Financial services and regulation - Application of the Financial Services and Markets Act 2000 and related legislation

Learning Outcomes

After studying this article, you will be able to explain the main principles and regulatory structure of the Financial Services and Markets Act 2000 (FSMA), identify what constitutes a regulated activity, understand the general prohibition and relevant exemptions, and apply the rules on financial promotions. You will be able to analyse practical scenarios involving solicitors and financial services, and answer SQE1-style questions on this topic.

SQE1 Syllabus

For SQE1, you are required to understand the application of the Financial Services and Markets Act 2000 and related legislation to legal practice. Focus your revision on:

  • the regulatory framework for financial services in England and Wales
  • the meaning and scope of regulated activities under FSMA 2000
  • the general prohibition and the need for authorisation or exemption
  • the main exemptions relevant to solicitors and professional firms
  • the regulation of financial promotions and the consequences of breach
  • the practical implications for solicitors advising on or arranging financial products

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 "general prohibition" under the Financial Services and Markets Act 2000?
  2. Name three examples of regulated activities under FSMA 2000.
  3. In what circumstances can a solicitor rely on a professional firms exemption to carry out a regulated activity?
  4. What is a financial promotion and what are the consequences of breaching the rules on financial promotions?

Introduction

The Financial Services and Markets Act 2000 (FSMA) is the main statute regulating financial services in England and Wales. It sets out who can carry out certain financial activities, what authorisation is required, and how financial promotions are controlled. Solicitors must be aware of the FSMA framework, as legal work often overlaps with regulated financial activities.

The Regulatory Structure

FSMA created a system of regulation for financial services, with two main regulators:

  • The Financial Conduct Authority (FCA): responsible for regulating the conduct of most financial services firms, including solicitors' firms carrying out regulated activities.
  • The Prudential Regulation Authority (PRA): regulates banks, insurers, and certain large investment firms for prudential matters.

The FCA's objectives include protecting consumers, maintaining market integrity, and promoting competition.

Key Term: Financial Conduct Authority (FCA)
The main regulator for most financial services firms in the UK, including those carrying out regulated activities under FSMA.

The General Prohibition and Regulated Activities

Section 19 FSMA sets out the "general prohibition": no person may carry on a regulated activity in the UK unless they are authorised or exempt. Breaching this is a criminal offence.

Key Term: general prohibition
The rule that no one may carry on a regulated activity in the UK unless authorised or exempt under FSMA 2000.

Key Term: regulated activity
An activity of a specified kind, carried on by way of business, relating to a specified investment, as defined in the Regulated Activities Order under FSMA 2000.

The Treasury specifies what counts as a regulated activity and a specified investment in the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 (RAO).

Examples of Regulated Activities

Common regulated activities include:

  • Accepting deposits (e.g., banking)
  • Managing investments
  • Advising on investments
  • Dealing in investments as agent or principal
  • Arranging deals in investments
  • Operating collective investment schemes
  • Effecting or carrying out insurance contracts

Key Term: specified investment
A financial product or instrument listed in the Regulated Activities Order, such as shares, bonds, insurance contracts, or regulated mortgages.

To be regulated, the activity must be carried on "by way of business" and relate to a specified investment.

The Authorisation Requirement

Firms or individuals wishing to carry on regulated activities must apply to the FCA (or PRA for certain firms) for authorisation. This involves meeting threshold conditions on suitability, resources, and systems. Authorisation is activity-specific and ongoing compliance is required.

Worked Example 1.1

A solicitor's firm wants to advise clients on which shares to buy as part of estate planning. Is this a regulated activity?

Answer:
Yes. Advising on the merits of buying or selling shares is a regulated activity, as shares are specified investments and the advice is given by way of business. Unless the firm is authorised or exempt, this would breach the general prohibition.

Exemptions and Exclusions

FSMA recognises that some activities should not require full FCA authorisation. There are two main ways this is achieved:

  • Exclusions: Certain activities are excluded from being regulated activities (e.g., acting as a trustee, giving generic advice, or arranging deals through an authorised person).
  • Exemptions: Some persons or firms are exempt from authorisation for specific activities, most notably professional firms (such as solicitors) carrying on regulated activities that are incidental to their main professional services.

