PERG The Perimeter Guidance Manual

Part

PERG The Perimeter Guidance Manual

Printed on: 07/05/2025

Rulebook at: 07/08/2009

Chapters

PERG 1 Introduction to the Perimeter Guidance manual
PERG 2 Authorisation and regulated activities
PERG 3 Guidance on the scope of the regulated
activity of issuing e-money
PERG 4 Guidance on regulated activities connected with mortgages
PERG 5 Guidance on insurance mediation activities
PERG 6 Guidance on the Identification of Contracts of Insurance
PERG 7 Periodical publications, news services and broadcasts: applications for certification
PERG 8 Financial promotion and related activities
PERG 9 Meaning of open-ended investment company
PERG 10 Guidance on activities related to pension schemes
PERG 11 Guidance on property investment clubs and land investment schemes
PERG 12 Guidance for persons running or advising on personal pension schemes
PERG 13 Guidance on the scope of the Markets in Financial Instruments Directive and the recast Capital Adequacy Directive
PERG 14 Guidance on home reversion and home purchase activities

PERG 1

Introduction to the Perimeter Guidance manual

PERG 1.1

Application and purpose

01/07/2005

Application

PERG 1.1.1

This manual applies to:

(1) a person who is considering carrying on activities in the United Kingdom which may fall within the scope of the Act and is seeking guidance on whether he needs to be an authorised person;

(2) a person who seeks to become an authorised person under the Act and who is, or is considering, applying to the FSAfor Part IV permission to carry on regulated activities in the United Kingdom;

(3) a person who is seeking guidance on whether any communication he may be seeking to make or cause to be made will be a financial promotion and be subject to the restriction in section 21 of the Act; and

(4) persons generally.

01/07/2005

Purpose

PERG 1.1.2

The purpose of this manual is to give guidance about the circumstances in which authorisation is required, or exempt person status is available, including guidance on the activities which are regulated under the Act and the exclusions which are available.

01/07/2005

PERG 1.2

Introduction

01/07/2005

PERG 1.2.1

(1) The Financial Services and Markets Act 2000 (the Act) is the UK legislation under which bodies corporate, partnerships, individuals and unincorporated associations are permitted by the FSA to carry on various financial activities which are subject to regulation (referred to as regulated activities).

(2) The activities which are regulated activities are specified in the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 (the Regulated Activities Order): for example, accepting deposits, managing investments, effecting contracts of insurance, dealing in investments as agent. In general terms, a regulated activity is an activity, specified in the Regulated Activities Order, carried on by way of business in relation to one or more of the investments specified in the Regulated Activities Order. PERG 2 gives further general guidance on regulated activities and specified investments.

01/07/2005

PERG 1.2.2

(1) The Act, and the secondary legislation made under the Act, is complex. Although PERG gives guidance about regulated activities and financial promotions, it does not aim to, nor can it, be exhaustive.

(2) References have been made to relevant provisions in the Act or secondary legislation. However, since reproducing an entire statutory provision would sometimes require a lengthy quotation, or considerable further explanation, many provisions of the Act, or secondary legislation made under the Act, are summarised. For the precise details of the legislation, readers of the manual should, therefore, refer to the Act and the secondary legislation itself, as well as the manual.

(3) The Act and the secondary legislation made under it can be obtained from HMSO at http://www.legislation.hmso.gov.uk/legislation/uk.htm or can be accessed through the Treasury's website (www.hm-treasury.gov.uk).

01/07/2005

PERG 1.2.3

PERG uses words and phrases that have specific meanings in the Handbook or in legislation; these may be different from, or more precise than, their usual dictionary meanings. Defined terms used in the text of the Handbook are shown in italics (see Chapter 7 of the Reader's Guide to the Handbook at http://fsahandbook.info/FSA/pdf/rguide.pdf). For the meanings of defined terms used in PERG, see the Glossary. It is essential that readers refer to these definitions. In the case of those parts of PERG which take the form of Q&A, however, to ensure greater accessibility of the text we have only italicised Handbook terms in those places where we think that it would be helpful to the majority of readers.

01/11/2007

PERG 1.2.4

PERG 1.4.1 G (General guidance to be found in PERG) summarises the general guidance contained in PERG. Readers should note that in a cross-reference, as explained in paragraph 40 of the Readers' Guide, the code letters of the manual or sourcebook immediately precede the chapter number. For example, PERG 1 is the first chapter of the Perimeter Guidance manual. PERG 1.5 provides details of and links to other general guidance on perimeter issues that is available on the FSA website.

