You might think financial services regulation is only for banks and investment firms, but it catches solicitors far more often than you'd expect. Whenever you advise on investments, arrange insurance, or manage client money in certain ways, you're potentially carrying out regulated activities under the Financial Services and Markets Act 2000 (FSMA).
Carrying out a regulated activity without proper authorisation or an applicable exemption is a criminal offence under s.23 FSMA. You could face up to two years' imprisonment and an unlimited fine. On top of that, any agreement made in the course of the unauthorised activity is unenforceable against the other party. This isn't a technicality you can ignore.
Breaching the general prohibition in s.19 FSMA is a criminal offence punishable by up to two years' imprisonment and/or an unlimited fine. Even if you don't realise you're carrying out a regulated activity, ignorance is not a defence. You must be able to identify when financial services issues arise in your work.
SQE1 questions on financial services typically test whether you can identify a regulated activity, determine whether a solicitor's exemption applies, and understand the consequences of acting without authorisation. Focus on learning the specified investments, specified activities, and the conditions for the Part XX exemption.
Financial services in the UK are regulated by two main bodies. The Financial Conduct Authority (FCA) regulates the conduct of all financial services firms and the prudential regulation of those not supervised by the PRA. The Prudential Regulation Authority (PRA), part of the Bank of England, is responsible for prudential regulation of banks, building societies, insurers, and major investment firms.
The FCA is the regulator you'll encounter most as a solicitor. It has a strategic objective of ensuring that financial markets function well, and three operational objectives: protecting consumers, protecting and enhancing the integrity of the UK financial system, and promoting effective competition. The FCA authorises firms to carry out regulated activities and can take enforcement action against those who breach FSMA.
The PRA focuses on prudential standards for the most significant financial institutions. Its general objective is promoting the safety and soundness of the firms it regulates. As a solicitor, you're unlikely to deal directly with the PRA, but you should know it exists and understand the dual-regulator model.
| Feature | FCA | PRA |
|---|---|---|
| Focus | Conduct of business and consumer protection | Prudential soundness and financial stability |
| Scope | All authorised financial services firms | Banks, building societies, insurers, major investment firms |
| Relevance to solicitors | High — authorises firms, oversees exempt professional firms regime | Low — unlikely to interact directly |
| Key power | Authorisation, supervision, enforcement | Setting prudential standards, supervision of systemic firms |
Section 19 FSMA contains the general prohibition: no person may carry on a regulated activity in the United Kingdom unless they are an authorised person or an exempt person. This is the starting point for all financial services analysis. If what you're doing is a "regulated activity," you need to be authorised or exempt.
A regulated activity has three components: it must be a specified activity, carried on in relation to a specified investment, and carried on by way of business. All three elements must be present. The specified activities and investments are set out in the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 (known as the RAO).
To carry on a regulated activity lawfully, a person typically needs to be authorised by the FCA (or PRA for dual-regulated firms). Authorised persons must comply with the FCA Handbook and are subject to ongoing supervision. Most solicitors' firms are not FCA-authorised, so they rely on exemptions instead.
Specified investments are the financial products that trigger regulation when you carry out a specified activity in relation to them. The RAO lists them in detail. You don't need to memorise every single one, but you must know the main categories that come up in solicitors' practice.
Securities include shares (also called stocks or equities), debentures (which include loan stock and bonds), and government and public securities (such as gilts). If you're advising a client on buying shares in a company or arranging the purchase of debentures, you're dealing with specified investments.
Insurance contracts are specified investments and come in several types. General insurance covers things like property damage, liability, and motor insurance. Life insurance includes whole-of-life policies, endowment policies, and annuities. Pure protection contracts provide cover only against death, illness, or disability without any investment element.
Collective investment schemes pool money from multiple investors to invest in a portfolio of assets. The two main types are unit trusts (where investors hold units in a trust) and open-ended investment companies (OEICs, where investors hold shares in a company). These are specified investments, so arranging or advising on them is regulated.
Deposits (money held by a bank or building society on terms under which it will be repaid) are specified investments. So are rights under pension schemes, options, futures, and contracts for differences. You're most likely to encounter deposits, pension rights, and insurance contracts in everyday solicitors' work.
| Category | Examples | Common Practice Context |
|---|---|---|
| Securities | Shares, debentures, gilts | Business sales, company formations, estate administration |
| Insurance contracts | Life insurance, general insurance, pure protection | Property transactions, wills, commercial advice |
| Collective investment schemes | Unit trusts, OEICs | Estate administration, trust management |
| Deposits | Bank/building society accounts | Client money handling, estate administration |
| Pension rights | Occupational and personal pension schemes | Divorce, employment, estate planning |
Even if you're dealing with a specified investment, you only need authorisation or an exemption if you're carrying out a specified activity in relation to it. The RAO sets out the full list. The activities most relevant to solicitors are dealing, arranging, managing, advising, and insurance distribution.
