Money laundering and financial services - Financial services

Learning Outcomes

This article covers financial services regulation relevant to solicitors’ practice under FSMA and the SRA, including:

• What is meant by ‘financial services’ in the legal context and the scope of the General Prohibition
• Identification of regulated activities and specified investments commonly encountered by solicitors
• How and when key statutory exclusions apply (takeover, necessary, trustee/PR, and acting through authorised persons)
• Applying the ‘by way of business’ test to distinguish incidental legal services from regulated services
• The Designated Professional Body (DPB) exemption: conditions, limits, and firm conduct requirements
• Additional rules for insurance distribution (SRA notification, demands and needs, client information, and oversight)
• Core SRA professional compliance: professional indemnity insurance, client care, client money, transparency, and complaints
• Client due diligence and anti-money laundering controls where services intersect with financial transactions
• Practical risk management: referrals to authorised persons, commission handling, disclosures, and avoiding unauthorised advice
• Application to SQE2-style advisory and scenario questions, common pitfalls, sanctions, and client protection implications

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, with a focus on the following syllabus points:

• 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 (including takeover, necessary, trustee/PR, and acting through authorised persons) and the professional exemption for solicitors
• How to apply the 'by way of business' test in practice to distinguish incidental legal work from regulated services
• The additional requirements when dealing with insurance distribution, including client information and SRA notification
• The SRA and firm compliance requirements, including indemnity insurance, client care and risk management, and client due diligence for relevant activities

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 are the consequences of undertaking a regulated financial activity without authorisation or exemption?
2. Which activities commonly carried out by solicitors fall within the financial services regulatory regime?
3. Name two exclusions that may be available to a solicitor when dealing with specified investments.
4. 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. Day-to-day risk management often requires deciding whether an activity is incidental to legal services, whether an exclusion applies, and when the safer course is to refer the client to an FCA-authorised adviser. Where matters involve insurance products, additional rules apply. Firms must also ensure appropriate client due diligence, systems and controls to prevent their services being used for money laundering or financial crime, particularly when an activity involves specified investments or client money.

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 on investments, arranging deals, dealing as agent, managing investments, safeguarding and administering investments, and certain mortgage and insurance-related activities.

Key Term: specified investment
An investment listed in the Regulated Activities Order, such as shares, debentures, units in collective investment schemes, insurance contracts, pension schemes, funeral plans, and regulated mortgage contracts. 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.

Key Term: by way of business
A test focusing on whether the activity has a commercial or professional character (e.g., delivered for or in expectation of reward as part of a business). Personal, non-business advice is not caught, but advice given in a professional context typically is.

Key Term: authorised person
A firm or individual authorised or registered by the FCA (or otherwise permitted) to carry on regulated activities in the UK.

Undertaking a regulated activity without authorisation or exemption is a criminal offence. Agreements made by unauthorised persons in contravention of the general prohibition may be unenforceable against the client, and the person may be subject to injunctions, fines, and restitution orders. Breaches often trigger parallel professional consequences (SRA action), remedial duties to clients, and reputational harm.

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 or debentures in a business (e.g., share sale agreements, investment terms).
• Arranging or advising on insurance for property transactions (e.g., defective title insurance, indemnity policies).
• Helping clients finance property through regulated mortgages, or introducing clients to mortgage providers or investment advisers.
• Advising on pension arrangements, collective investments or investment portfolios.
• Safeguarding or administering client investments (e.g., holding share certificates as part of legal services).

Whether a solicitor is caught depends on the precise activity and whether exclusions or exemptions apply. For example, advising on the merits of investing sale proceeds in shares is regulated advice, whereas drafting a share purchase agreement in a corporate transaction may fall within an exclusion. Introducing a client to an FCA-authorised firm can often avoid the general prohibition, provided no separate regulated advice is given and referral fees are properly handled.

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. These statutory carve-outs are narrowly construed and must be applied to the facts with care.

Frequently Relied On Exclusions

• Takeover exclusion: Applies where the client is acquiring or disposing of 50% or more of shares in a company. Typical corporate transactions involving a transfer of control are generally outside the scope of regulated activities when advice relates to the acquisition or disposal of shares as part of taking or relinquishing control. This facilitates legal advice and negotiation in share sale deals without requiring FCA authorisation.