01/07/2005

PERG 1.3

Status of guidance

01/07/2005

PERG 1.3.1

This guidance is issued under section 157 of the Act (Guidance). It represents the FSA's views and does not bind the courts. For example, it would not bind the courts in an action for damages brought by a private person for breach of a rule (see section 150 of the Act (Actions for damages)), or in relation to the enforceability of a contract where there has been a breach of sections 19 (The general prohibition) or 21 (Restrictions on financial promotion) of the Act (see sections 26 to 30 of the Act (Enforceability of agreements)). Although the guidance does not bind the courts, it may be of persuasive effect for a court considering whether it would be just and equitable to allow a contract to be enforced (see sections 28(3) and 30(4) of the Act). Anyone reading this guidance should refer to the Act and to the relevant secondary legislation to find out the precise scope and effect of any particular provision referred to in the guidance and any reader should consider seeking legal advice if doubt remains. If a person acts in line with the guidance in the circumstances mentioned by it, the FSA will proceed on the footing that the person has complied with the aspects of the requirement to which the guidance relates.

01/07/2005

PERG 1.4

General guidance to be found in PERG

01/07/2005

PERG 1.4.1

PERG 1.4.2 G has a table setting out the general guidance to be found in PERG.

01/07/2005

PERG 1.4.2

Table: list of general guidance to be found in PERG.

Chapter:

Applicable to:

About:

PERG 2:
Authorisation and regulated activities

•an unauthorised person wishing to find out whether he needs to be authorised or exempt• an authorised person wishing to know whether he needs to vary his Part IV permission

• the regulatory scope of the Act• the Regulated Activities Order•the Exemption Order•the Business Order

PERG 3:
Issuing e-money

a person who needs to know

• whether a particular electronic payment product ise-money and whether the person issuing it needs to beauthorised under the Act• whether any communications about the product will be restricted

• the scope of the regulated activity of issuing e-money• the application of the restriction in section 21 of the Act (Restrictions on financial promotion) to communications about e-money

PERG 4:
Regulated activities connected with mortgages

any person who needs to know whether the activities he conducts in relation to mortgages are subject to FSA regulation. This is likely to include:

•lenders•administration service providers•mortgage brokers and advisers

the scope of relevant orders (in particular, the Regulated Activities Order) as respects activities concerned with mortgages

PERG 5:
Insurance mediation activities

any person who needs to know whether he carries on insurance mediation activities and is, thereby, subject to FSA regulation. This is likely to include:

•insurance brokers• insurance advisers•insurance undertakings• other persons involved in the sale or administration of contracts of insurance, where these activities are secondary to their main business.

the scope of relevant orders (in particular, the Regulated Activities Order) as respects activities concerned with the sale or administration of insurance

PERG 6:
Identification of contracts of insurance

any person who needs to know whether a contract with which he is involved is a contract of insurance

the general principles and range of specific factors that the FSA regards as relevant in deciding whether any arrangement is a contract of insurance

PERG 7:
Periodical publications, news services and broadcasts: application for certification

any person who needs to know whether he will be regulated for providing advice about investments through the medium of a periodical publication, a broadcast or a news service

• the circumstances in which such persons will be carrying on the regulated activities of advising on investments or advising on regulated mortgage contracts (including where a request for a certificate may be appropriate)•how the FSA will exercise its power to grant certificates

PERG 8:
Financial promotion and related activities

any person who needs to know

•whether his communications are financial promotions or are subject to the restriction in section 21 of the Act or both•whether his activities in making or helping others to make financial promotions are regulated activities.

•the scope of the restriction on financial promotion under section 21 of the Act and the main exemptions provided•the circumstances in which persons who are primarily involved in making or helping others to make financial promotions may themselves be conducting regulated activities requiring authorisation or exemption

PERG 9:
Meaning of open-ended investment company

any person who needs to know whether a body corporate is an open-ended investment company as defined in section 236 of the Act (Open-ended investment companies) and is therefore a collective investment scheme.

the circumstances in which a body corporate will be an open-ended investment company

PERG 10:
Activities related to pension schemes

Any person who needs to know whether his activities in relation to pension schemes will amount to regulated activities or whether the restriction in section 21 of the Act will apply to any financial promotions he may make.

•the regulated activities that arise in connection with the establishment and operation of pension schemes and any exclusions that may be relevant

•the circumstances in which financial promotions about pension schemes may be exempt from the restriction in section 21 of the Act

PERG 11:
Property investment clubs and land investment schemes

Any person who needs to know whether his activities in relation to property investment clubs and land investment schemes will amount to regulated activities or whether the restriction in section 21 of the Act will apply to any financial promotions he may make.

•the regulated activities that may arise in connection with the establishment and operation of property investment clubs and land investment schemes and any exclusions that may be relevant

•the extent to which the financial promotion restriction in section 21 of the Act applies

PERG 12:
Running or advising on personal pension schemes

any person who needs to know whether his activities in relation to establishing, running, advising on or marketing personal pension schemes will amount to regulated activities

the regulated activities that arise in connection with establishing, running, advising on or marketing personal pension schemes and any exclusions that may be relevant

PERG 13:
Guidance on the scope of the Markets in Financial Instruments Directive and the recast Capital Adequacy Directive

Any UK person who needs to know whether MiFID or the recast CADas implemented in the UK apply to him

the scope of MiFID and the recast CAD

PERG 14:
Home reversion and home finance activities

Any person who needs to know whether his activities in relation to home reversion plans or home purchase plans will amount to regulated activities or whether the restriction in section 21 of the Act will apply to any financial promotions he may make.

