Financial services and regulation - Appropriate sources of i...

Learning Outcomes

This article outlines the primary sources of information relevant to financial services regulation in the UK for SQE1 candidates. It clarifies the structure and hierarchy of the regime, enabling you to pinpoint how FSMA 2000, the RAO, the FPO and Treasury Orders interact with FCA and PRA rulebooks and SRA Standards and Regulations. It highlights how to use the FCA Handbook (especially PERG, CONC, ICOBS, COBS, SYSC and DISP) to analyse whether an activity is regulated, to determine applicable conduct rules, and to locate guidance on consumer credit, insurance distribution and investment business. It explains how the SRA Financial Services (Scope) Rules and SRA Financial Services (Conduct of Business) Rules govern solicitors relying on the s 327 DPB exemption, including status disclosure, commission handling and record‑keeping. It emphasises using FOS decisions, FCA publications and professional body guidance to test the fairness and robustness of advice, complaint handling and client communications. Overall, it equips you to navigate statutory instruments, handbooks and SRA rules systematically in SQE1 problem questions, so you can identify when authorisation is required, when exclusions or exemptions apply, and which regulatory standards must be followed when delivering legal services that intersect with financial services.

SQE1 Syllabus

For SQE1, you are required to demonstrate a working knowledge of the sources foundational to financial services regulation and to identify where to find authoritative rules and guidance when dealing with situations involving financial services activities, even if conducted under exemption, with a focus on the following syllabus points:

• The primary legislation governing financial services (FSMA 2000).
• Key regulatory handbooks and rulebooks (FCA Handbook, PRA Rulebook).
• Specific SRA rules applicable to solicitors undertaking financial services work.
• The hierarchy and application of these sources in practice.
• The Regulated Activities Order (RAO) and Financial Promotion Order (FPO) and how they define and delimit “specified activities,” “specified investments” and “controlled activities/investments.”
• Practical use of FCA Handbook sourcebooks and guidance (e.g., PERG for perimeter guidance; CONC, ICOBS, COBS, SYSC, DISP) when activities touch consumer credit, insurance distribution or investment promotions.

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 principal UK statute governing financial services regulation?
   1. Financial Services Act 2012
   2. Companies Act 2006
   3. Financial Services and Markets Act 2000
   4. Solicitors Act 1974
2. Which regulatory body's handbook provides detailed rules on the conduct of business for most firms, including solicitors relying on exemptions?
   1. Prudential Regulation Authority (PRA)
   2. Solicitors Regulation Authority (SRA)
   3. Financial Conduct Authority (FCA)
   4. Legal Services Board (LSB)
3. Which SRA rules specifically govern the financial services activities that solicitors' firms can carry out under the professional firms' exemption?
   1. SRA Accounts Rules
   2. SRA Financial Services (Conduct of Business) Rules
   3. SRA Principles
   4. SRA Financial Services (Scope) Rules

Introduction

When advising clients on matters that intersect with financial services, solicitors must manage a complex regulatory environment. Identifying the correct sources of information is fundamental to providing competent advice and ensuring compliance with legal and professional obligations. This article examines the appropriate sources of information relating to the regulation of financial services relevant to solicitors in England and Wales. Understanding these sources is critical for applying the correct rules and principles in practice, particularly when determining the scope of permitted activities and the conduct required when undertaking them. It also explains how to assess the practical “perimeter” between legal services and regulated financial services so that you can spot when authorisation is needed, when exclusions apply, and when the designated professional body (DPB) exemption under FSMA s 327 can be relied upon.

Primary Legislative and Regulatory Sources

The UK's financial services regulatory framework is built upon primary legislation supplemented by detailed rules and guidance issued by regulatory bodies. For most practical questions, you will move from statute (FSMA) to secondary legislation (RAO and FPO), then to supervisory rules (FCA and PRA), and finally to SRA arrangements for exempt professional firms.