Dealing as principal means buying, selling, subscribing for, or underwriting investments on your own account. As a solicitor, you're unlikely to do this, but it could arise if your firm buys investments for its own benefit rather than on behalf of a client.
Dealing as agent means buying or selling investments on behalf of another person. If a client asks you to sell their shares and you carry out the transaction for them, you're dealing as agent. This is a specified activity even though you're acting for the client.
This is the activity that catches solicitors most often. Arranging deals means making arrangements for another person to buy, sell, subscribe for, or underwrite investments. If you introduce a client to a stockbroker, or set up the paperwork for a share transfer, you may be arranging deals. There's also a broader category of "making arrangements with a view to" transactions in investments.
Arranging deals is broadly defined and can catch you without realising it. Simply introducing a client to an insurance broker, or drafting documents that facilitate a share purchase, could amount to arranging. Always ask yourself: am I making arrangements that bring about or help bring about a transaction in a specified investment?
Managing investments means exercising discretion in managing assets belonging to another person where those assets include specified investments. This could apply if you're acting as a trustee or attorney with power to make investment decisions on behalf of a client.
Advising on investments means giving advice to a person in their capacity as an investor or potential investor on the merits of buying, selling, subscribing for, or underwriting a particular investment. The key word is "particular" — generic advice about types of investment (such as "you should consider putting money into a pension") is not a regulated activity. But if you say "you should buy shares in XYZ Ltd," that's advising on a particular investment.
The line between generic and specific advice is crucial. Telling a client "you should think about life insurance" is generic and not regulated. Telling them "you should take out this particular policy from ABC Insurance" is specific advice on a particular investment and IS regulated. In the SQE1 exam, look carefully at whether the advice relates to a particular investment or investments generally.
Insurance distribution (formerly insurance mediation) covers activities such as advising on, proposing, or assisting with insurance contracts. This is regulated under the Insurance Distribution Directive (IDD) as implemented in the UK. If you help a client arrange an insurance policy, even incidentally to a property transaction, you may be carrying out insurance distribution.
Property work is one of the most common areas where financial services issues arise. When your client needs a mortgage, you may be arranging a regulated mortgage contract. When they need buildings insurance, you may be carrying out insurance distribution. If you recommend a particular lender or insurance product, you could be advising on investments.
In wills and probate work, you'll regularly encounter specified investments. The deceased's estate may include shares, unit trusts, insurance policies, and pension rights. As a personal representative, you may need to sell investments or transfer them to beneficiaries. Acting as an executor who manages an investment portfolio involves managing investments.
Selling a business often involves the sale of shares, which are specified investments. If you're acting on a share sale, you may be arranging deals in investments. Company formations and reorganisations may involve issuing new shares or debentures. Even drafting the share purchase agreement could amount to arranging.
Financial services issues crop up in divorce proceedings too. Pension sharing orders involve rights under pension schemes. If you advise a client on how to divide their investment portfolio, or recommend selling particular investments, you could be advising on investments. Insurance policies held jointly may need to be dealt with as part of the settlement.
Whenever you encounter shares, insurance, pensions, mortgages, unit trusts, or any other financial product in your work, pause and ask: am I carrying out a specified activity in relation to a specified investment? If the answer might be yes, check whether you're covered by the Part XX exemption or another exemption before proceeding.
Part XX of FSMA provides the main route by which solicitors can carry out regulated activities without being FCA-authorised. Under this regime, the SRA acts as a "designated professional body" (DPB) and oversees solicitors' firms that carry out exempt regulated activities. Your firm is treated as an "exempt professional firm" provided it meets the conditions set out in s.327 FSMA.
For the Part XX exemption to apply, four conditions must all be satisfied. If any one of them is not met, your firm is not exempt and is committing a criminal offence by carrying out the regulated activity. These conditions are strict, so you need to understand each one thoroughly.
The most important condition is that the regulated activity must be incidental to your legal work. If a client instructs you on a house purchase and you arrange buildings insurance as part of that transaction, the insurance distribution is incidental. But if you set up a separate insurance broking service that anyone can use, that's a standalone financial services business and the exemption doesn't apply.
You must not receive commission or other payment from a financial product provider for recommending their product, unless you account to the client for it. The idea is that your advice should be independent and not influenced by which product earns your firm the most commission. If you do receive commission, you must pass it on to the client or get their informed consent to keep it.
Receiving commission from a product provider without accounting to the client will take you outside the Part XX exemption entirely. This doesn't just breach a rule — it means you were never exempt, and you've committed a criminal offence under s.23 FSMA. Always disclose and account for any commission.