•the regulated activities that arise in connection with home reversion plansand home purchase plans and any exclusions that may be relevant•the circumstances in which financial promotions about home reversion plansand home purchase plans may be made without breaching the restriction in section 21 of the Act

01/11/2007

PERG 1.5

What other guidance about the perimeter is available from the FSA?

01/07/2005

PERG 1.5.1

General guidance on the perimeter is also contained in various FSA documents (mainly fact sheets and frequently asked questions) that are available on the FSA website at www.fsa.gov.uk.These documents, and the URL on which they may be accessed, include:

(1) [deleted]

(2) [deleted]

(3) [deleted]

(4) guidance about the position under the Insurance Mediation Directive and the Regulated Activities Order of property owners and tenants - http://www.fsa.gov.uk/pages/Doing/small_firms/insurance/faq/property.shtml;

(5) guidance about the scope of the exclusion in article 72C of the Regulated Activities Order (Provision of information on an incidental basis) http://www.fsa.gov.uk/pages/Doing/small_firms/insurance/faq/exclusion.shtml;

(6) guidance on passporting for insurers and insurance intermediaries - http://www.fsa.gov.uk/pages/Doing/small_firms/insurance/faq/insurers.shtml;

(7) guidance about the position under the Insurance Mediation Directive and the Regulated Activities Order of the company appointed to manage a PPP or similar construction and operation project - www.fsa.gov.uk/pubs/other/letter_pppforum.pdf ;

(8) guidance about the position under the Insurance Mediation Directive and the Regulated Activities Order of property managing agents - http://www.fsa.gov.uk/pages/Doing/small_firms/insurance/library/imd.shtml; and

(9) guidance for employers about how to provide advice and information to their employees on pension matters without contravening the Act - www.fsa.gov.uk/pubs/other/guide4employers.pdf.

06/05/2008

PERG 1.5.2

Any person who, having read relevant general guidance and, where appropriate, taken legal advice, remains uncertain about whether his activities amount to regulated activities or his communications will be subject to the restriction in section 21 of the Act, may seek individual guidance from the FSA . Requests for individual guidance should be made in line with SUP 9.

01/07/2005

PERG 1.5.3

In addition, the FSA has established a team to provide general assistance and guidance to persons generally about the scope of the Act. Enquiries of this kind may be made:

(1) by authorised firms, to either the FirmContact Centre (email fcc@fsa.gov.uk, Tel 0845 606 9966) or their normal supervisory contact; or

(2) by individuals or non-authorised firms, to the Consumer Contact Centre (email ccc@fsa.gov.uk, Tel 0845 606 1234) or the Perimeter Enquiries Team (email authorisationenquiries@fsa.gov.uk, Tel 020 7066 0082)

01/07/2005

PERG 1.5.4

The FSA will review its general guidance from time to time and may need to amend or withdraw published or written guidance in the light of changing circumstances, developing business practices, or case law. For the status of guidance issued by the FSA , see PERG 1.3.1 G.

01/07/2005

PERG 2

Authorisation and regulated activities

PERG 2.1

Application and purpose

01/07/2005

Application

PERG 2.1.1

This chapter is relevant to any person who needs to know what activities fall within the scope of the Act.

01/07/2005

Purpose

PERG 2.1.2

The purpose of this chapter is to provide guidance:

(1) to unauthorised persons who wish to find out whether they need to be authorised and, if so, what regulated activities their permission needs to include; and

(2) to authorised persons who may have questions about the scope of their existing permission.

01/07/2005

PERG 2.2

Introduction

01/07/2005

PERG 2.2.1

Under section 23 of the Act (Contravention of the general prohibition), a person commits a criminal offence if he carries on activities in breach of the general prohibition in section 19 of the Act (The general prohibition) .. Although a person who commits the criminal offence is subject to a maximum of two years imprisonment and an unlimited fine, it is a defence for a person to show that he took all reasonable precautions and exercised all due diligence to avoid committing the offence.

06/10/2007

PERG 2.2.2

Another consequence of a breach of the general prohibition is that certain agreements could be unenforceable (see sections 26 to 29 of the Act). This applies to agreements entered into by persons who are in breach of the general prohibition. It also applies to any agreement entered into by an authorised person if the agreement is made as a result of the activities of a person who is in breach of the general prohibition.

01/07/2005

PERG 2.2.3

Any person who is concerned that his proposed activities may require authorisation will need to consider the following questions (these questions are a summary of the issues to be considered and have been reproduced, in slightly fuller form in the decision tree in PERG 2 Annex 1 G):

(1) Will I be carrying on my activities by way of business (see PERG 2.3)?

(2) Will I be managing the assets of an occupational pension scheme (see PERG 2.3.2G (3))?

(3) If the answer is 'Yes' to (1) or (2), will my activities involve specified investments in any way (see PERG 2.6)?

(4) If so, will my activities be, or include, regulated activities (see PERG 2.7)?

(5) If so, will I be carrying them on in the United Kingdom (see PERG 2.4)?

