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   FSMA 2000
  FSMA 2000
  Introduction   FSA powers
  Mainstream financial activity   Exempt professional firm
  Regulated Activities Order   Regulated activity
  Designated professional body  

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Introduction
Receiving Royal Assent on 14 June 2000, the Financial Services and Markets Act 2000 (FSMA) was brought into force at midnight on the 30 November 2001, commonly known at the time as N2. The effect of this Act is to constitute the Financial Services Authority (FSA) as a super-regulator, with powers to regulate insurance, investment business and banking as well as pensions on divorce. The FSMA abolishes the Self-Regulating Organisations (SRO) and replace the existing two-tier regulatory regime for investment business established under the Financial Services Act 1986, with an integrated regime and a single regulator being the FSA. The FSMA will at the first stage reproduce and update the existing rulebook but the second stage will introduce new features.

The FSMA will create the market abuse regime that will apply to members of the public as well as regulated individuals; the FSMA will establish the Financial Services and Markets Tribunal; the FSMA will create a financial promotion regime prohibiting persons or an exempt person from communicating financial activities; the FSMA will create a single compensation and ombudsman scheme called the Financial Ombudsman Service (FOS); and the FSMA will appoint individuals within regulated firms to be registered with the FSA as approved persons.


Mainstream financial activity
The Financial Services and Markets Act 2000 replaces and updates the Financial Services Act 1986, professional firms that carry on mainstream financial activity will be regulated directly by the Financial Services Authority. Mainstream financial activity will include direct advice to clients on the choice of investment products, discretionary investment management and certain types of corporate finance activities such as listings and public offers.

If a professional firm does not conduct mainstream financial activity they can under section 327 of the FSMA be designated an exempt professional firm and can then be supervised and regulated by a designated professional body (DPB) rather than the FSA. However, they must comply with their DPB restricted activities rules, the exemptions within the regulated activities order and non exempt activities order as specified by HM Treasury.


Regulated activity
For regulated activity under the Financial Services and Markets Act 2000 a professional firm wishing to provide mainstream financial services will need to achieve authorisation from the Financial Services Authority. Subsequent to authorisation the firm would be regulated by the FSA and must comply with the FSA's Handbook of Rules and Guidance.

A firm that is an authorised person under section 31 of the FSMA can be a person who has a Part IV permission to carry on one or more regulated activities as: an EEA firm qualifying for authorisation under Schedule 3 of the FSMA (EEA Passport Rights); a Treaty firm qualifying for authorisation under Schedule 4 of the FSMA (Treaty Rights); and a person who is otherwise authorised by a provision of, or made under, the FSMA. The activities that could be regulated activity under a Regulated Activities Order (RAO) are:

Dealing in shares as principal or agent;
Safeguarding and administering investments on behalf of clients;
Managing discretionary investments;
Entering into a regulated mortgage contract;
Advising on, and/or arranging the acquisition or disposal of shares and life policies;
Advising on, and/or arranging the assignment of life policies.

If an exempt professional firm conducts regulated activity that is outside the terms of the section 327 conditions and therefore is not exempt regulated activity, the firm could be in breach of the general prohibition and committing a criminal offence.


Regulated Activities Order
A RAO within Schedule 2 of the FSMA contains a list of regulated activities, the definitive list of regulated activities being contained in the Regulated Activities Order as specified by HM Treasury are as follows:

A deposit; Futures and options;
Stocks and shares; Funeral contracts;
Instruments giving entitlement to investment; Rights to or interests in investments;
Units in a collective investment scheme; Regulated mortgage contracts;
Those rights under stakeholder pensions; Lloyds syndicate capacity and membership;
Instruments creating or acknowledging indebtedness, eg bonds, loan stock, debentures; Government and public securities except certain loan stock eg National Savings Certificates;
Rights under a contract of insurance; Contracts for differences.

Within the Regulated Activities Order there will be a number of exclusions and activities carried on within these terms will not be regulated activity. Therefore exempt professional firms, as with other firms that are not authorised, will be able to carry on business within the terms of the exclusions without breaching the general prohibition.


FSA powers
Contained in Section 19 of the Financial Services and Markets Act 2000, general prohibition is the prohibition stating that no person may carry on a regulated activity in the United Kingdom, or purport to do so, unless he is an authorised person or an exempt person. Areas where general prohibition apply are:

Effecting and carrying out contracts of insurance; Establishing a stakeholder pension scheme;
Acting as a stakeholder pension scheme manager; Acting as managing agent at Lloyds;
Advising a person to become a member of a Lloyds syndicate; Market making and dealing in the same way as a stockbroker;
Establishing a collective investment scheme; Entering into broker fund arrangements;
Entering into as lender or administering a regulated mortgage contract; Entering as provider into a funeral plan contract.

A Direction power taken by the Financial Services Authority is set out under section 328 of the FSMA. It allows the FSA to prevent use of the exemption by members of a particular profession or particular types of firm within that profession. Alternatively, the FSA can make a Direction in terms of regulated activity and exempt professional firms could not then carry on that activity.


Designated professional body

A designated professional body will be so designated by HM Treasury under section 326 of the Financial Services and Markets Act 2000. A DPB could include the Law Society and Institutes of Chartered Accountants and will be responsible for supervising and regulating exempt professional firms. A DPB must cooperate with the Financial Services Authority, especially with regard to sharing information.

There are certain exempt regulated activities under the FSMA regulated activities that may be carried on by members of a profession, which is supervised and regulated by a designated professional body without breaching the general prohibition.

The Financial Services and Markets Act 2000 requires a designated professional body to make restricted activity rules, which have to be approved by the Financial Services Authority. An exempt professional firm must carry on, and hold itself out as carrying on, only regulated activities allowed by these rules.

A non exempt activities order under section 327(6) of the Financial Services and Markets Act 2000 states that the activities must not be of a description, or relate to an investment of a description, specified in an Order made by HM Treasury for the purposes of this sub-section. This together with the restricted activities rules of designated professional bodies will prohibit exempt professional firms from carrying on specific types of regulated activity.


Exempt professional firm
This is a person to whom, under section 327 of the Financial Services and Markets Act 2000, the general prohibition does not apply. Exempt professional firms can carry on certain exempt regulated activities that are subordinate to and derived from their professional services, under the supervision and regulation of a designated professional body. These exemptions could be:

Introduce a client to an authorised person such as an independent financial adviser (IFA);
Arrange a transaction on behalf of a client with or through an authorised person where:
The advice given to the client is by an authorised person; or
It is clear that the client has not sought advice from the professional firm.

Exempt professional firms will in general therefore be carrying on very different regulated activities from IFA.

With regard to disclosure rules most firms that were previously regulated for investment business by their recognised professional bodies (RPB) before 30 November 2001 will be exempt professional firms from N2. The rules of the RPB instruct the firms when they were allowed to disclose that they are regulated for investment business. However, since N2 exempt professional firms will not be authorised and the Financial Services Authority will consider it misleading to assume it is authorised.

Under Section 24(1) of the FSMA it is a criminal offence for a person to describe himself as an authorised person if he is not. Therefore, disclosure rules will require an exempt professional firm to avoid any representation to its clients that it is authorised by the FSA or that the regulatory protection offered by the FSMA will apply.

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