Financial Services and Markets Act 2000 (FSMA 2000)

The foundational statute is FSMA 2000. This Act establishes the overall regulatory architecture, including the general prohibition on carrying out regulated activities without authorisation (s 19) and the restrictions on financial promotions (s 21). It grants powers to the Treasury to specify which activities and investments are regulated via secondary legislation, most notably the Regulated Activities Order 2001 (RAO). FSMA 2000 also provides the framework for exemptions applicable to professional firms, such as solicitors (s 327), and empowers the FCA and PRA to issue and enforce detailed rulebooks.

Key Term: Financial Services and Markets Act 2000 (FSMA 2000)
The primary UK statute establishing the regulatory framework for financial services, defining regulated activities and investments, and outlining the powers of regulatory bodies like the FCA and PRA.

The General Prohibition and perimeter analysis

Under s 19 FSMA, a person must not carry on a regulated activity in the UK unless they are authorised or exempt. “Regulated activity” means a specified activity in relation to a specified investment, undertaken by way of business, to which no exclusion applies (as set out in the RAO). The s 327 “professional firms” exemption allows certain activities without FCA authorisation, provided strict conditions are met and the firm complies with both the Scope and Conduct of Business rules issued by its designated professional body (for solicitors, the SRA). Financial promotions are separately restricted under s 21 FSMA and the Financial Promotion Order (FPO) even when the related activity is not itself regulated.

Key Term: Designated Professional Body (DPB) Exemption (FSMA s 327)
A statutory exemption allowing professional firms (including SRA‑regulated firms) to carry out certain “exempt regulated activities” without FCA authorisation, provided the activities are incidental to legal services, status is disclosed, and the firm complies with its DPB’s scope and conduct rules.

Secondary Legislation (Statutory Instruments)

FSMA 2000 delegates power to HM Treasury to make detailed orders specifying the scope of regulation. Key statutory instruments include:

• Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 (RAO): Defines the specific activities and investments that fall under the regulatory regime. It sets out “specified investments” (such as shares, debentures, units, rights under a contract of insurance) and “specified activities” (such as advising on investments, arranging, dealing). It also contains exclusions that remove certain borderline scenarios from being regulated activities.
• Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (FPO): Details the rules surrounding financial promotions by defining “controlled investments” and “controlled activities” and listing exemptions. It applies even where the related activity is not regulated under the RAO.
• Financial Services and Markets Act 2000 (Professions) (Non‑Exempt Activities) Order 2001: Specifies activities excluded from the professional firms’ exemption, i.e., activities that a professional firm cannot do without FCA authorisation.

Key Term: Regulated Activities Order (RAO)
The statutory instrument that specifies regulated activities and investments, along with key exclusions. It is the definitive source for determining whether a particular activity/investment is “regulated” under FSMA.

Key Term: Financial Promotion Order (FPO)
The statutory instrument that defines “controlled investments/activities” for the purposes of s 21 FSMA and sets out exemptions for communications that would otherwise be prohibited.

Key Term: Specified Investment (RAO)
An investment type explicitly listed in the RAO (e.g., shares, debentures, rights under a contract of insurance). An activity is only “regulated” if it relates to a specified investment (and no exclusion applies).

Key Term: Specified Activity (RAO)
An activity type explicitly listed in the RAO (e.g., arranging deals in investments, advising on investments, dealing in investments). It becomes a regulated activity only when performed “by way of business” in relation to a specified investment and not excluded.

How these instruments are used in practice

• Start by identifying the investment (is it a “specified investment” under the RAO?).
• Identify the activity (is it a “specified activity” under the RAO?).
• Consider whether the activity is carried on “by way of business.”
• Check for exclusions under the RAO that might remove the activity from regulation.
• If the activity is regulated and no exclusion applies, ask whether the DPB exemption (s 327 FSMA) is available and whether your firm complies with SRA Scope/Conduct rules.
• Independently assess whether any communication amounts to a financial promotion under s 21 FSMA. Even when an activity is not regulated, a communication might be prohibited unless an FPO exemption applies or an authorised person approves the content.

Revision Tip

When the facts are borderline, use FCA “Perimeter Guidance” (PERG) to interpret the RAO and FPO provisions: PERG 2 and 8 (perimeter and investment advice), PERG 4 (insurance distribution), and PERG 17 (consumer credit). These sections provide worked explanations and examples that the FCA uses to supervise firms.