(6) If so, will my activities be excluded (see PERG 2.8 and PERG 2.9)?

(7) If not, will I be exempt (see PERG 2.10.5 G to PERG 2.10.8 G)?

(8) If not, am I allowed to carry on regulated activities without authorisation (see PERG 2.10.9 G to PERG 2.10.16 G)?

(9) If not, do I benefit from the few provisions of the Act that authorise me without a permission under Part IV of the Act (see PERG 2.10.10 G (Members of Lloyds))?

(10) If not, what is the scope of the Part IV permission that I need to seek from the FSA(see PERG 2 Annex 2 G)?

06/02/2008

PERG 2.2.4

The rest of this chapter provides a high level guide through the questions set out in PERG 2.2.3 G. It aims to give an overall picture but in doing so it necessarily relies on the reader referring to UK statutory provisions and European legislationto fill in the detail (which can be extensive).

01/11/2007

PERG 2.2.5

The process of applying for Part IV permission is available on the FSA website How do I get authorised: http://www.fsa.gov.uk/Pages/Doing/how/index.shtml . But a list of the activities for which permission may be given is annexed to this chapter (see PERG 2 Annex 2 G). You may find this helpful in providing an overview of the activities that are regulated. The list is included here because, with some exceptions, the investments and activities for which permission may be given are the same as the investments and activities specified in the Regulated Activities Order. This creates a few additional categories for which permission must be sought.

06/10/2007

PERG 2.3

The business element

01/07/2005

PERG 2.3.1

Under section 22 of the Act (Regulated activities), for an activity to be a regulated activity it must be carried on 'by way of business'.

01/07/2005

PERG 2.3.2

There is power in the Act for the Treasury to change the meaning of the business element by including or excluding certain things. They have exercised this power (see the Financial Services and Markets Act 2000 (Carrying on Regulated Activities by Way of Business) Order 2001 (SI 2001/1177), the Financial Services and Markets Act 2000 (Regulated Activities) (Amendment) (No.2) Order 2003 (SI 2003/1476) and the Financial Services and Markets Act 2000 (Carrying on Regulated Activities by Way of Business) (Amendment) Order 2005 (SI 2005/922). The result is that the business element differs depending on the activity in question. This in part reflects certain differences in the nature of the activities:

(1) The activity of accepting deposits will not be regarded as carried on by way of business by a person if he does not hold himself out as accepting deposits on a day-to-day basis and if the deposits he accepts are accepted only on particular occasions. In determining whether deposits are accepted only on particular occasions, the frequency of the occasions and any distinguishing characteristics must be taken into account.

(2) Except as stated in PERG 2.3.2G (2A) and PERG 2.3.2G (3), the business element is not to be regarded as satisfied for any of the regulated activities carried on in relation to securities or contractually based investments (or for those regulated activities carried on in relation to 'any property') unless a person carries on the business of engaging in one or more of the activities. This also applies to the regulated activities of advising on a home finance transaction and arranging a home finance transaction. This is a narrower test than that of carrying on regulated activities by way of business (as required by section 22 of the Act), as it requires the regulated activities to represent the carrying on of a business in their own right.

(2A) A person who carries on an insurance mediation activity will not be regarded as doing so by way of business unless he takes up or pursues that activity for remuneration. PERG 2.3.3 G gives guidance on the factors that are relevant to the meaning of 'by way of business' in section 22 of the Act. PERG 5.4 (The business test) gives further guidance on the business element as applied to insurance mediation activities.

(3) A person managing assets on a discretionary basis while acting as trustee of an occupational pension scheme may in certain circumstances be regarded as acting by way of business even if he would not, in the ordinary meaning of the phrase, be regarded as doing so. The Financial Services and Markets Act (Carrying on Regulated Activities by Way of Business) Order 2001 (as amended) contains some exceptions from this (see article 4).

(4) The business element for all other regulated activities is that the activities are carried on by way of business. This applies to the activities of effecting or carrying out contracts of insurance, certain activities relating to the Lloyd's market, entering as provider into a funeral plan contract, entering into a home finance transaction or administering a home finance transaction, and operating a dormant account fund .

07/08/2009

PERG 2.3.3

Whether or not an activity is carried on by way of business is ultimately a question of judgement that takes account of several factors (none of which is likely to be conclusive). These include the degree of continuity, the existence of a commercial element, the scale of the activity and the proportion which the activity bears to other activities carried on by the same person but which are not regulated. The nature of the particular regulated activity that is carried on will also be relevant to the factual analysis.

01/07/2005

PERG 2.4

Link between activities and the United Kingdom

01/07/2005

PERG 2.4.1

Section 19 of the Act (The general prohibition) provides that the requirement to be authorised under the Act only applies in relation to activities that are carried on 'in the United Kingdom'. In many cases, it will be quite straightforward to identify where an activity is carried on. But when there is a cross-border element, for example because a client is outside the United Kingdom or because some other element of the activity happens outside the United Kingdom, the question may arise as to where the activity is carried on.

