1. Regulatory Framework
The Financial Services Authority (FSA) is the principal regulator for investment business in the United Kingdom. The FSA became fully operational on 1st December 2001 and its powers are set out in the Financial Services and Markets Act 2000.
The Act provides that no individual or firm may carry on a regulated activity unless that individual/firm is authorised by the FSA. From 1st December 2001 to 31st October 2004 the FSA’s regulatory regime was confined to the conduct of investment business. However, with effect from 31st October 2004, the FSA’s regulatory regime is extended to incorporate mortgage business and with effect from 14th January 2005, the regime is extended to include general insurance business.
Regulated activities are defined in the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 which has been amended by the Financial Services and Markets Act 2000 (Regulated Activities) (Amendment No.1) Order 2003 to include mortgage business and by the Financial Services & Markets Act 2000 (Regulated Activities) (Amendment No.2) Order 2003 to include insurance business.
An individual solicitor or firm of solicitors can undertake certain regulated activities and thereby be exempt from the requirement to be authorised by the FSA if that solicitor/firm is licensed by the Society under Part XX of the Financial Services and Markets Act 2000. The Part XX regime allows the establishment of exempt professional firms (exempt from the FSA’s regime) to undertake exempt regulated activities provided such activities are an integral part of a solicitor’s professional services. For the purposes of the Part XX regime, the Society is a Designated Professional Body and licenses firms to conduct exempt regulated activities.
The Society’s regime is known as the “Incidental Financial Business (IFB) Regime” effective from 31s October 2004 and this regime replaces the Incidental Investment Business Regime which has been in operation since 1st December 2001. The IFB regime allows firms to conduct certain activities which would otherwise require FSA authorisation. The essence of these incidental financial business activities is that they are integral to the professional services provided to clients and are not conducted on a stand-alone basis. Furthermore, such activities must not be marketed on a stand-alone basis.
As the FSA’s regime has been expanded to include mortgage and insurance business, there has been a similar expansion to the Society’s IFB regime so that it incorporates investment, mortgage and general insurance business.
There are four options open to firms of Scottish solicitors under the UK’s investment business regulatory regime and these are -
- FSA authorisation.
- An IFB Licence from the Society.
- Acting as an introducer to an independent financial adviser – this option can be undertaken in connection with either of the first two options.
- None of the above.
It is important to recognise the wide definition of a regulated activity which includes -
- advising on investments, mortgages and general insurance.
- making arrangements in investment, mortgages and general insurance.
- selling investments, mortgages and general insurance.
The definition of regulated activities is therefore very wide and is not confined only to the giving of advice but includes making arrangements in the following product areas - .
Insurance products includes after the event legal expenses insurance, Bonds of Caution, building insurance, defective title indemnity insurance, household contents insurance, missing beneficial indemnity insurance, term assurance, unoccupied property insurance and warranty in insurance..
Investment products includes shares, fixed interest stock, individual savings accounts, pension and collective investment schemes, unit trusts and open-ended investment companies.
Regulated mortgage contract is one which is secured by a first legal mortgage on land which is in the United Kingdom and where at least 40% of the land is, or is to be used, as a dwelling by the borrower.
