14.2 Section 327, Scope Rules and Insurance Distribution

Part 20 and section 327: the exemption solicitors actually use

Section 327 says the general prohibition does not apply if the conditions in subsections (2) to (7) are satisfied and there is no FCA direction under section 328 or order under section 329 blocking the activity. The conditions a newly qualified solicitor must be able to apply are:

• 327(2): the person is a member of a profession or is controlled or managed by such members.
• 327(3): the person must not receive from anyone other than the client a pecuniary reward or other advantage, for which the person does not account to the client, arising out of the activities. Commission from an insurer that is not accounted for to the client kills the exemption.
• 327(4): the manner of providing the service must be incidental to the provision of professional services.
• 327(5): the person must not carry on, or hold themselves out as carrying on, a regulated activity other than one the designated professional body's rules allow, or one for which they are otherwise an exempt person.

The SRA Scope Rules, Rule 2 restates those conditions and adds the section 332(4) idea: the activities must arise out of, or be complementary to, the provision of a particular professional service to a particular client. "We offer financial planning to anyone who phones" is holding out. "We will arrange a defective-title indemnity because this buyer's title is defective" is complementary to that conveyancing file.

The SRA's published examples of work that can sit under SRA regulation as an EPF include: arranging an indemnity insurance policy for a client buying a house if there is a defect on the title; advising on debt linked to a matrimonial matter; and managing securities or contractually based investments that are part of the assets of an estate in a probate matter. Those examples are still subject to Rule 2, Rule 3 and, for insurance, Rule 5.

Scope Rule 1 applies the rules to authorised bodies that are not regulated by the FCA, their managers and employees. They do not apply to solicitors, RELs, RFLs or RSLs practising outside SRA-authorised firms (for example in an FCA-authorised bank's legal team). Where the body is a licensed body, the rules apply only to the activities the SRA regulates under the licence.

A firm that wants to carry on mainstream investment business (discretionary portfolio management for the public, arranging packaged retail investments as a product line, acting as a broker) needs FCA Part 4A permission. It then becomes dually regulated. The Scope Rules no longer police its FCA-permission activities. The Conduct of Business Rules still apply to that firm's non-mainstream regulated activities. Dual regulation is a business-model choice, not a default.

What an EPF must not do: Scope Rules 3, 4 and 6

Rule 3 is the prohibited-activities list. You must not carry on, or agree to carry on:

• an activity, or an activity relating to an investment, specified in a section 327(6) order;
• entering into a regulated credit agreement as lender, or exercising the lender's rights, except where the agreement relates exclusively to payment of disbursements or professional fees due to you;
• entering into a regulated consumer hire agreement as owner, or exercising the owner's rights;
• operating an electronic lending system (RAO article 36H);
• providing credit references (RAO article 89B);
• insurance distribution activities in relation to insurance-based investment products; or
• creating, developing, designing or underwriting a contract of insurance.

So you may, in a narrow way, allow a client time to pay your fees or disbursements. You may not become a consumer lender. You may arrange (as an ancillary intermediary) a title-indemnity policy. You may not underwrite that policy or distribute an investment-wrapped insurance product.

Rule 4 bans acting as sponsor to an issue of securities to be admitted on the London Stock Exchange, nominated adviser to an AIM issue, or corporate adviser to an issue on the ICAP Securities and Derivatives Exchange or any similar exchange. A newly qualified solicitor who is asked to "be the firm's Nomad on this AIM float" must refuse. That is FCA-authorised corporate-finance work.

Rule 6 tightens credit-related work. You must not give a client credit-card cheques, a credit or store card, credit tokens, running-account credit, a current account or high-cost short-term credit; hold a continuous payment authority over the client's account; or take an article in pledge or pawn. You must not enter into, or exercise lender rights under, a regulated credit agreement secured on land by legal or equitable mortgage, or one that includes a variable rate of interest. You must not provide a debt management plan. You must not charge a separate fee for, or attribute any element of your fees to, credit broking. The exam-friendly pattern is the client who cannot pay this month: you may wait for your bill; you may not invent a secured, variable-rate soft loan and invoice a "credit arrangement fee".

Insurance distribution: Rule 5 and the Conduct of Business Rules

Arranging or advising on a contract of insurance is insurance distribution. The SRA's insurance-distribution guidance uses the Insurance Distribution Directive definition: advising on, proposing, or carrying out other work preparatory to the conclusion of contracts of insurance, concluding such contracts, or assisting in their administration and performance, including in the event of a claim.