01/07/2005

PERG 2.4.2

Even with a cross-border element a person may still be carrying on an activity 'in the United Kingdom'. For example, a person who is situated in the United Kingdom and who is safeguarding and administering investments will be carrying on activities in the United Kingdom even though his client may be overseas.

01/07/2005

PERG 2.4.3

Section 418 of the Act (Carrying on regulated activities in the United Kingdom) takes this one step further. It extends the meaning that 'in the United Kingdom' would ordinarily have by setting out five additional cases. The Act states that, in these five cases, a person who is carrying on a regulated activity but who would not otherwise be regarded as carrying on the activity in the United Kingdom is, for the purposes of the Act, to be regarded as carrying on the activity in the United Kingdom.

(1) The first case is where a UK-based person carries on a regulated activity in another EEA State in exercise of rights under a Single Market Directive.

(2) The second case consists of the marketing in another EEA State of a UK-based collective investment scheme by the scheme's manager where the scheme in question is one to which the UCITS Directive applies.

(3) The third case is where a regulated activity is carried on by a UK-based person and the day-to-day management of the activity is the responsibility of an establishment in the United Kingdom.

(4) The fourth case is where a regulated activity is carried on by a person who is not based in the United Kingdom but is carried on from an establishment in the United Kingdom. This might occur when each of the stages that make up a regulated activity (such as managing investments) takes place in different countries. For example, a person's management is in country A, the assets are held by a nominee in country B, all transactions take place in country B or country C but all decisions about what to do with the investments are taken from an office in the United Kingdom. Given that the investments are held, and all dealings in them take place, outside the United Kingdom there may otherwise be a question as to where the regulated activity of managing investments is taking place. For the purposes of the Act, it is carried on in the United Kingdom.

(5) The fifth case, inserted by the ECD Regulations is, in effect, where an electronic commerce activity is carried on, from an establishment in the United Kingdom, in another EEA State.

01/11/2007

PERG 2.4.4

The application of the third and fourth cases will depend on how the activities carried on from the UK establishment are set up and operated.

01/07/2005

PERG 2.4.5

A person who is based outside the United Kingdom but who sets up an establishment in the United Kingdom must therefore consider the following matters. First, he must not, unless he is authorised, carry on regulated activities in the United Kingdom. Second, unless he is authorised, the day-to-day management of the carrying on of the regulated activity must not be the responsibility of the UK establishment. This may, for example, affect those UK establishments that in the context of deposit-taking activities were, before the commencement of the Act, treated as representative offices of overseas institutions. Such institutions will need to seek authorisation if the responsibility for the day-to-day management of the accepting of deposits by them outside the United Kingdom is nevertheless effectively that of their UK establishment. Third, such a person will need to ensure that he does not contravene other provisions of the Act that apply to persons who are not authorised. These include the controls on financial promotion (section 21 of the Act (Financial promotion)), and on giving the impression that a person is authorised (section 24).

01/07/2005

PERG 2.4.6

A person based outside the United Kingdom may also be carrying on activities in the United Kingdom even if he does not have a place of business maintained by him in the United Kingdom (for example, by means of the internet or other telecommunications system or by occasional visits). In that case, it will be relevant to consider whether what he is doing satisfies the business test as it applies in relation to the activities in question. In addition, he may be able to rely on the exclusions from certain regulated activities that apply in relation to overseas persons (see PERG 2.9.15 G).

01/07/2005

PERG 2.4.7

Electronic commerce activities, other than insurance business falling within the scope of the Insurance Directives, provided by an incoming ECA provider will not be regulated activities (see PERG 2.9.18G (2)).

01/07/2005

PERG 2.5

Investments and activities: general

01/07/2005

PERG 2.5.1

In addition to the requirements as to the business test and the link to the United Kingdom, two other essential elements must be present before a person needs authorisation under the Act. The first is that the investments must come within the scope of the system of regulation under the Act (see PERG 2.6). The second is that the activities, carried on in relation to those specified investments, are regulated under the Act (see PERG 2.7). Both investments and activities are defined in the Regulated Activities Order made by the Treasury under section 22 of the Act.

01/07/2005

PERG 2.5.2

The Regulated Activities Order contains exclusions. Exclusions may exist in relation to both the element of investment and the element of activity. Each should therefore be checked carefully. The exclusions that relate to specified investments are considered in PERG 2.6, together with the outline of the specified investments. The exclusions that relate to activities are considered separately from the outline of activities (see PERG 2.8 and PERG 2.9).

01/07/2005

Modification of certain exclusions as a result of MiFIDand theInsurance Mediation Directives

PERG 2.5.3

The application of certain of the exclusions considered in PERG 2.8 (Exclusions applicable to certain regulated activities) and PERG 2.9 (Regulated activities: exclusions applicable to certain circumstances) is modified in relation to persons who are subject to MiFID or the Insurance Mediation Directive. The reasons for this and the consequences of it are explained in PERG 2.5.4 Gas respects MiFID , and PERG 5 (Insurance mediation activities), as respects the Insurance Mediation Directive.