• Necessary exclusion: Permits activity relating to specified investments if it is a necessary part of a legal service (other than managing assets). The activity must be reasonably regarded as essential to the legal service being provided. Examples include arranging payment of consideration in a share sale or transmitting instructions to complete a transaction. It does not permit ongoing investment management or portfolio decisions.

• Acting through an authorised person: The solicitor introduces the client to a regulated financial adviser or product provider who then provides the advice and service. If the solicitor does not give separate regulated advice, does not make arrangements beyond the introduction, and any financial benefit is properly accounted to the client where required, the solicitor typically does not need authorisation.

• Acting as trustee, nominee, or personal representative: Activities undertaken in these capacities are often excluded, allowing solicitors to carry out necessary acts connected with estate administration or trusts without triggering authorisation, provided they do not amount to managing investments as a separate regulated service.

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.

These exclusions significantly reduce regulatory friction for core legal work. However, they do not cover investment advice on how to invest proceeds, ongoing portfolio management, or arranging specific investment products outside the limited scope of the legal service.

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 meet conditions set by FSMA and the SRA’s Financial Services rules (e.g., scope and conduct requirements), and do not receive separate remuneration for the activity unless fully accounted to the client.

Solicitors can rely on the DPB Exemption where:

• The activity is incidental to the provision of legal services and is not offered as a standalone financial service.
• The firm complies with SRA Financial Services (Scope) and Financial Services (Conduct of Business) requirements, including client information duties.
• No additional commission or reward is received unless fully disclosed and, where required, rebated or accounted to the client.
• The firm does not hold itself out as carrying on regulated financial services business (e.g., marketing investment advice).

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.

Where the DPB exemption is relied upon, firms must ensure they have appropriate systems for conflicts, client communications, and insurance. If an activity goes beyond incidental levels or becomes a regular, standalone offering, the firm should obtain FCA authorisation or cease the activity.

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. Insurance distribution is a distinct regulated activity under the UK’s implementation of the Insurance Distribution Directive.

Extra requirements then arise. These include notifying the SRA, complying with the SRA’s insurance distribution rules, appointing a responsible person for insurance distribution oversight, and providing prescribed information to clients about the nature of the service, the product, remuneration, and conflicts. Firms must ensure that any recommendation is based on the client’s “demands and needs,” that clients receive clear and fair information before they are bound by a policy, and that product governance and training are appropriate.

Key Term: insurance distribution activity
The selling, arranging, or administration of insurance contracts on behalf of clients, requiring regulatory compliance and SRA notification. Exclusions that might apply to other activities often do not apply here.

Fringe Cases and Firm Compliance

Some activities, such as advising on pensions, investment portfolios, collective investment schemes, 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. Similarly, mortgage broking and advice on regulated mortgage contracts will often be regulated; arranging such finance is usually the remit of FCA-authorised mortgage intermediaries.

Where there is any doubt, the safest course is to introduce the client to an authorised person and avoid giving regulated advice. Maintain clear internal policies on referrals, commission handling, and client disclosures. 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.

• Professional indemnity insurance: All firms must maintain adequate and appropriate professional indemnity insurance. The level depends on the size and nature of the practice and claims history. Freelance solicitors must maintain appropriate insurance if carrying out reserved legal activities. Clients should be told the scope and limits of this insurance in client care communications.

• Client care and transparency: Solicitors must inform clients whether and how the services provided are regulated, including whether any activity is covered by the SRA regime (e.g., under the DPB exemption) and whether FCA regulation does not apply. Firms must ensure clients receive best possible information about costs, keep clients informed, and provide clear complaints information. Firms have eight weeks to respond to a complaint before the Legal Ombudsman can be engaged.

• Client money and assets: Firms must safeguard client money and assets. Client money must be held in a designated client account unless an exception applies (e.g., advance payments for fees and certain disbursements). Systems must prevent loss or misuse and ensure prompt accounting. When receiving any financial benefit (e.g., commission) arising from a client’s instructions, the benefit must be properly accounted to the client unless agreed otherwise.

• Compliance officers: 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 and that the firm’s regulatory obligations are monitored.

