Financial services and regulation - Relevant exemptions for ...

Learning Outcomes

This article outlines the FSMA exemptions and related regulatory framework for solicitors, including:

• Scope and rationale of FSMA regulation as it applies to solicitors and the significance of the general prohibition for practice and exams
• Circumstances when solicitors can rely on FSMA exemptions—particularly the s.327 professional exemption—and when FCA authorisation is required instead
• Conditions that must be satisfied for exempt regulated activities, with emphasis on the “incidental” tests and DPB oversight
• The structure and key requirements of the SRA Financial Services (Scope) Rules and SRA Financial Services (Conduct of Business) Rules
• Core RAO exclusions relevant to everyday legal work (introducer, professional/necessary, takeover, trustee/personal representative) and their limits
• The distinction between regulated investment advice and unregulated generic information, and how to spot exam fact patterns that cross the line
• How insurance distribution and consumer‑credit arrangements interact with RAO exclusions and the s.327 exemption in common client scenarios
• How to assess communications as financial promotions under s.21 FSMA and identify when FPO exemptions may be available
• Practical compliance steps for exempt firms, including client disclosures, record‑keeping, and commission or referral‑fee accounting
• Application of these principles to typical SQE1 multiple‑choice questions and short scenario‑based problems

SQE1 Syllabus

For SQE1, you are required to understand the financial services regulatory framework as it applies to solicitors, with a focus on the following syllabus points:

• the general prohibition under FSMA 2000 and its application to solicitors
• the s.327 professional exemption and its conditions
• the SRA Financial Services (Scope) Rules and Conduct of Business Rules
• relevant exclusions for solicitors under the Regulated Activities Order 2001
• the practical implications of these exemptions and exclusions in client scenarios
• the financial promotions restriction under s.21 FSMA and key FPO 2005 exemptions (real‑time, non‑real‑time, one‑off and introducer)
• insurance distribution activities and when solicitors must rely on s.327 or obtain authorisation
• consumer credit arrangements in the RAO (including the 12‑month, interest‑free fee arrangements and when s.327/COB rules apply).

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 main condition that allows a solicitor to carry out certain regulated activities without FCA authorisation?
2. Which SRA rules must a solicitor comply with when relying on the s.327 professional exemption?
3. Give an example of a regulated activity that is excluded from the s.327 exemption for solicitors.
4. What must a solicitor do if they receive a commission from a third party in connection with an exempt regulated activity?

Introduction

Solicitors sometimes encounter financial services work when advising clients, especially in areas like conveyancing, probate, or corporate transactions. The Financial Services and Markets Act 2000 (FSMA) regulates a wide range of financial activities. Generally, only those authorised by the Financial Conduct Authority (FCA) may carry out regulated activities. However, solicitors can rely on specific exemptions and exclusions to avoid the need for FCA authorisation, provided strict conditions are met.

Understanding these exemptions is essential for SQE1, as breaching FSMA can result in criminal liability and invalidate client transactions. In addition to the general prohibition on regulated activities (s.19 FSMA), solicitors must also be alert to the separate restriction on “financial promotions” (s.21 FSMA) and the broad definition of “insurance distribution” and “credit‑related” activities in the Regulated Activities Order (RAO). The professional exemption under s.327 is valuable but only where the activity is genuinely incidental to legal services, permitted by the SRA, and all SRA Conduct of Business requirements are met.

The General Prohibition

Section 19 FSMA states that no person may carry on a regulated activity in the UK unless they are authorised or exempt. Breaching this rule is a criminal offence.

Key Term: general prohibition
The rule under FSMA 2000 that prohibits carrying on regulated activities unless authorised by the FCA or exempt.

In addition to criminal liability, agreements entered into by unauthorised persons in breach of the general prohibition are generally unenforceable against the other party, and money or property transferred may be recoverable (subject to limited court discretions). This reinforces the need to identify an applicable exemption or exclusion before undertaking any activity that may be regulated.

Regulated Activities and Specified Investments

A regulated activity is an activity of a specified kind, carried on by way of business, relating to a specified investment. The details are set out in the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 (RAO).

Key Term: regulated activity
An activity specified in the RAO 2001, relating to a specified investment, carried on by way of business.

Specified investments include shares, debentures, insurance contracts, mortgages, and more. Land is not a specified investment.

Key Term: specified investment
A financial product or instrument listed in the RAO 2001, such as shares, insurance contracts, or mortgages.