Regulatory Handbooks and Rulebooks

While legislation provides the framework, the detailed operational rules are contained within the handbooks and rulebooks issued by the primary regulators, the FCA and the PRA.

Financial Conduct Authority (FCA) Handbook

The FCA Handbook is a comprehensive source of rules and guidance applicable to FCA‑authorised firms and, importantly, to firms undertaking specific activities even if not directly authorised (such as solicitors relying on exemptions for certain activities). It covers conduct of business standards, client protection measures, and rules relating to specific market sectors. Solicitors must be aware of relevant parts of the FCA Handbook, especially when dealing with consumer credit activities or insurance distribution.

Key Term: FCA Handbook
A detailed compilation of rules and guidance issued by the Financial Conduct Authority, setting out regulatory requirements for firms conducting financial services business in the UK (including sourcebooks such as CONC for consumer credit, ICOBS for insurance distribution, COBS for investment business, SYSC for systems and controls, DISP for complaint handling, and PERG for perimeter guidance).

Using the FCA Handbook for legal practices

• PERG (Perimeter Guidance): Explains whether an activity is inside/outside regulation and how RAO/FPO apply.
• CONC: Consumer credit sourcebook. Relevant if assisting with credit agreements, credit broking or debt counselling. Many legal practices touch consumer credit when helping clients finance transactions.
• ICOBS: Insurance distribution rules. Relevant when a conveyancer or litigator discusses or arranges insurance (e.g., defective title policies; ATE insurance).
• COBS: Conduct of Business rules for investment business, including appropriateness and suitability when advice/arranging crosses into investments.
• SYSC: Systems and Controls. Establishes governance standards that FCA‑authorised firms must keep. Even exempt firms benefit from mirroring SYSC concepts.
• DISP: Complaints handling and ombudsman referral rules. Useful when clients raise complaints about the financial services element of a case.

Prudential Regulation Authority (PRA) Rulebook

The PRA Rulebook applies primarily to PRA‑authorised firms (banks, insurers, major investment firms), focusing on prudential requirements like capital adequacy and risk management to ensure financial stability. While less directly relevant to most solicitors' firms than the FCA Handbook, understanding its existence helps complete the regulatory picture and is helpful when your matter depends on how a bank or insurer must operate with prudential constraints.

Key Term: PRA Rulebook
The set of rules and guidance issued by the Prudential Regulation Authority, primarily governing the prudential regulation of significant financial institutions in the UK.

Solicitors Regulation Authority (SRA) Rules and Guidance

For solicitors operating under the s 327 exemption, the SRA provides specific rules and guidance within the SRA Standards and Regulations. These rules set the boundaries of what solicitors can do and how they must behave when carrying out “exempt regulated activities.”

SRA Financial Services (Scope) Rules

These rules define the extent of the regulated activities that solicitors' firms can undertake when relying on the s 327 exemption. They specify permitted activities and also incorporate prohibitions designated by Treasury Orders, essentially outlining the boundaries within which exempt professional firms must operate. Consulting these rules is critical to ensure a firm does not carry out activities requiring FCA authorisation.

Key Term: SRA Financial Services (Scope) Rules
SRA rules defining the specific regulated activities that firms authorised by the SRA can conduct under the FSMA 2000 s 327 exemption.

SRA Financial Services (Conduct of Business) Rules

When carrying out exempt regulated activities under the s 327 exemption, solicitors' firms must comply with these specific conduct rules. They cover aspects such as status disclosure to clients (clarifying the firm is not FCA‑authorised), record‑keeping, handling commissions, and specific requirements for insurance distribution activities.

Key Term: SRA Financial Services (Conduct of Business) Rules
SRA rules setting out the standards of conduct required for SRA‑authorised firms when carrying out exempt regulated activities under the FSMA 2000 s 327 exemption.

