BUSINESS LAW AND PRACTICE NOTES
PROFESSIONAL CONDUCT
Professional Conduct – Partnership
PREP TASK
Your firm is not authorised by the Financial Conduct Authority and has a policy of
not relying on the ‘professional/necessary’ exclusion if the risks associated with a
transaction exceed the firm’s standard insurance cover of £5m.
Explain why your firm can advise Talkers on the merits of investing in FSC without committing
an offence under the Financial Services and Markets Act 2000.
First thing to think about is will we have the necessary competence and skill? Think about
client’s best interest (Principle 7). This also means ensuring that the solicitor can give
competent advice and take account of the client’s needs and attributes (para 4.2 SRA Code
of Conduct)
Section 19 of the Financial Services and Market Act = “Firm must not carry on a regulated
activity without it being authorised by the Financial Conduct Authority”. A breach of section 19
= criminal offence.
Are we carrying out a regulated activity? Definition of regulated activity = specified activity
carried on by way of a business relating to a specified investment without an exclusion
applying. FOUR PART TEST: (if 1-3 are satisfied then it is a regulated activity and cannot
advise but see exclusions in 4)
1. Are you in business? Yes, the solicitors firm will be in business as it will be providing a
professional service to a client
2. Is there a specified investment? Yes, shares are a specified investment.
Specified Investments:
(a) company stocks and shares (but not shares in the share capital of open-ended
investment companies or building societies incorporated in the UK);
(b) debentures, loan stock and bonds;
(c) government securities, such as gilts;
(d) unit trusts and open-ended investment companies (OEICs), which are similar to
unit trusts, but use the structure of a company rather than a trust;
(e) insurance contracts;
(f) mortgages;
(g) home reversion/home purchase plans.
Investments that will not be relevant include:
(a) interests in land;
(b) certain National Savings products
3. Is there a specified investment activity? Yes, advising on the merits of investing in a
particular investment i.e. buying shares in FCS – specified investment activity.
Specified activities
(a) Dealing as agent –
o buying, selling and substring for or underwriting the investment where you
deal on behalf of a client (than on your own account) and commit that client to
transactions. E.g. selling shares on behalf of a client pursuant of a financial
order made on divorce.
o APPLICABLE EXCLUSIONS – ATP, Execution-only, Professional/Necessary,
Takeover
(b) Arranging –
, o The solicitor will often be involved as the contact between the client and the
life company, or the client and the stockbroker. It is in this context that the
solicitor may be ‘arranging’.
o Arrangements are excluded where the solicitor merely introduces clients to a
person authorised by the FCA (an authorised third person – ATP) and the
introduction is made with a view to the provision of independent advice to the
client.
However, this exclusion does not apply where the transaction relates to
an insurance contract. If you do something more than just introduce the
client in respect of the investment (eg, you help the client to complete an
application form), you will be ‘arranging’.
o APPLICABLE EXCLUSIONS – Introducing, ATP, Execution-only,
Professional/Necessary, Acting as a trustee/PR, Takeover
(c) Managing –
o Managing requires active participation beyond the mere holding of
investments and applies only to ‘discretionary management’ (ie, involving the
exercise of discretion).
o This investment activity will be most common in firms that undertake probate
and trust work, where the solicitor is acting as trustee or personal
representative.
o APPLICABLE EXCLUSIONS – Acting as a trustee/PR
(d) Safeguarding-
o This involves safeguarding and administering investments belonging to a
client. This is also particularly relevant for firms which undertake probate and
trust work.
o APPLICABLE EXCLUSIONS – Professional/necessary, Acting as a
trustee/PR
(e) Advising –
o This involves giving advice to a person in his capacity as an investor on the
merits of his buying, selling, subscribing for, or underwriting an investment.
Advice must be about a specific investment; generic advice is outside the
scope of the FSMA 2000. Thus you can, if you have the knowledge, advise a
client to invest in shares rather than gilts, but if you advise the client to buy
shares in a particular company, say Tesco, this will be a regulated activity.
o If you do not have the requisite knowledge to provide generic advice, or if the
client requires advice on a specified investment, you could refer him to a
person authorised by the FCA (an ATP) with a view to the ATP providing that
advice. Thus if a client wants advice on what shares to buy, you could refer
him to an authorised stockbroker. It will be the stockbroker who ‘advises’ the
client under the FSMA 2000. The referral to the ATP would not amount to a
specified activity.
o APPLICABLE EXCLUSIONS –Professional/Necessary, Acting as a
trustee/PR, Takeover
(f) Lending money on/administrating a regulated mortgage contract .
4. Is there an exclusion?
Exclusions:
(a) introducing (see arranging above);
(b) using an Authorised Third Person (ATP);
o If you do something more than merely ‘introduce’ the client to an ATP, you
could be ‘arranging’ or even ‘ dealing as the client’s agent’. However, these
will be excluded under RAO 2001, arts 22 and 29 if the transaction is entered
into with or through an ATP on the advice given to the client by the ATP.
o You cannot rely on this exclusion if you receive from any person other than
the client any pecuniary reward (eg, commission) or other advantage, for
which you do not account to your client, arising out of his entering into the
transaction.
o This exclusion will not apply if the transaction relates to an insurance contract.