“By way of business” is an objective test. Occasional activity that is truly incidental to legal work may still be caught if, in substance, it amounts to carrying on a regulated activity. Equally, the RAO specifies both the investments and the activities: advising on investments, arranging deals in investments, dealing as agent or principal, managing investments, safeguarding and administering investments, and (separately) insurance distribution. Generic legal information that does not identify a particular investment or make a recommendation will typically fall outside “advising on investments”.

Key Term: Designated Professional Body (DPB)
A professional regulator designated under FSMA to supervise firms relying on the s.327 exemption in place of FCA authorisation. The SRA (via the Law Society) is a DPB.

Exemptions for Solicitors – The s.327 Professional Exemption

Section 327 FSMA allows members of designated professional bodies, including solicitors regulated by the SRA, to carry on certain regulated activities without FCA authorisation, provided strict conditions are met.

The main conditions are:

• The activity must arise out of, or be ancillary to, the provision of a particular professional service to a particular client.
• The activity must be incidental to the main legal services provided.
• The solicitor must not receive any reward or advantage from a third party (other than the client) unless it is fully accounted for to the client.
• The activity must not be prohibited by Treasury order or FCA direction.
• The solicitor must not carry on any other regulated activities except those permitted by the SRA.

Key Term: s.327 professional exemption
An exemption under FSMA 2000 allowing solicitors to carry out certain regulated activities without FCA authorisation, if strict conditions are met.

Two important “incidental” tests are applied in practice:

• a client‑specific test: the regulated activity must arise out of, or be related to, the legal service being provided to that particular client; and
• a firm‑wide test: viewed across the firm, the manner of providing any regulated activity must be incidental to the provision of professional services—firms must not run a financial services business or hold themselves out as doing so.

Key Term: incidental
For s.327, both the activity must be related to a specific client’s legal matter, and the firm’s provision of any regulated activity must be merely ancillary to its legal services overall.

SRA Scope and Conduct of Business Rules

To use the s.327 exemption, solicitors must comply with the SRA Financial Services (Scope) Rules and the SRA Financial Services (Conduct of Business) Rules.

• The Scope Rules set out which activities are permitted and which are prohibited.
• The Conduct of Business Rules require solicitors to provide clients with clear information about their regulatory status, keep records of transactions and commissions, and act in the client's best interests.

Key Term: SRA Scope Rules
SRA rules specifying which regulated activities solicitors may carry out under the s.327 exemption.

Key Term: SRA Conduct of Business Rules
SRA rules governing how solicitors must conduct exempt regulated activities, including disclosure and record-keeping.

In practice, relying on s.327 is only permissible where:

• the activity is permitted by the Scope Rules (for example, advising/arranging in the context of a corporate acquisition), and not within classes restricted by Treasury order or FCA direction;
• the activity is genuinely incidental to legal services (no separate marketing of investment services; no ongoing investment management service);
• the firm provides required client disclosures (that it is regulated by the SRA, not by the FCA; that its financial services are limited in scope) and keeps appropriate records; and
• any commission or other benefit from third parties is disclosed and accounted to the client (reflecting the fiduciary duty not to make a secret profit).

Excluded Activities

Some activities are excluded from the s.327 exemption and require FCA authorisation. These include:

• Activities not incidental to legal services (e.g., running a financial services business).
• Activities prohibited by Treasury order (e.g., advising on pension transfers and opt‑outs).
• Activities where the solicitor receives a commission from a third party and does not account to the client.

Additionally, insurance distribution often cannot be covered by RAO exclusions and will require either FCA authorisation or use of the s.327 exemption with full compliance to the Scope/Conduct rules.

Exclusions under the Regulated Activities Order

The RAO 2001 contains further exclusions relevant to solicitors, such as:

• The "introducing" exclusion: simply introducing a client to an FCA-authorised person, with no further involvement.
• The "professional/necessary" exclusion: where the regulated activity is a necessary part of legal services.
• The "takeover" exclusion: advising on or arranging the sale of shares amounting to a takeover (50% or more of voting shares).
• The "trustee/personal representative" exclusion: acting as a trustee or personal representative, provided no extra remuneration is received.

Key Term: exclusion
A provision in the RAO 2001 that removes certain activities from the scope of regulation, even if they would otherwise be regulated activities.

The RAO also recognises arrangements involving an Authorised Third Party (ATP). Where an authorised person provides the advice or executes the transaction, solicitors may rely on an ATP‑related exclusion, provided any third‑party remuneration is properly disclosed and accounted.

Key Term: authorised third party (ATP)
An FCA‑authorised person who advises or deals; solicitors may rely on RAO exclusions where an ATP performs the regulated elements, subject to proper disclosure/accounting.

