Regulated Activities

The Financial Services and Markets Act 2000, as amended, provides for the creation of statutory instruments that outline regulated activities. The Regulated Activities Order specifies that the following are regulated activities:

• Accepting deposits
• Issuing electronic money
• Affecting and carrying out contracts of insurance as a principal
• Dealing in investments as a principal or agent
• Arranging deals in investments, arranging home finance transactions, regulated mortgages, home reversion plans, and home purchase plans; this includes mortgages but excludes buy-to-let or second charge loans, home reversion plans, and equity release products. A home purchase plan is an Islamic law-compliant mortgage.
• Operating a multilateral facility – a system that allows parties, including retail or other investment firms, to buy and sell financial instruments.
• Managing investments, which involves exercising discretion.
• Assisting in the administration and performance of a contract of insurance.
• Safeguarding and administering investments, which covers depositories and custodians.
• Sending dematerialized instructions, relating to the electronic transmission of investment instructions.
• Establishing collective investment schemes.
• Operating, establishing, or winding up personal pension schemes or stakeholder pension schemes.
• Giving basic advice on stakeholder products, which applies to the basic level of advice on tightly regulated stakeholder products.
• Advising on investment.
• Advising on home finance transactions, regulated mortgage contracts, home reversion plans, home purchase plans, sale and rent buy-back agreements, Lloyds market activities (insurance-related), and entering as a provider of an insurance plan contract.
• Entering into and administering home finance transactions, regulated mortgage contracts, home reversion plans, home purchase plans, sale and rent-back agreements.
• Bidding on admission auctions, which relates to climate protection credits.
• Agreeing to carry on most regulated activities.
• Administering a specified benchmark, such as LIBOR.
• Operating dormant accounts for meeting repayment claims.
• Debt adjusting, debt counselling, debt administration, and debt collecting.
• Credit broking.
• Operating an electronic system in relation to lending.
• Entering into a regulated credit agreement as a lender and exercising lenders’ rights and duties under such an agreement.
• Entering into a regulated consumer hire agreement as an owner and exercising owners’ rights and duties under the agreement.
• Providing credit information services.
• Providing credit references as a primary business.

Generally, regulated activities must be carried on by way of a business for the order to apply. This is a matter of degree and generally implies continuity.

The activities apply to activities undertaken in the UK by establishing in the UK, carried out in the UK overseas as cross-border activities, in another EEA state from the UK base and passporting into that state under EU law, or in another EU state if day-to-day management is carried out in the UK.

The Perimeter Guidance Manual provides useful guidance on whether activities fall on one side of the line or another. There are several exceptions outlined in the Perimeter Guidance Manual, including persons dealing as principals who do not hold themselves out to the market as willing to deal, or any persons dealing on their own account, and companies issuing their own shares and not regulated for sale.

Trustees and personal representatives who do not hold themselves out as providing the service and are not separately authorized are not subject to authorization. Employee share schemes are exempted.

Media advice is subject to certain conditions for mainstream media, provided it is not the primary purpose of the media. For example, investment advice by mainstream media is exempt.

Overseas persons who do not carry out activities from a permanent active establishment or permanent place in the UK are exempt. This covers cases where the activity results from an unsolicited approach by a UK individual or where the activity requires the direct involvement of an authorized or exempt firm.

Activities are already within the scope of the Regulated Activities Order if they relate to specified investments. Specified investments include deposits, electronic money, rights under a contract of insurance (including life financial investment type insurance and general insurance contracts), debentures, loans, and other instruments, government and public securities, warrants, certificates representing securities (ADRs), units and collective investment schemes, rights under personal pensions and stakeholder pension schemes, greenhouse gas emissions allowances, auctions to dispose of specified investments or currencies, and futures for investment purposes.

Home finance transactions cover regulated mortgages, where the loan is covered by a first legal mortgage and the property is located in the United Kingdom, occupied at least 40 percent of the time by the borrower or their family.

Home reversion plans, home purchase plans, and regulated sale and rent-back agreements are mentioned above. In a home reversion plan, the customer retains ownership until death or moving to residential care. In sale and rent-back, there is a sale of an interest in the property, but the owner continues to occupy at least 40 percent of the property.

No person may carry out a regulated activity in the United Kingdom or purport to do so without being authorized under financial services by the Financial Conduct Authority or the Prudential Regulation Authority or being exempt.

Dual regulated firms, such as larger credit institutions, insurers, and larger investment firms, are discussed in a separate chapter. The Financial Conduct Authority regulates the conduct of business for all firms and also undertakes prudential regulation for firms falling below the Prudential Regulation Authority threshold.

There are some exempt categories subject to conditions. Appointed representatives who undertake sales in relation to products such as life insurance do not require separate authorization.

Members of professions, such as accountants and solicitors, who provide investment advice, provided it does not constitute the major part of their business and is incidental and not separately paid, are exempt from the requirement. They are subject to the requirements of their professional body, which may be scrutinized by their regulator.

Certain international bodies, local authorities, housing associations, treasury taskforces, and governmental organizations are designated as exempt. Enterprise schemes, charities, student loans companies, UK National Savings and Investments are exempt in respect of certain activities.

There is a single scheme of authorization, undertaken by the Prudential Regulation Authority or the Financial Conduct Authority. Firms may be authorized in respect of several regulated activities. The scope of activities a firm may carry out is determined by the permissions and authorization it receives. It is an offence to undertake activities beyond the scope of authorization. Threshold conditions establish minimum requirements for regulation, requiring a minimum standard of fitness and propriety.

Threshold conditions are outlined in guidance by the regulators. Broadly, they cover several factors. The applicant must have the appropriate legal status for carrying on the activity, considering its legal and organizational structure. It must have UK-based offices or carry out business in the UK.

The firm must have effective supervision for its business activities and organization, appropriate resources in terms of capital, personnel, and others, relevant to the nature and extent of its business, appropriate non-financial resources, such as risk management skills and management experience, and the ability to withstand adverse conditions.

The firm must be proper and suitable, having the appropriate organizational and managerial competence, with managers acting with probity and managing the business accordingly.

The business model conditions require that business risks should not pose a risk to the integrity of the financial system, and the business model must be viable and sustainable, with appropriate contingency plans.

Prudential requirements mandate that business be undertaken prudently, with the appropriate capital and liquidity, and the relevant resources to manage and deal with risks, relative to the scale and extent of the business.

Applications require detailed information on the relevant threshold conditions, with the regulator adopting a proportional approach to information requirements, depending on the complexity and scale of the business. Information generally includes details of the business and its activities, compliance with regulatory requirements, business plans, financial budgets and projections, compliance systems, details of key individuals, and outsourcing.

The regulator may make further inquiries and may require attendance at meetings, visit the applicant’s premises, and have regard to connected entities. A written notice of the regulator’s decision is given. Authorization may be granted subject to limitations different from those applied for.

The initial decision is made by the regulatory body, recorded on a register of authorized persons. If the conditions on authorization are not accepted or the application is refused, the matter is passed to the Regulatory Decisions Committee for review. Ultimately, there may be a final reference to the tribunal if the decision is not accepted.

The regulator must be satisfied that the firm is capable of complying with its requirements and applicable regulations, having the relevant systems, controls, and personnel in place.