Professional Firms Exemption

Solicitors' firms can rely on the "designated professional body" (DPB) exemption (FSMA s.327) if:

  • The regulated activity is incidental to their main professional services.
  • The activity is not separately remunerated.
  • The firm is regulated by a designated professional body (e.g., the SRA).
  • The activity is not prohibited by Treasury order.

Key Term: designated professional body (DPB) exemption
An exemption allowing professional firms (such as solicitors) to carry on certain regulated activities without FCA authorisation, provided strict conditions are met.

Key Term: incidental
The regulated activity must arise out of, or be ancillary to, the provision of professional services to a particular client, and must not be a major part of the firm's business.

Other Common Exclusions

  • Introducing: Simply introducing a client to an FCA-authorised person, with no further involvement, is excluded.
  • Acting as trustee or personal representative: Activities carried out as a trustee or PR, without extra remuneration, are excluded.
  • Takeover exclusion: Advising or arranging the sale or purchase of shares where the transaction involves a change of control (e.g., more than 50% of voting shares) is excluded.

Worked Example 1.2

A solicitor arranges for a client to buy 75% of the shares in a private company. Is this a regulated activity?

Answer:
No, if the solicitor relies on the takeover exclusion, as the transaction involves more than 50% of the voting shares and is between eligible parties. No FCA authorisation is required.

Financial Promotions

FSMA also regulates financial promotions—communications inviting or inducing someone to engage in investment activity.

Section 21 FSMA prohibits unauthorised persons from making financial promotions unless:

  • The content is approved by an authorised person.
  • The promotion falls within an exemption in the Financial Promotion Order 2005.

Key Term: financial promotion
Any invitation or inducement to engage in investment activity, communicated in the course of business.

The rules apply to all forms of communication, including advertisements, emails, websites, and brochures.

Exemptions for Financial Promotions

Exemptions include:

  • Communications to existing clients about incidental activities.
  • One-off communications.
  • Promotions to high net worth or sophisticated investors.
  • Communications made by professional firms under the DPB exemption, if the activity is incidental and permitted.

Worked Example 1.3

A solicitor sends a brochure to a client about investing in a specific insurance product. The firm is not FCA-authorised. Is this permitted?

Answer:
Only if the promotion is covered by an exemption (e.g., the DPB exemption applies and the activity is incidental and permitted), or if the content is approved by an FCA-authorised person. Otherwise, this would breach s.21 FSMA and could be a criminal offence.

Enforcement and Consequences of Breach

The FCA has wide powers to investigate and sanction breaches of FSMA, including:

  • Requiring information and documents.
  • Imposing fines and public censures.
  • Restricting or withdrawing authorisation.
  • Prosecuting criminal offences (e.g., unauthorised regulated activities or unlawful financial promotions).

Breach of the general prohibition (s.19) or financial promotion rules (s.21) is a criminal offence, punishable by imprisonment and/or a fine. Agreements made in breach may be unenforceable.

Exam Warning

Breaching the general prohibition or financial promotion rules is a criminal offence. Solicitors must check whether their activities require FCA authorisation or fall within an exemption. Ignorance of the law is not a defence.

Summary

AreaAuthorisation Needed?Exemption/Exclusion?Example for Solicitors
Advising on investmentsYesDPB exemption if incidental, not separately remuneratedAdvising on insurance as part of probate work
Arranging share salesYesTakeover exclusionArranging sale of >50% of shares
Financial promotionsYesDPB exemption or content approved by FCA-authorised personSending brochures about investments

Key Point Checklist

This article has covered the following key knowledge points:

  • The Financial Services and Markets Act 2000 regulates financial services in England and Wales.
  • The "general prohibition" makes it a criminal offence to carry on regulated activities without authorisation or exemption.
  • Regulated activities are defined in the Regulated Activities Order and must be carried on by way of business and relate to specified investments.
  • Solicitors can rely on the DPB exemption if the activity is incidental, not separately remunerated, and permitted by the SRA.
  • Financial promotions are tightly regulated; unauthorised promotions are generally prohibited unless an exemption applies.
  • Breaching FSMA rules can result in criminal prosecution, fines, and unenforceable agreements.

Key Terms and Concepts

  • Financial Conduct Authority (FCA)
  • general prohibition
  • regulated activity
  • specified investment
  • designated professional body (DPB) exemption
  • incidental
  • financial promotion
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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.

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