Learning Outcomes
After reading this article, you will be able to explain what is meant by 'financial services' in the legal context, identify which activities are regulated under the Financial Services and Markets Act 2000, recognise the permitted exclusions and exemptions for solicitors, and outline the professional compliance requirements imposed by the SRA. This will prepare you to answer SQE2-style legal advice and scenario questions confidently in this area.
SQE2 Syllabus
For SQE2, you are required to understand the key legal and regulatory issues relating to financial services in practice, and how these impact solicitors’ day-to-day work.
As you revise this area, focus on:
- The scope of financial services regulation in England and Wales, including the key statutes and regulators
- What constitutes a 'regulated activity' and a 'specified investment' for financial services purposes
- The meaning and consequences of the 'General Prohibition'
- The main available exclusions and the professional exemption for solicitors
- The additional requirements when dealing with insurance distribution
- The SRA and firm compliance requirements, including indemnity insurance, client care and risk management
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.
- What are the consequences of undertaking a regulated financial activity without authorisation or exemption?
- Which activities commonly carried out by solicitors fall within the financial services regulatory regime?
- Name two exclusions that may be available to a solicitor when dealing with specified investments.
- When must a solicitor hold professional indemnity insurance in relation to financial services?
Introduction
Understanding when financial services law applies is essential for practising solicitors. Many legal activities—such as arranging mortgages, advising on share sales, or handling client money—cross into the sphere regulated mainly by the Financial Services and Markets Act 2000 (FSMA). Solicitors need to be able to identify when authorisation is needed, the extent and limits of their exemption, and their ongoing SRA obligations.
Financial Services Regulation and the General Prohibition
Financial services in England and Wales are primarily governed by FSMA, along with related statutory instruments and guidance.
The main regulatory authorities are the Financial Conduct Authority (FCA), responsible for the conduct and authorisation of most financial services firms and individuals, and the Prudential Regulation Authority (PRA), dealing with prudential aspects for certain firms.
Anyone carrying on a 'regulated activity' in respect of a 'specified investment' by way of business in the UK must be authorised by the FCA or benefit from an exemption.
Key Term: regulated activity
Activities specified in the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001, including advising, arranging, managing, dealing as agent, safeguarding, and administering certain investments.Key Term: specified investment
An investment listed in the Regulated Activities Order, such as shares, debentures, insurance contracts, pension schemes, and mortgages. Land is not a specified investment.Key Term: General Prohibition
The rule in s.19 FSMA stating that no person may carry on a regulated activity in the UK unless they are authorised or exempt.
Undertaking a regulated activity without authorisation or exemption is a criminal offence and may render related client transactions void and subject to penalties.
Regulated Activities Commonly Affecting Solicitors
Although most legal work is outside financial services regulation, solicitors may encounter regulated activities, especially when:
- Advising clients on buying or selling shares in a business.
- Arranging insurance for property transactions.
- Helping clients finance property through mortgages or providing introductions to financial advisors.
Solicitors therefore need to assess carefully whether their activity requires specific authorisation or falls within a permitted exclusion or professional exemption.
Permitted Exclusions and the Designated Professional Body Exemption
Several exclusions within FSMA and its subordinate legislation allow solicitors to avoid the general prohibition for many of their typical activities.
Frequently Relied On Exclusions
- Takeover exclusion: Applies where the client is acquiring or disposing of 50% or more of shares in a company, usually outside the scope of regulated activities for share sales.
- Necessary exclusion: Permits activity relating to specified investments if it is a 'necessary' part of a legal service (other than managing assets)—for example, arranging payment of the purchase price for a property.
- Acting through an authorised person: The solicitor introduces the client to a regulated financial adviser who then provides the advice and service, removing the need for the solicitor's authorisation if no separate advice or commission is received.
Key Term: exclusion
A statutory provision that removes certain activities or circumstances from the scope of FCA regulation, even though they might otherwise qualify as regulated activities.Key Term: Designated Professional Body (DPB) exemption
Allows solicitors regulated by the SRA to carry out some regulated activities as incidental to their legal practice, provided they do not receive extra remuneration for the activity and comply with SRA Rules.
Solicitors can rely on the DPB Exemption where:
- The activity is incidental to the provision of legal services.