• Client due diligence (CDD) and AML controls: Where services involve financial transactions (e.g., property purchases, business acquisitions, opening accounts, managing client money), firms must apply appropriate CDD, record-keeping, and training under the Money Laundering Regulations. This complements financial services compliance and is essential to prevent misuse of legal services for money laundering.

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. Where activities are carried out under the DPB exemption rather than FCA authorisation, clients typically rely on the firm’s PII rather than the Financial Services Compensation Scheme.

Key Term: Financial Services Compensation Scheme (FSCS)
The statutory compensation scheme for customers of authorised financial services firms. Activities carried out by solicitors under the DPB exemption are not covered by FSCS in the same way as FCA-authorised activities; clients rely on the firm’s professional indemnity insurance.

When carrying on any regulated or excluded activity (including under 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 (including that the FSCS may not apply, but the firm’s PII does).

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, including investigation, fines, conditions, or intervention.
• Agreements made in breach of the general prohibition may be unenforceable; restitution orders and injunctions can be sought.
• Client compensation claims and invalidation of transactions (or significant disruption to them).
• Criminal prosecution for unauthorised practice.
• Personal liability for individual solicitors and firm managers.

The severity of sanctions depends on the nature of the breach, harm to clients or markets, and whether remedial steps were taken promptly. Firms should maintain a conservative approach to borderline activities and seek specialist compliance advice where needed.

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.

Worked Example 1.3

A private client solicitor, acting as executor of an estate, proposes to switch the estate’s investment portfolio from one fund to another to improve returns, without seeking external advice.

Answer:
Acting as personal representative benefits from certain exclusions, but making discretionary investment decisions or giving investment advice is likely to be a regulated activity. Unless the solicitor is authorised, the prudent course is to instruct or refer to an FCA-authorised investment manager and avoid giving regulated advice.

Worked Example 1.4

In a property purchase, the solicitor discusses mortgage options with the client, recommends a specific regulated mortgage contract from a particular lender based on interest rate and features, and offers to submit the application.

Answer:
Advising on and arranging a regulated mortgage contract are regulated activities. The solicitor should not recommend a specific product unless authorised. The safe route is to refer the client to an FCA-authorised mortgage broker, explain the limits of the solicitor’s role, and avoid submitting applications or giving product-specific advice.

Worked Example 1.5

A corporate solicitor drafts a share purchase agreement where the buyer is acquiring 60% of the target’s shares and includes provisions to complete the sale, transfer consideration, and settle completion mechanics.

Answer:
This falls within the takeover exclusion as it relates to acquiring control (more than 50% of shares) and is a necessary part of the legal service. Drafting and arranging completion mechanics are typically permitted. The solicitor must avoid giving separate investment advice (e.g., whether the buyer should invest in the target versus alternative investments), which would be regulated.

Worked Example 1.6

A firm regularly introduces clients to an IFA with whom it has a commission-sharing arrangement. The firm explains that it does not give investment advice and discloses any commission that may be received.

Answer:
Introducing clients to an authorised person is generally an exclusion. The firm must not provide regulated advice, must ensure transparency about any financial benefit, and must account to clients for commissions where required under SRA rules. If introductions become a significant standalone activity, the firm should reassess whether it remains incidental and within the DPB scope.

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, arranging mortgages, or holding client money linked to investments may trigger regulatory and professional requirements. Apply the business test, ask whether an exclusion applies, and consider whether the DPB exemption covers the activity. Where insurance is involved, remember additional insurance distribution obligations.

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. Using authorised third parties for regulated advice is often the safest route.

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'
• The 'by way of business' test and its application to solicitor work
• Common regulated activities encountered by solicitors and how they are excluded by statute or exemption (takeover, necessary, trustee/PR, and acting through authorised persons)
• 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, including demands and needs assessments and client information
• Key SRA professional requirements, including professional indemnity insurance, client care, complaints handling, client money obligations, and compliance officer roles
• The legal and professional consequences of carrying out unauthorised regulated activities, including criminal liability, unenforceability, restitution, and regulatory sanctions
• The importance of client due diligence and AML controls when activities intersect with financial transactions

Key Terms and Concepts

• regulated activity
• specified investment
• General Prohibition
• by way of business
• authorised person
• exclusion
• Designated Professional Body (DPB) exemption
• incidental activity
• insurance distribution activity
• professional indemnity insurance
• Financial Services Compensation Scheme (FSCS)