Practical conduct requirements (commonly tested signposts)

• Status disclosure (Rule 2): Written disclosure before the service is provided that the firm is not FCA‑authorised; identify the regulated financial services activities the firm undertakes; set out complaints and redress arrangements (including SRA regulation and Legal Ombudsman).
• Execution/record‑keeping (Rules 3–4): Execute transactions promptly where appropriate and keep accurate records of instructions, decisions and dates.
• Commissions (Rule 5): Keep records of commissions attributable to regulated financial services activities and account appropriately to the client (unless agreed otherwise).
• Insurance distribution (Part 3): Specific requirements regarding demands-and-needs statements, communication standards and remuneration transparency when undertaking insurance distribution.
• Execution‑only (Rule 7): Written confirmations are required when the client insists on “execution‑only” for retail investments.
• Retention of records (Rule 8): Retain records for six years after the transaction.

Other SRA Guidance

The SRA periodically issues guidance notes, warning notices, and case studies relevant to financial services. These provide practical interpretation and clarification of the rules and highlight areas of regulatory focus or concern, such as involvement in high‑risk investment schemes or proper client due diligence. Staying updated with SRA publications is essential for maintaining compliance.

Worked Example 1.1

A solicitor is advising a client on the purchase of a business. As part of the transaction, the client needs advice on arranging a commercial loan secured against the business assets. The solicitor's firm relies on the s 327 exemption.

Where should the solicitor look first to determine if advising on and arranging this specific type of loan falls within the firm's permitted activities under the exemption?

Answer:
The solicitor should first consult the SRA Financial Services (Scope) Rules. These rules detail the regulated activities permitted under the s 327 exemption for SRA‑regulated firms and incorporate relevant prohibitions. This will clarify whether advising on and arranging this commercial loan requires FCA authorisation or can be done under the exemption.

Worked Example 1.2

A solicitor's firm, operating under the s 327 exemption, is carrying out insurance distribution activities incidental to its conveyancing work. A client complains about the information they received regarding an indemnity policy.

Which specific SRA rules directly govern the conduct requirements for providing this insurance advice?

Answer:
The SRA Financial Services (Conduct of Business) Rules contain specific provisions (currently in Part 3) relating to the conduct required when undertaking insurance distribution activities under the exemption. These rules cover communication standards, information disclosure, demands‑and‑needs statements, and remuneration transparency.

Worked Example 1.3

A litigation team wants to recommend After‑the‑Event (ATE) insurance to a client and discuss options. They are not FCA‑authorised and intend to rely on the professional firms’ exemption.

Which sources should they consult to ensure this insurance distribution activity is permitted and properly conducted?

Answer:
Check the RAO (to confirm that rights under a contract of insurance are a specified investment and that “advising on investments” is a specified activity), then assess whether an RAO exclusion applies. Confirm reliance on the s 327 DPB exemption and review the SRA Financial Services (Scope) Rules for permitted activities. Finally, follow the SRA Financial Services (Conduct of Business) Rules and the FCA’s ICOBS standards as best‑practice reference for insurance distribution processes (even if operating under exemption).

Worked Example 1.4

A partner plans to publish a client update about investing in unlisted shares in local growth companies. The update describes investment features and invites readers to contact the firm to proceed.

Which source of law governs whether this client update is a prohibited financial promotion and how exemptions might apply?

Answer:
Section 21 FSMA 2000 and the Financial Promotion Order (FPO) govern financial promotions. The FPO sets out exemptions (e.g., communications to certified high net worth individuals or one‑off communications) and defines “controlled investments/activities.” The firm must either rely on an FPO exemption or have the content approved by an FCA‑authorised person.

Other Relevant Sources

Depending on the context, other sources might be relevant.

Case Law and Regulatory Decisions

Decisions from courts (e.g., interpreting FSMA provisions) and regulatory bodies (e.g., FCA enforcement decisions, Financial Ombudsman Service decisions) offer clarity on how rules are applied and interpreted in practice. While case law names are not required knowledge for SQE1, FCA and FOS decisions help illustrate supervisory expectations and “fair and reasonable” outcomes for retail clients. The FOS online database is especially useful for understanding how client communications, suitability/appropriateness and insurance distribution complaints are resolved.