(c) acting for an execution-only client;
o There is an exclusion similar to the ATP exclusion where the client, in his
capacity as an investor, is not seeking and has not sought advice from the
, solicitor as to the merits of the client’s entering into the transaction (or, if the
client has sought such advice, the solicitor has declined to give it but has
recommended that the client seek such advice from an authorised person).
There is the same restriction in respect of commissions and contracts of
insurance.
(d) acting as trustee or personal representative;
o The exclusion applies to arranging, managing, safeguarding and advising
fellow trustees and/ or beneficiaries. It also applies to lending money on, or
administering a regulated mortgage contract.
o This exclusion has limitations. It is available to a solicitor acting as a trustee or
PR, and not to a solicitor acting for a trustee or PR
(e) Activities carried on in the course of a profession or non-investment business - the
‘professional/necessary’ exclusion;
o This applies to advising, arranging, safeguarding and dealing as agent. There
is an exclusion if the activity is performed in the course of carrying on any
profession or business and may reasonably be regarded as a necessary part
of other services provided in the course of that profession or business, ie
where it is not possible for the other services to be provided unless the
regulated activity is also provided.
o Examples of where this exclusion may apply include: in acting on the
acquisition of a company, giving advice on the merits of buying it and
arranging for the acquisition of its shares; or, in probate work, arranging for
the sale of all of the assets to pay IHT.
o However, the exclusion does not apply if the activity is remunerated
separately from the other services. Further, as a result of the Insurance
Distribution Directive (2016/97/EC), if the activity consists of taking up or
pursuing insurance distribution, this exclusion is not available.
(f) Activities carried on in connection with the sale of a body corporate – the
‘takeover’ exclusion.
o This exclusion applies to arranging, advising and dealing as agent. It will
apply to a transaction to acquire or dispose of shares in a body corporate
(other than an OEIC), or for a transaction entered into for the purposes of
such an acquisition or disposal, if:
(a) the shares consist of or include 50% or more of the voting shares in the
body corporate; and
(b) the acquisition or disposal is between parties each of whom is a body
corporate, a partnership, a single individual or a group of connected
individuals.
o Talkers is acquiring more than 50% of the shares in FSC and the transaction
is between a body corporate i.e. Talkers and 3 connected individuals being
Kaye, Michael and Paul. Note – if a) and b) was not satisfied – exclusion still
would apply as the object of the transaction may reasonably be regarded as
being the acquisition of day to day control of the company. As Talkers will
have complete control over who is on the board of FCS after the acquisition.
NOTE: Cannot advise unless regulated as it would be a criminal offence (Section
19)
CONCLUSION: Therefore, because an exclusion applies – this is not a regulated activity
and the firm can advise.
, Partnership
(WS1)
Outcomes
1) Recognise and advise on the existence of a partnership, and the terms that
regulate the running of the partnership business (when does a partnership
exist and what are the rules).
2) Advise on key provisions of the Partnership Act 1890, especially in connection
with the existence and duration of a partnership, profit-sharing, decision-
making, retirement, expulsion and dissolution.
3) Identify and explain key provisions typically included in a written partnership
agreement, including those necessary to exclude or vary the terms otherwise
implied by the Partnership Act 1890.
4) Recognise the professional conduct implications of advising more than one
partner on the terms of a draft partnership agreement.
5) Advise on whether a former partner will remain liable for partnership debts.
Tutorial ‘Partnership Formation, Agreements and Dissolution’.
Definition of Partnership - Section 1 of the Partnership Act. It is a relationship which
exists when two or more persons carry on business together to make a profit.
Partnership arises when definition is satisfied.
A partnership with one or more corporate members is often referred to as a
corporate partnership.
Group Partnership refers to a partnership between two or more partnerships. A
sub-partnership is a partnership within a partnership, or put another it way it is a
partnership with a share of another partnership.
All partners are liable for the debts of their firm. If someone deals with one partner
– will need to prove (amongst other things) that a partnership exists before a
claim based on that dealing with succeed against the other partners. Likewise,
someone who wants to enforce a right, obligation or duty against another person
on the basis that they are partners will also have to prove the existence of a
partnership.
A partnership can be formed accidentally, association or even by carelessness.
a) Accidentally forming a partnership – this exists whenever two or more persons
seek to pursue a commercial enterprise together. If they choose to do that
through a separate legal entity such as a limited liability company or limited
liability partnership a general partnership will not arise.
b) Badges of partnership – when working out whether a partnership exists – have to
work out whether the criteria in section 1 of the Act are satisfied and to do this you
have to look for what some call the “badges” of partnership. Section 2 provides
rules to determine whether a partnership exists. If there are common business
activities and arrangements for sharing profits and losses it may be difficult to
avoid the conclusion that there is a partnership.
c) Avoiding forming a partnership - to avoid carrying on business ‘in common’ the
participants must not merge their separate businesses, or more to the point,
create a single business out of the venture. They may avoid the implication of
carrying on a business in common if each participant retains legal and beneficial
ownership of and operational control over their respective assets whilst pursuing
the venture. If they do retain ownership and control of their own assets the
participants may decide, rather than share profits, to share gross returns, which is
