained by the making of contributions to an occupational pension scheme or to a personal pension scheme, where the contributions are paid to a life office;

pension transfer

means a transaction resulting from a decision by an individual to transfer deferred benefits from a final salary occupational pension scheme, or from a money-purchase occupational pension scheme, in favour of an individual pension contract or contracts;

PEP

means a personal equity plan within the Personal Equity Plan Regulations 1989;

personal pension scheme

means any scheme or arrangement which is not an occupational pension scheme or a stakeholder pension scheme and which is comprised in one or more instruments or agreements, having or capable of having effect so as to provide benefits to or in respect of people on retirement, or on having reached a particular age, or on termination of service in an employment;

plan provider

has the meaning given by article 63B(3) of the Regulated Activities Order read with paragraphs (7) and (8) of that article;

professional services

means services provided by a firm in the course of its practice and which do not constitute carrying on a regulated activity;

pure protection contract

(i)

A long-term insurance contract:

(A)

under which the benefits are payable only in respect of death or of incapacity due to injury, sickness or infirmity;

(B)

which has no surrender value or the consideration consists of a single premium and the surrender value does not exceed that premium; and

(C)

which makes no provision for its conversion or extension in a manner which would result in its ceasing to comply with (a) or (b); or

(ii)

a reinsurance contract covering all or part of a risk to which a person is exposed under a long-term insurance contract;

registered foreign lawyer

means an individual registered with the SRA under section 89 of the Courts and Legal Services Act 1990;

Regulated Activities Order

means the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001;

regulated activity

means an activity which is specified in the Regulated Activities Order; 

regulated collective investment scheme

means:

(i)

an investment company with variable capital;

(ii)

an authorised unit trust scheme as defined in section 237(3) of FSMA; or

(iii)

a scheme recognised under sections 264, 270 or 272 of FSMA;

regulated home purchase plan

has the meaning given by article 63F(3) of the Regulated Activities Order;

regulated home reversion plan

has the meaning given by article 63B(3) of the Regulated Activities Order;

regulated mortgage contract

has the meaning given by article 61(3) of the Regulated Activities Order;

regulated sale and rent back agreement

has the meaning given by article 63J(3) of the Regulated Activities Order;

reinsurance contract

means a contract of insurance covering all or part of a risk to which a person is exposed under a contract of insurance;

reversion seller

has the meaning given by article 63B(3) of the Regulated Activities Order;

security

has the meaning given by article 3(1) of the Regulated Activities Order but does not include an investment which falls within the definition of a packaged product;

stakeholder pension scheme

means a scheme established in accordance with Part I of the Welfare and Pensions Reform Act 1999 and the Stakeholder Pension Scheme Regulations 2000; and

transaction

means the purchase, sale, subscription or underwriting of a particular investment.

8.2

In these rules references to statutes, rules, codes or regulations, statements or principles etc other than these rules include any modification or replacement thereof.

8.3

As the context requires, other words and expressions shall have the meanings assigned to them by the Interpretation Act 1978, FSMA and the SA.

8.4

References in these rules to activities carried on by a firm include activities carried on by an individual as sole principal, manager or employee of the firm.