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,
• RELs in any part of the United Kingdom, and
• RFLs in England and Wales,

in carrying out regulated activities in the United Kingdom, for the purposes of the Financial Services and Markets Act 2000.

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, 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 FCA.

1.2

These rules:

(a)

prohibit firms which are not regulated by the FCA 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 FCA and the Prudential Regulation Authority (PRA) the statutory regulators of financial services business. Under FSMA anyone carrying on regulated activities needs to be regulated by the FCA. 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 FCA.

2.2

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

(a)

any reserved legal activity;

(b)

any non-reserved legal activity except, in relation to an MDP, any such activity that is excluded on the terms of the licence;

(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 FCA and comply with the FCA'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);

(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);

(p)

entering into a regulated credit agreement as lender except where the regulated credit agreement relates exclusively to the payment of disbursements or professional fees due to the firm;

(q)

exercising, or having the right to exercise, the lender's rights and duties under a regulated credit agreement except where the regulated credit agreement relates exclusively to the payment of disbursements or professional fees due to the firm;

(r)

entering into a regulated consumer hire agreement as owner;

(s)

exercising, or having the right to exercise, the owner's rights and duties under a regulated consumer hire agreement;

(t)

operating an electronic system in relation to lending within the meaning of article 36H of the Regulated Activities Order;

(u)

carrying on the activity of providing credit references within the meaning of article 89B of the Regulated Activities Order;

(v)

insurance distribution activities in relation to insurance-based investment products; or

(w)

creating, developing, designing and/or underwriting a contract of insurance.

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 FCA 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 FCA 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

Retail investment products (except personal pension schemes)

(a)

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

(i)

recommending, or arranging for, a client to buy a retail investment 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 retail investment 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 distribution activities

(a)

A firm may only carry on insurance distribution activities as an ancillary insurance intermediary.

(b)

A firm must not carry on any insurance distribution activities unless the firm:

(i)

is registered in the Financial Services Register; and

(ii)

has appointed an insurance distribution officer who will be responsible for the firm's insurance distribution activities.

(c)

If a firm is carrying on, or proposing to carry on, insurance distribution activities it must notify the SRA in the prescribed form.

(d)

The SRA may give the FCA any of the information collected on the prescribed form and the firm must notify the SRA without undue delay of any changes to this information or to any information about the firm that appears on the Financial Services Register.

(e)

Rule 5.6(c) does not apply to a firm that has been registered in the Financial Services Register and was able to carry on insurance mediation activities before 1 October 2018.

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.

5.11

Credit-related regulated activities

(a)

A firm must not enter into any transaction with a client in which it:

(i)

provides the client with credit card cheques, a credit or store card, credit tokens, running account credit, a current account or high-cost short-term credit;

(ii)

holds a continuous payment authority over the client's account; or

(iii)

takes any article from the client in pledge or pawn as security for the transaction.

(b)

A firm must not:

(i)

enter into a regulated credit agreement as lender; or

(ii)

exercise, or have the right to exercise, the lender's rights and duties under a regulated credit agreement,

which is secured on land by a legal or equitable mortgage.

(c)

A firm must not:

(i)

enter into a regulated credit agreement as lender; or

(ii)

exercise, or have the right to exercise, the lender's rights and duties under a regulated credit agreement,

which includes a variable rate of interest.

(d)

A firm must not provide a debt management plan to a client.

(e)

A firm must not charge a separate fee for, or attribute any element of the firm's fees to, credit broking services.

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 FCA 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

[Deleted]

7.4

[Deleted]

7.5

[Deleted]

Rule 8: Interpretation

8.1

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.

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.