01/11/2007

Investment services and activities

PERG 2.5.4

It remains the Government's responsibility to ensure the proper implementation of MiFID . Certain persons subject to the requirements of MiFID must be brought within the scope of regulation under the Act. A core element of MiFID is the concept of investment firm.An investment firm is any person whose regular occupation or business is the provision of one or more investment services to third parties or the performance of one or more investment activities on a professional basis. An investment firm is not subject to MiFID requirements if it falls within one or more of the exemptions in article 2 MiFID. Further information about these exemptions is contained in PERG 13.5. To the extent that an investment firm falls within one of these exemptions, it will not be a MiFID investment firm. Where a firm is not a MiFID investment firm because one or more of the exemptions in article 2 apply, it may still be carrying on regulated activities and therefore require authorisation unless it is an exempt person.

01/11/2007

PERG 2.5.4A

The UK has exercised the optional exemption in article 3 of MiFID. Further information about this exemption is contained in Q48 to 53 in PERG 13.5. It is a requirement of article 3 MiFID that the activities of firms relying on the exemption are "regulated at national level". The investment services to which article 3 apply (namely reception and transmission of orders and investment advice in relation to either transferable securities or units in collective investment undertakings) correspond to regulated activities (see PERG 13 Annex 2 Tables 1 and 2).

01/11/2007

PERG 2.5.5

For persons who are MiFID investment firms, the activities that must be caught by the Regulated Activities Order are those that are caught by MiFID . To achieve this result, some of the exclusions in the Order (that will apply to persons who are not caught by MiFID ) have been made unavailable to MiFID investment firms when they provide or perform investment services and activities. A "MiFID investment firm", for these purposes, includes credit institutions to which MiFID applies (see PERG 13, Q5 and 9) and UCITS investment firms providing the services of portfolio management and personal recommendations in relation to financial instruments or the ancillary service of safekeeping and administration in relation to unitsof collective investment undertakings. The same exclusions are also unavailable to third country investment firms when they provide investment services and activities. Article 4(4) of the Regulated Activities Order (Specified activities: general) lists a number of exclusions that must be disregarded. These relate to the exclusions concerned with:

(1) the absence of holding out (see PERG 2.8.4G (1));

(2) transactions or arrangements with or through certain persons (see PERG 2.8.4G (2), PERG 2.8.5G (1) and PERG 2.8.6G (4));

(3) risk management (see PERG 2.8.4G (5) and PERG 2.8.5G (2));

(4) persons acting under powers of attorney (see PERG 2.8.7 G);

(4A) professions or businesses not involving regulated activities (see PERG 2.9.5 G);

(5) sale of goods (see PERG 2.9.7 G);

(6) groups and joint enterprises (see PERG 2.9.9 G);

(7) sale of a body corporate (see PERG 2.9.11 G); and

(8) business angel-led enterprise capital funds (see PERG 2.9.20 G to PERG 2.9.22 G).

01/11/2007

Insurance mediation or reinsurance mediation

PERG 2.5.6

The Insurance Mediation Directive has in part been implemented through various amendments to the Regulated Activities Order. These include article 4(4A) (Specified activities: general) which precludes a person who, for remuneration, takes up or pursues insurance mediation or reinsurance mediation in relation to a risk or commitment situated in an EEA State from making use of certain exclusions. In other cases, some of the exclusions provided in relation to particular regulated activities are unavailable where the activity involves a contract of insurance. This is explained in more detail in PERG 5 (Insurance mediation activities).

01/07/2005

PERG 2.6

Specified investments: a broad outline

01/07/2005

PERG 2.6.1

The following paragraphs describe the various specified investments, taking due account of any exclusion that applies.

01/07/2005

Deposits

PERG 2.6.2

A deposit is defined in article 5(2) of the Regulated Activities Order. This focuses on a sum of money paid by one person to another on terms that it will be repaid when a specified event occurs (for example, a demand is made).

01/07/2005

PERG 2.6.3

Certain transactions are excluded. The definition of deposit itself excludes money paid in connection with certain transactions such as advance payments for the provision of goods or services and sums paid to secure the performance of a contract. The circumstances in which payments are excluded from the definition itself are exhaustively stated in article 5(3) of the Regulated Activities Order (Accepting deposits). In addition, there is a separate exclusion in article 9 of the Order (Sums received in consideration for the issue of debt securities) and another in article 9A (Sums received in exchange for electronic money). PERG 3.2.15 G to PERG 3.2.19 G contain guidance on the exclusion relating to electronic money.

01/07/2005

PERG 2.6.4

In addition, several separate exclusions focus on the identity of the person paying the money or the person receiving it (or both).

(1) Payments by certain persons are excluded if they are made by specified persons (such as local authorities or national, or supranational, bodies) or by persons acting in the course of a business consisting wholly or partly of lending money.

(2) Exclusions apply for sums paid between certain persons who are linked in a specified way (such as group companies or close relatives).

