14.1 The FSMA Perimeter and Authorisation

Why FSMA appears on FLK1 Legal Services

The SQE1 FLK1 assessment specification for assessments from 1 September 2026 requires functioning knowledge of the financial-services regulatory framework, including authorisation and how it applies to solicitors' firms; recognition of specified investments, specified activities and relevant exemptions; and the application of the Financial Services and Markets Act 2000 (FSMA) and related secondary legislation to a solicitor's work. That sits in Legal Services, which from January 2027 is grouped in FLK1 Session 1 with Business Law and Practice and Dispute Resolution. Ethics can wrap the same file: a client who wants you to "just suggest a good ISA" is testing independence and honesty as well as the FSMA perimeter.

This independent OpenExamPrep section teaches the current statutory perimeter and the SRA's published financial-services rules. Official sources to keep open while you revise are FSMA section 19, FSMA section 22, FSMA section 327, the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 (the RAO), the SRA Financial Services (Scope) Rules and the SRA Financial Services (Conduct of Business) Rules. The Scope Rules in force from 11 April 2025 were made by the SRA Board on 16 December 2024 under, among other powers, FSMA section 332. This chapter does not invent FCA Handbook paragraph numbers. If a question needs a Handbook rule, the stem will give it or you will look it up in practice; SQE1 tests functioning recognition of the statute, the RAO and the SRA rules.

The general prohibition and what "authorised" means

FSMA section 19(1) is the sentence you must be able to apply: no person may carry on a regulated activity in the United Kingdom, or purport to do so, unless that person is an authorised person or an exempt person. Section 19(2) names that rule the general prohibition.

An authorised person is a person with permission under FSMA Part 4A (the modern permission regime) from the Financial Conduct Authority (FCA) and, for deposit-taking and some insurance, the Prudential Regulation Authority (PRA). A high-street solicitors' firm that does not hold Part 4A permission is not an FCA-authorised investment firm. An exempt person for section 19 purposes includes, for example, an appointed representative of an authorised person. Separately, FSMA Part 20 (members of the professions) provides that the general prohibition does not apply to a professional firm that satisfies section 327. Those firms are exempt professional firms (EPFs). They are still SRA-authorised bodies. They are not, for the exempt work, FCA-authorised persons.

The SRA, through the Law Society, is a designated professional body under Part 20. That is why SRA-authorised firms (including sole practices) can carry on certain regulated financial-services activities without FCA regulation if they meet section 327. The SRA must tell the FCA which firms rely on the exemption; those firms appear on the Financial Services Register. Appearance on that register is not the same as holding Part 4A permission.

What is a regulated activity?

FSMA section 22(1) defines the core idea. An activity is a regulated activity if it is an activity of a specified kind, carried on by way of business, and it relates to an investment of a specified kind (or, for a few activities also specified for that purpose, is carried on in relation to property of any kind). "Specified" means specified by Treasury order. The main order is the RAO 2001 (SI 2001/544). Later FSMA amendments also bring in activities about a person's financial standing, administering a benchmark, and (in Great Britain) claims-management services. SQE1 will almost always test the classic pair: specified activity + specified investment + by way of business.

The Financial Services and Markets Act 2000 (Carrying on Regulated Activities by Way of Business) Order 2001 (SI 2001/1177) tells you when an activity is, or is not, treated as carried on by way of business. Functioning knowledge is enough: a firm that offers investment advice as part of its service line is acting by way of business. A solicitor who, once, tells a sibling that a particular share "looks cheap" in a purely private conversation is not running an investment business. The exam trap is the office conversation that is really a product recommendation to a client.

Specified investments a newly qualified solicitor must recognise

You do not need the whole RAO Part III list. You do need to recognise the investments that appear on solicitor files:

A house is not itself a specified investment. A regulated mortgage contract, a contract of insurance over the house, and shares in the company that owns the house can be. Read the product, not the asset the client can see.

Specified activities that appear on solicitor files

Advice in article 53 is advice on the merits of buying, selling, subscribing for or underwriting a particular investment. Generic comments ("equity markets can fall", "you should take independent financial advice") are not the same as naming a product. SQE1 rewards that distinction.

Exclusions that can take you outside the perimeter

If an exclusion in the RAO applies, the activity is not a regulated activity, so section 19 is not engaged. Three exclusions matter on solicitor files.

Article 7 (sums received by solicitors) keeps ordinary client-account receipts out of "accepting deposits". That is why holding purchase monies is an Accounts Rules problem, not an FCA-authorisation problem.

Article 66 (trustees, nominees and personal representatives) excludes several activities when you act as trustee or personal representative and do not hold yourself out as offering that financial-services activity to the public. A probate solicitor who, as executor, holds the deceased's share certificate while the estate is wound up is in a different place from a firm advertising "we manage investment portfolios".

Article 67 excludes certain arranging, dealing-as-agent, safeguarding and advising activities where the activity is carried on in the course of a profession that does not otherwise consist of regulated activities, and the activity "may reasonably be regarded as a necessary part of other services" provided in that profession. The exclusion fails if the activity is remunerated separately from those other services. A conveyancer who includes a necessary title-insurance arrangement in the conveyancing fee may have a 67 argument. A conveyancer who invoices a standalone "insurance advice fee" has given that argument away. Article 67 is not a free-standing licence to run an insurance brokerage. Even where 67 helps, insurance distribution still has its own IDD-driven SRA rules once you are inside that activity.

The Treasury has also made the Financial Services and Markets Act 2000 (Professions) (Non-Exempt Activities) Order 2001 (SI 2001/1227) under section 327(6). That order lists regulated activities that cannot be done under the Part 20 exemption at all. Scope Rule 3(a) and (b) repeat that prohibition: do not carry on an activity, or an activity relating to an investment, specified in a section 327(6) order.

Consequences of getting the perimeter wrong

Section 23(1) makes contravention of the general prohibition a criminal offence: on indictment, imprisonment for up to two years, a fine, or both. It is a defence that the accused took all reasonable precautions and exercised all due diligence. Section 26 makes an agreement made in the course of carrying on a regulated activity in contravention of the general prohibition unenforceable against the other party, who can recover money or property transferred and compensation for loss (this section does not apply to accepting deposits). The client-care letter will not save a firm that has been running an unauthorised investment business.

The financial-promotion restriction

FSMA section 21 is a separate restriction. A person must not, in the course of business, communicate an invitation or inducement to engage in investment activity (or, in Great Britain, claims-management activity) unless that person is an authorised person or the content is approved by an authorised person who has the necessary permission to approve it. "Communicate" includes causing a communication to be made. A communication originating outside the United Kingdom is caught if it is capable of having an effect in the United Kingdom. The Treasury's Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 sets out exemptions (for example certain one-off communications). Functioning knowledge: a firm's website that invites the public to invest in a client's company, or a mailshot promoting a particular fund, is a section 21 problem even if the firm never deals as agent. Do not "just put it on the site" because the corporate client asked you to.