Rule 5 allows that work only as an ancillary insurance intermediary. You must be registered in the Financial Services Register and have appointed an insurance distribution officer responsible for the activities. If you carry on, or propose to carry on, the activities, you must notify the SRA in the prescribed form (unless you were already registered for insurance mediation before 1 October 2018). You must tell the SRA without undue delay of changes. The SRA may pass the information to the FCA.

The Conduct of Business Rules then police how EPFs (and dual-regulated firms, for non-mainstream activities) do the work. Rule 2 (status disclosure) applies only to bodies not regulated by the FCA. Before providing a service that includes a regulated financial-services activity, and in good time before concluding a contract of insurance, you must give the client, in writing, in a way that is clear, fair and not misleading: a statement that you are not authorised by the FCA; your name and practising address; the nature of the activities and that they are limited in scope; a statement that you are authorised and regulated by the SRA; and an explanation that complaints and redress run through the SRA and the Legal Ombudsman.

For insurance distribution you must also state that you are an ancillary insurance intermediary and use the SRA's prescribed wording: the firm is not authorised by the FCA; it is included on the FCA-maintained register so that it can carry on insurance distribution activity (broadly advising on, selling and administering insurance contracts); that part of the business, including complaints or redress, is regulated by the SRA; and the register is on the FCA website. Learn the ideas in that paragraph. SQE1 will test whether you give the disclosure before the policy is bound, not whether you can recite every clause.

Other COB rules that earn marks: Rule 3 — execute an agreed transaction as soon as possible unless it is in the client's best interests not to. Rules 4 and 5 — keep records of instructions, of persons you instruct, and of commission and how you accounted to the client. Rule 6 — if you safeguard and administer investments, operate systems for safekeeping; if assets go to a third party, obtain an acknowledgement and, if that is on the client's instructions, get those instructions in writing. Rule 7 — if you arrange a retail investment product on an execution-only basis, confirm in writing that the client did not seek advice, or persisted after advice, and that the transaction is on the client's explicit instructions. Rule 8 — keep each record for at least six years. Rules 9–11 add insurance-specific duties: communications clear, fair and not misleading; marketing identifiable as marketing; pre-contract information on whether you give a personal recommendation, who you represent, and significant shareholdings between the firm and an insurer.

Worked FLK1 patterns

Title indemnity on a purchase. The buyer cannot get a clean title. You arrange a defective-title indemnity. The investment is a contract of insurance (article 75). Arranging and advising are specified activities. The work arises out of this conveyancing file, so Part 20 and Rule 2 can apply. You still need Register entry, an insurance distribution officer, Rule 2 disclosure, and you must account for any commission. You do not need Part 4A permission for that isolated, complementary policy.

"While you are here, which ISA should I buy?" The client is not asking you to complete a legal service to which a particular product is complementary. Recommending a particular ISA is article 53 advice on a specified investment, offered as a product line. An EPF that holds itself out as a general investment adviser fails section 327(5) and Rule 2. Decline, and refer the client to an FCA-authorised adviser if they want product advice.

Estate securities. As executor you hold the deceased's shares pending sale or appropriation. Article 66 and the SRA's probate example can cover incidental safeguarding or arranging. Advertising "discretionary investment management for families" is a different business and needs FCA permission.

Insurer commission of £400. Section 327(3) and COB Rule 5 require you to account to the client. Paying the commission into the office account as extra profit, without telling the client, is both a perimeter failure and an ethics failure (own-interest conflict, Principle 7).

Exam traps

• Treating every SRA firm as FCA-authorised, or treating the Financial Services Register entry as Part 4A permission.
• Missing the "purport to" limb of section 19: a letterhead that offers "regulated investment advice" is already a problem.
• Using article 67 after charging a separate insurance or broking fee.
• Forgetting that commission must be accounted for to the client or the section 327 exemption fails.
• Lending the client living expenses on a variable rate, or taking a charge on their house, and calling it "just helping with fees".
• Skipping the insurance-distribution officer or the prescribed status disclosure because "it is only one policy".
• Citing invented FCA Handbook numbers. This independent OpenExamPrep section stays with FSMA, the RAO and the published SRA rules — the sources SQE1 can fairly expect you to apply at newly qualified level.