(3) Exclusions apply to sums received by persons acting for specified purposes. This covers sums received by a practising solicitor acting in the course of his profession or by authorised or exempt persons carrying on one of a specified range of regulated activities and acting within the scope of their permission or exemption.

01/07/2005

Electronic money

PERG 2.6.4A

Electronic money is specified as an investment in article 74A of the Regulated Activities Order (as amended by the Financial Services and Markets Act 2000 (Regulated Activities) (Amendment) Order 2002 (SI 2002/682)). It is defined, in article 2 of that Order, as monetary value, as represented by a claim on the issuer, which is stored on an electronic device, issued on receipt of funds and accepted as a means of payment by persons other than the issuer. Further guidance is given in PERG 3 (Guidance on the scope of the regulated activity of issuing e-money).

01/07/2005

Rights under a contract of insurance

PERG 2.6.5

Contract of insurance is defined to include certain things that might not be considered a contract of insurance at common law. Examples of such additions include capital redemption contracts or contracts to pay annuities on human life. Detailed guidance on identifying a contract of insurance is in PERG 6 (Guidance on the Identification of Contracts of Insurance).

01/07/2005

PERG 2.6.6

There are two main sorts of contracts of insurance. These are general insurance contracts and long-term insurance contracts. The Regulated Activities Order provides that, in certain specified circumstances, a contract is to be treated as a long-term insurance contract notwithstanding that it contains supplementary provisions that might also be regarded as relating to a general insurance contract (see article 3(3)).

01/07/2005

PERG 2.6.7

The Regulated Activities Order uses two further terms in relation to contracts of insurance to identify those contracts under which rights are treated as contractually based investments.

(1) The first term is 'qualifying contracts of insurance' (referred to as life policies in the Handbook). This identifies those long-term insurance contracts under which rights are treated as contractually based investments. This term does not cover long-term insurance contracts which are contracts of reinsurance or, if specified conditions are met, contracts under which benefits are payable only on death or incapacity.

(2) The second term is 'relevant investments'. This term applies to:

(a) contractually based investments, which includes rights under life policies, and rights to or interests in such investments under article 89 of the Regulated Activities Order (Rights to or interests in investments); and

(b) rights under contracts of insurance other than life policies (but not rights to or interests in such rights).

This term is used in connection with the treatment, under various parts of the Regulated Activities Order, of persons carrying on insurance mediation activities (see PERG 5 (Insurance mediation activities) for further guidance on such activities).

01/07/2005

PERG 2.6.8

Certain arrangements in relation to funeral plans are specifically excluded from being contracts of insurance if they would otherwise be so. The exclusion applies to arrangements that fall within the definition of a funeral plan contract (see PERG 2.6.26 G) as well as arrangements that are excluded from the regulated activity of entering as provider into funeral plan contracts (see PERG 2.8.14 G).

01/07/2005

Shares etc

PERG 2.6.9

Shares are defined in the Regulated Activities Order as shares or stock in a wide range of entities; that is, any body corporate wherever incorporated and unincorporated bodies formed under the law of a country other than the United Kingdom. They include deferred shares issued by building societies as well as transferable shares in industrial and provident societies, credit unions and equivalent EEA bodies. These shares are transferable and negotiable in a way similar to other shares or stock and are treated as such for the purposes of defining regulated activities. They are specifically mentioned as being within the specified investment category of shares because other types of share issued by these mutual bodies are not transferable and are expressly excluded (see PERG 2.6.10 G).

01/07/2005

PERG 2.6.10

The following are excluded from the specified investment category of shares. Shares or stock in all open-ended investment companies are excluded from being treated in this particular category (but see PERG 2.6.17 G). Exclusions from this category also apply to shares or stock in the share capital of certain mutuals or in equivalent EEA bodies. This takes out building society or credit union accounts and non-transferable shares in industrial and provident societies. These may nevertheless be specified investments in another category (such as deposits in the case of building society accounts).

01/07/2005

Debt instruments

PERG 2.6.11

Two categories of specified investments relating to debt instruments are dealt with under this heading. They broadly split into private debt and public sector debt.

(1) The first category of 'instruments creating or acknowledging indebtedness' (defined in article 77 of the Regulated Activities Order and referred to in the Handbook as debentures) expressly refers to a range of instruments such as debentures, bonds and loan stock and contains a catch-all reference to 'any other instrument creating or acknowledging indebtedness.'

(2) The second category (defined in article 78 of the Regulated Activities Order and referred to in the Handbook as government and public securities) refers to loan stock, bonds and other instruments creating or acknowledging indebtedness which are issued by or on behalf of any government, the assemblies for Scotland, Wales or Northern Ireland, a local authority or an international organisation.

An instrument cannot fall within both categories of specified investments relating to debt instruments. 'Instrument' is defined to include any record whether or not in the form of a document (see article 3(1) of the Regulated Activities Order).

01/07/2005

PERG 2.6.12

Certain instruments are excluded from both these categories of specified investments. These include trade bills, specified banking documents (such as cheques and banknotes though not bills of exchange accepted by a banker) and contracts of insurance. There is a further exclusion from this category of specified investment dealing with public debt for National Savings deposits and products.