Key Term: Financial Ombudsman Service (FOS)
The statutory body that resolves complaints from consumers about financial services. Its published decisions offer practical guidance on “fair and reasonable” outcomes but are not binding case law.

Professional Body Guidance

The Law Society often publishes practice notes and guidance on financial services matters relevant to solicitors, offering practical advice on compliance and best practice. SRA warning notices (e.g., on dubious investment schemes or improper promotions) should also be monitored. For anti‑money laundering and sanctions, refer to the sector‑specific legal guidance and the Money Laundering Regulations for due diligence and record‑keeping (these obligations apply irrespective of whether the activity is regulated under FSMA).

Worked Example 1.5

A private client team regularly receives commissions from an insurer for referrals linked to defective title policies. A client asks whether those commissions are kept by the firm.

Which rules and sources must the firm apply when handling commissions?

Answer:
Apply the SRA Financial Services (Conduct of Business) Rules, especially Rule 5 on keeping records of commissions and accounting to clients unless otherwise agreed. Consider the FCA’s ICOBS standards as guidance for transparency and remuneration disclosures. The firm’s status disclosure should explain how commissions are dealt with and what protections (SRA regulation; Legal Ombudsman) are available.

Worked Example 1.6

A consumer complains to the firm that advice given on an instalment‑credit arrangement for a home improvement project led to unexpected costs.

What sources help assess whether the activity was regulated and how complaints should be handled?

Answer:
Use the RAO to confirm whether the activity amounted to “credit broking” or “advising on credit,” and whether an exclusion applies. If it was a regulated activity and the DPB exemption cannot be relied on, FCA CONC would apply (requiring authorisation). For complaint handling standards and ombudsman referral, refer to DISP and the FOS website for how similar complaints are adjudicated. If the firm acted under exemption, it must still follow the SRA complaints obligations and signpost the Legal Ombudsman.

Revision Tip

When faced with a financial services issue, always start by identifying the specific activity and investment involved. This allows you to work through the RAO (specified investments/activities and exclusions) and rules (FCA Handbook, SRA Scope/Conduct Rules and the DPB exemption) effectively to determine authorisation requirements and conduct obligations. Independently assess any communications against the FPO.

Key Point Checklist

This article has covered the following key knowledge points:

• The primary legislative source is the Financial Services and Markets Act 2000 (FSMA 2000), supplemented by Statutory Instruments like the Regulated Activities Order (RAO) and the Financial Promotion Order (FPO).
• FSMA s 19 imposes the general prohibition; FSMA s 21 restricts financial promotions. The s 327 DPB exemption allows certain “exempt regulated activities” when strict conditions are met.
• Detailed rules and guidance are found in the FCA Handbook (particularly PERG, CONC, ICOBS, COBS, SYSC and DISP) and the PRA Rulebook (relevant for prudential regulation of major institutions).
• Solicitors operating under the s 327 exemption must comply with the SRA Financial Services (Scope) Rules to determine permitted activities.
• Conduct when carrying out exempt regulated activities is governed by the SRA Financial Services (Conduct of Business) Rules, including status disclosure, record‑keeping, commission handling and insurance distribution requirements.
• The RAO sets out “specified investments/activities” and exclusions; the FPO sets out “controlled investments/activities” and exemptions for communications.
• Case law, regulatory decisions (FCA, FOS), and professional body guidance (Law Society; SRA warning notices) provide practical interpretation and examples.
• For complaint handling and consumer outcomes, consult DISP and FOS decisions; for perimeter questions, use FCA PERG.
• Always consider anti‑money laundering and sanctions obligations across all client matters.

Key Terms and Concepts

• Financial Services and Markets Act 2000 (FSMA 2000)
• Regulated Activities Order (RAO)
• Financial Promotion Order (FPO)
• Specified Investment (RAO)
• Specified Activity (RAO)
• FCA Handbook
• PRA Rulebook
• Designated Professional Body (DPB) Exemption (FSMA s 327)
• SRA Financial Services (Scope) Rules
• SRA Financial Services (Conduct of Business) Rules
• Financial Ombudsman Service (FOS)