Sale of a Body Corporate (Takeover)

The RAO permits solicitors to advise on and arrange transactions for the sale/acquisition of a body corporate where the shares consist of or include 50% or more of the voting rights. Parties may be corporates, partnerships, a single individual, or connected individuals. This exclusion is frequently relied upon in corporate sales and share purchases forming part of legal work.

Professional/Necessary Exclusion

Where the regulated activity is a necessary part of the main legal service (for example, arranging escrow or a temporary holding arrangement as part of a completion), the necessary/professional exclusion may apply. However, necessity is construed narrowly; ongoing investment services or services promoted separately are unlikely to be “necessary”.

Consumer Credit and Payment Terms for Fees

Credit‑related regulated activities are covered under RAO Parts 2 and 3A. A solicitor might inadvertently enter consumer credit territory by allowing clients time to pay fees. An arrangement is exempt where:

• the number of repayments does not exceed 12,
• the total term does not exceed 12 months, and
• the credit is provided without interest or charges.

If these conditions are met, the arrangement is exempt. Otherwise, either the s.327 exemption must cover the activity (and Part 4 of the Conduct of Business Rules applies), or FCA authorisation is required.

Insurance Distribution

Rights under a contract of insurance are specified investments. “Insurance distribution” includes introducing, advising on, proposing, arranging, assisting in the administration and performance of insurance contracts (including claim assistance).

Key Term: insurance distribution
Advising on, proposing, arranging, or assisting with insurance contracts, including helping with claims; rights under insurance are specified investments.

Solicitors regularly encounter insurance in property (defective title), probate (life policies), and litigation (ATE insurance). Given that the main RAO exclusions rarely apply to insurance distribution, solicitors must either rely on s.327 and comply fully with SRA Scope/Conduct rules (including disclosure and record‑keeping), or seek FCA authorisation (or rely on specific limited exceptions not covered here).

Financial Promotions

Section 21 FSMA prohibits unauthorised persons from communicating an invitation or inducement to engage in investment activity unless the content is approved by an authorised person or an exemption applies under the Financial Promotion Order 2005 (FPO).

Key Term: financial promotion
A communication (invitation or inducement) to engage in investment activity; restricted under s.21 FSMA unless approved or exempt.

All forms of communication (real‑time and non‑real‑time) can be caught. Exemptions include:

• real‑time promotions to existing clients where the controlled activity would itself be exempt or excluded (FPO art 55);
• non‑real‑time promotions containing prescribed statements for exempt professional firms (art 55A);
• one‑off communications tailored to one client (arts 28/28A), subject to conditions; and
• introducer communications (art 15), provided the solicitor is not connected to the ATP, receives no third‑party reward (unless accounted to the client), and has declined to advise on merits.

The structure and conditions of FPO exemptions mirror the approach for regulated activities: the promotion must be genuinely incidental to legal services and within the s.327/RAO framework.

Key Term: introducing exclusion
Under RAO/FPO, a solicitor may introduce a client to an authorised person without further involvement, provided conditions (including disclosure/accounting and lack of connection) are met.

Practical Application and Compliance

Solicitors must ensure that any regulated activity they undertake is genuinely incidental to legal work for a particular client. They must not hold themselves out as providing financial services generally. Any commission or reward from a third party must be disclosed and accounted for to the client.

When assessing a scenario:

• Identify whether a specified investment and a specified activity are involved.
• Consider RAO exclusions (introducer, takeover, necessary, trustee/PR) and whether an ATP is involved.
• If relying on s.327, confirm both incidental tests, DPB permission via the Scope Rules, and compliance with the Conduct of Business Rules (status disclosure, record‑keeping, commission accounting).
• Check whether the communication is a financial promotion under s.21 FSMA and whether an FPO exemption applies.
• For insurance and credit‑related matters, recognise that exclusions are narrow and s.327 compliance is often required; authorisation may be necessary if conditions cannot be met.

Worked Example 1.1

A solicitor is acting for a client in the purchase of a business. The client asks the solicitor to arrange insurance for the new premises. The solicitor arranges the insurance and receives a commission from the insurer, which is not disclosed to the client.

Answer:
The solicitor cannot rely on the s.327 exemption unless the commission is fully accounted for to the client. Failing to disclose and account for the commission breaches both FSMA and SRA rules.

Worked Example 1.2

A solicitor refers a client to an independent financial adviser (IFA) for investment advice. The solicitor receives a referral fee from the IFA and does not inform the client.

Answer:
The solicitor cannot rely on the "introducing" exclusion if they receive a reward from the IFA and do not account for it to the client. This is a breach of both FSMA and SRA rules.