The SRA is the designated professional body for solicitors under the Part XX regime. It makes rules governing how solicitors' firms can carry out exempt regulated activities. The SRA Financial Services (Scope) Rules set out which regulated activities firms can carry on, and the SRA Financial Services (Conduct of Business) Rules govern how those activities must be conducted.
The SRA divides regulated activities into two categories. Non-mainstream regulated activities are those that solicitors can carry out under the Part XX exemption — things like arranging insurance incidentally to legal work, or advising on investments as part of an estate administration. Mainstream regulated activities are those that require full FCA authorisation — solicitors cannot carry these out under the Part XX exemption alone.
Under the Part XX exemption, you can carry out non-mainstream regulated activities such as arranging deals in investments, advising on investments, and insurance distribution — provided each activity is incidental to your legal services. You can also manage investments in limited circumstances, such as when acting as a trustee or personal representative.
If a client wants you to provide a financial service that goes beyond what's incidental to your legal work — for example, setting up a discretionary investment management service — you must either become FCA-authorised or refer the client to an authorised firm. Don't try to stretch the exemption to cover activities it wasn't designed for.
When you carry out a regulated activity under the Part XX exemption, you must tell your client that you're not authorised by the FCA. You must explain that you're regulated by the SRA, and that complaints and redress mechanisms may differ from those available against FCA-authorised firms. This disclosure should be given in writing before you carry out the activity.
You must keep proper records of any regulated activities you carry out. Your firm should have a system for identifying when financial services issues arise and ensuring the Part XX conditions are met. The SRA can inspect your firm's compliance with the financial services rules, and failures can result in disciplinary action.
When a client's needs go beyond what you can do under the Part XX exemption, refer them to an FCA-authorised firm. Make sure the referral itself doesn't amount to arranging — a simple introduction is usually fine, but actively facilitating the transaction may cross the line. Document what you did and why.
Insurance distribution is one of the most common regulated activities solicitors carry out. In conveyancing, you may help a client arrange buildings insurance. In commercial work, you may advise on professional indemnity or key person insurance. In family law, you may deal with life insurance policies as part of a financial settlement. Each of these could amount to insurance distribution.
The Insurance Distribution Directive (IDD) imposes specific requirements on anyone carrying out insurance distribution, including solicitors acting under the Part XX exemption. You must act honestly, fairly, and professionally in accordance with the best interests of the customer. You must provide certain pre-contract information, including details about the insurance product and any conflicts of interest.
Many solicitors assume that helping a client sort out insurance in a property transaction is just part of the conveyancing service. It is — but it's also insurance distribution, which is a regulated activity. Make sure you comply with the SRA's financial services rules every time you touch an insurance product, even if it feels routine.
A client instructs you to act on the sale of their company by way of a share sale. You draft the share purchase agreement and handle the completion. This involves arranging deals in specified investments (shares). The Part XX exemption applies because the activity is incidental to your legal services, you're not receiving commission from a third party, and you're providing professional legal services to a particular client.
A conveyancing client asks you which buildings insurance policy they should buy. If you recommend a specific product, you're advising on a specified investment (insurance contract). If you also receive commission from the insurer without accounting to the client, you've broken one of the s.327 conditions and lost the Part XX exemption entirely. The safe approach: either give generic advice or account for any commission.
You're appointed executor of an estate that includes a portfolio of shares and unit trusts. You need to decide whether to sell or retain particular investments for the beneficiaries. This is managing investments — a specified activity in relation to specified investments. The Part XX exemption can apply because the activity is incidental to your work as executor, but you must still comply with all the conditions.
In the SQE1 exam, work through the analysis methodically: (1) identify the specified investment, (2) identify the specified activity, (3) check if it's by way of business, (4) determine if the Part XX exemption applies by checking all four conditions. Don't jump to conclusions — the examiners often include distractors that look like regulated activities but aren't, or situations where one condition for the exemption isn't met.
Some solicitors' firms choose to become FCA-authorised, usually because they want to offer mainstream financial services that go beyond what the Part XX exemption allows. This might include running a discretionary investment management service, acting as an independent financial adviser, or carrying out regulated mortgage activities as a primary business line.
An FCA-authorised solicitors' firm is subject to dual regulation — both the SRA and the FCA. This means complying with two sets of rules, which increases the regulatory burden. The firm must meet the FCA's threshold conditions for authorisation, maintain adequate financial resources, and comply with the FCA Handbook in addition to the SRA Standards and Regulations.
Remember the three-part test for a regulated activity and the four conditions for the Part XX exemption. If you can apply these systematically, you'll handle any financial services question the SQE1 throws at you. Don't forget that the consequence of getting it wrong isn't just regulatory — it's criminal.