- No additional commission or reward is received (unless fully accounted to the client).
- The work falls within the scope of authorisation provided by their professional body (the SRA).
Key Term: incidental activity
A regulated financial services activity carried out as part of, and subordinate to, the provision of regular legal services, not as a main or separately charged service.
Insurance Distribution Activities
When a solicitor or firm deals with insurance on behalf of a client—such as arranging defective title insurance in property transactions—some of the usual exclusions do not apply. Extra requirements then arise. These include notifying the SRA, registering as an insurance distributor, appointing a specific officer, and providing prescribed information to clients.
Key Term: insurance distribution activity
The selling, arranging, or administration of insurance contracts on behalf of clients, requiring regulatory compliance and SRA notification.
Fringe Cases and Firm Compliance
Some activities, such as advising on pensions, investment portfolios, or acting as a manager of client investments, seldom fall within permitted exclusions. In these cases, firms should refer, rather than advise, unless specifically authorised. Failure to comply can result in criminal and regulatory penalties.
SRA Professional Requirements and Risk Management
Alongside statutory requirements, the SRA imposes professional rules and firm-level requirements designed to protect clients and the public.
- All firms must maintain adequate and appropriate professional indemnity insurance.
- Practising solicitors must comply with client money and risk management obligations.
- When carrying on any regulated or excluded activity (including the DPB exemption), solicitors must explain to clients how the activity is regulated, any applicable exclusions, and the scope and limits of insurance and compensation schemes.
- Firms must appoint a compliance officer for legal practice (COLP) and a compliance officer for finance and administration (COFA), ensuring complaints, risk and insurance are properly managed.
Key Term: professional indemnity insurance
Insurance cover maintained by law firms to ensure losses suffered by clients due to professional errors or omissions are compensated.
Consequences of Breaching Financial Services Regulation
Engaging in regulated activities outside the available exclusions and exemptions, or failing to comply with insurance and professional responsibilities, may have serious outcomes:
- Regulatory action by the FCA and/or SRA.
- Client compensation and invalidation of transactions.
- Possible criminal prosecution for unauthorised practice.
- Personal liability for individual solicitors and firm managers.
Worked Example 1.1
A solicitor helps a client sell 100% of the shares of a private company. The work includes negotiating the transaction, preparing documents, and holding the client money. The solicitor seeks to provide investment advice about post-sale investment options.
Answer:
Negotiating or arranging the sale of shares may be excluded under the takeover exclusion. However, providing investment advice about how to invest the sale proceeds (e.g., in shares or funds) is a regulated activity and will not be covered by the exclusions. Unless the solicitor is authorised, the client should be referred to an FCA-regulated adviser.
Worked Example 1.2
During a conveyancing matter, a solicitor arranges defective title insurance for the client. They are not registered with the FCA but are fully authorised by the SRA and have complied with all insurance distribution rules.
Answer:
Arranging insurance for conveyancing work is a regulated activity but, if carried out in accordance with SRA requirements and the insurance distribution rules, can be covered via the Designated Professional Body exemption.
Exam Warning
If you are asked to advise a client as to whether their transaction requires FCA authorisation, always check the fundamental facts carefully. Activities involving financial advice, mixing legal and investment services, introducing clients for regulated investments, or holding client money linked to investments may trigger regulatory and professional requirements.
Revision Tip
When unsure, seek guidance from a compliance officer or specialist supervisor. Do not risk exceeding the professional or regulatory boundaries—client protection and your practising certificate are at stake.
Key Point Checklist
This article has covered the following key knowledge points:
- The scope and main regulatory authorities for financial services in England and Wales
- The meaning of 'regulated activity', 'specified investment', and the 'General Prohibition'
- Common regulated activities encountered by solicitors and how they are excluded by statute or exemption
- When and how to rely on the Designated Professional Body (DPB) exemption and the rules around incidental activities
- Additional requirements for insurance distribution activities for legal practices
- Key SRA professional requirements, including professional indemnity insurance and compliance obligations
- The legal and professional consequences of carrying out unauthorised regulated activities
Key Terms and Concepts
- regulated activity
- specified investment
- General Prohibition
- exclusion
- Designated Professional Body (DPB) exemption
- incidental activity
- insurance distribution activity
- professional indemnity insurance