Worked Example 1.3

A solicitor is asked by a client to advise on the purchase of shares in a private company. The client will acquire 60% of the voting shares. The solicitor is not FCA-authorised.

Answer:
The solicitor can rely on the "takeover" exclusion, as the transaction involves more than 50% of the voting shares. No FCA authorisation is required for this activity.

Worked Example 1.4

A conveyancing client asks, “What kinds of mortgages exist?” and the solicitor provides generic information about fixed versus variable rates without recommending any specific product. Later, the client asks, “Should I take XYZ Bank’s 2‑year fixed?” and the solicitor gives a view on that specific product.

Answer:
Generic information is not “advising on investments”; the RAO is not engaged. However, a view on a specific product is likely to be “advising on investments” in a home finance context and caught by FSMA. Unless an exclusion applies or s.327 can be relied upon within SRA Scope/Conduct rules, the solicitor must decline and refer the client to an FCA‑authorised adviser.

Worked Example 1.5

In a personal injury matter, the solicitor assists the client in making a claim under an existing insurance policy, including corresponding with the insurer and helping complete forms.

Answer:
Assisting in the administration and performance of a contract of insurance is an insurance distribution activity. RAO exclusions rarely cover this; the solicitor should rely on s.327 and comply with SRA Scope/Conduct rules (status disclosure, records, commissions) or be FCA‑authorised if the s.327 conditions are not satisfied.

Worked Example 1.6

A firm allows a client to pay its fees by 12 equal monthly instalments over 12 months, with no interest or charges.

Answer:
This fee arrangement is an exempt credit agreement under RAO if all conditions (maximum 12 payments; maximum 12 months; no interest/charges) are met. If any term exceeds these limits or includes interest/charges, the firm must rely on s.327 (and COB Part 4) or obtain authorisation.

Worked Example 1.7

A solicitor emails a single client with a bespoke note explaining legal steps in a share sale and, within it, invites the client to consider investing surplus cash into specified corporate bonds.

Answer:
The email is likely a financial promotion. If the invitation is personal and one‑off and the solicitor reasonably believes the client understands the risks and expects contact on the investment activity, the FPO “one‑off” exemption (arts 28/28A) may apply. Otherwise, the content must be approved by an authorised person or the promotion must fit another FPO exemption. In any event, the activity itself must be covered by an RAO exclusion or s.327.

Worked Example 1.8

A solicitor introduces a client to a mortgage broker who happens to be the solicitor’s sibling. The solicitor takes a small introducer fee but does not disclose this to the client.

Answer:
The FPO introducer exemption (art 15) will not apply where the introducer is “connected” to the authorised person. Moreover, any fee must be disclosed and accounted for. The solicitor should avoid making the introduction in these circumstances or ensure full disclosure/accounting and compliance with Scope/Conduct rules.

Exam Warning

If a solicitor carries out a regulated activity that is not genuinely incidental to legal work, or fails to comply with SRA rules, they may commit a criminal offence and the client transaction may be unenforceable.

Revision Tip

When answering SQE1 questions, always check:

• Is the activity a regulated activity?
• Is there an applicable exclusion or exemption?
• Are all conditions of the exemption met, including SRA rules?

Summary

Key Point Checklist

This article has covered the following key knowledge points:

• The general prohibition under FSMA 2000 prevents solicitors from carrying on regulated activities unless authorised or exempt.
• The s.327 professional exemption allows solicitors to carry out certain regulated activities if they are incidental to legal work and SRA rules are followed.
• Solicitors must comply with the SRA Scope and Conduct of Business Rules when relying on the exemption.
• Key exclusions under the RAO 2001 include the introducing, professional/necessary, takeover, and trustee/personal representative exclusions.
• Insurance distribution rarely falls within RAO exclusions; solicitors commonly rely on s.327 with full SRA compliance when assisting with insurance.
• Consumer credit arrangements for fees can be exempt if limited to no more than 12 interest‑free payments over no more than 12 months; otherwise, s.327 or authorisation may be required.
• Section 21 FSMA restricts financial promotions; use FPO exemptions (art 55/55A, one‑off, introducer) or have content approved by an authorised person.
• Solicitors must disclose and account for any commission or reward from third parties to the client.
• Breaching these rules can result in criminal liability and invalidate client transactions.

Key Terms and Concepts

• general prohibition
• regulated activity
• specified investment
• Designated Professional Body (DPB)
• s.327 professional exemption
• incidental
• SRA Scope Rules
• SRA Conduct of Business Rules
• exclusion
• authorised third party (ATP)
• insurance distribution
• financial promotion
• introducing exclusion