01/07/2005

Warrants

PERG 2.6.13

The category of specified investment of instruments giving entitlements to investments (referred to in the Handbook as warrants) covers warrants and other instruments which confer an entitlement to subscribe for shares, debentures and government and public securities. This is one of several categories of specified investments that are expressed in terms of the rights they confer in relation to other categories of specified investment. The rights conferred must be rights to 'subscribe' for the relevant investments. This means that they are rights to acquire the investments directly from the issuer of the investments and by way of the issue of new investments (rather than by purchasing investments that have already been issued).

01/07/2005

PERG 2.6.14

To keep clear distinctions between the different specified investment categories, instruments giving entitlements to investments are not to be regarded as options, futures or contracts for differences.

01/07/2005

Certificates representing securities

PERG 2.6.15

The specified investment category of certificates representing certain securities covers certificates or other instruments which confer rights in relation to shares and debt securities. It includes depositary receipts.

01/07/2005

PERG 2.6.16

There is an exclusion for any instrument that would otherwise fall within the specified investment category of units in a collective investment scheme. But the exclusion does not apply where the underlying investments covered by the certificate are issued by the same (non-public sector) issuer or constitute a single issue of public sector debt (such as a single issue of gilts). Certificates or other instruments conferring rights in respect of investments in these two cases continue to be treated as certificates representing certain securities.

01/07/2005

Units

PERG 2.6.17

The specified investment category of units in a collective investment scheme includes units in a unit trust scheme, shares in open-ended investment companies and rights in respect of most limited partnerships. Shares in or securities of an open-ended investment company are treated differently from shares in other companies. They are excluded from the specified investment category of shares. This does not mean that they are not investments but simply that they are uniformly treated in the same way as units in other forms of collective investment scheme. The effect is that an open-ended investment company will, in issuing its shares, be subject to the restrictions on promotion of collective investment schemes in section 238 of the Act (rather than to restrictions that apply to other forms of body corporate). For exclusions from the restrictions on the provisions of collective investment schemes, see the Financial Services and Markets Act 2000 (Promotion of Collective Investment Schemes) (Exemptions) Order 2001 (SI 2001/1060). Guidance on the meaning of open-ended investment company is in PERG 9 (Meaning of open-ended investment company).

01/10/2005

PERG 2.6.18

There are no exclusions in the Regulated Activities Order for this specified investment category. This is because 'collective investment scheme' is defined in section 235 of the Act (Collective investment schemes) for the purposes of the Act generally. But there is a separate power to provide for exemptions from that definition and the Treasury have exercised it (see the Financial Services and Markets Act 2000 (Collective Investment Schemes) Order 2001 (SI 2001/1062). The result is that units in certain arrangements are excluded from being collective investment schemes (for example, closed-ended bodies corporate, franchise arrangements, timeshare schemes).

01/07/2005

Rights under a pension scheme

PERG 2.6.19

Two types of investment are specified here:

(1) rights under a stakeholder pension scheme; and

(2) rights under a personal pension scheme.

06/04/2007

PERG 2.6.19A

A stakeholder pension scheme is defined in section 1 of the Welfare Reform and Pensions Act 1999. Regulations made under that section set out detailed rules under which such schemes will operate (see the Stakeholder Pension Scheme Regulations 2000). Schemes must be registered with The Pensions Regulator.

06/04/2007

PERG 2.6.19B

A personal pension scheme is, broadly speaking, a pension scheme which is not an occupational pension scheme or a stakeholder pension scheme. That is, a scheme or arrangement that is comprised in one or more instruments or agreements, having or capable of having effect so as to provide benefits to or in respect of people:

(1) on retirement; or

(2) on having reached a particular age; or

(3) on termination of service in an employment.

06/04/2007

PERG 2.6.19C

Rights under stakeholder pension schemes and personal pension schemes are specified investments for the purposes of the Regulated Activities Order. There are no exclusions in the Order.

06/04/2007

Options

PERG 2.6.20

The specified investment category of optionscomprises:

(1) options to acquire or dispose of securities or contractually based investments, currency and certain precious metals and options to acquire or dispose of such options. Options to buy or sell other types of commodity will only fall within this specified investment category if they are options to buy or sell futures, or options to buy or sell contracts for differences, which are based on other commodities. But options to buy or sell other types of commodity may be contracts for differences (see PERG 2.6.23 G);

(2) options to acquire or dispose of other property and falling within paragraphs 5, 6, 7 or 10 of Annex 1 to MiFID (see article 83(2) of the Regulated Activities Order and PERG 13, Q32 to Q34 for guidance about these instruments), but only where they are options in relation to which a MiFID investment firm or a third country investment firm provides or performs investment services and activities on a professional basis; and

(3) options to acquire or dispose of an option to which (2) applies. See article 83(1)(e) of the Regulated Activities Order.

01/11/2007

PERG 2.6.20A

It follows therefore that options not falling within PERG 2.6.20G (1), for example physically settled options on non-precious metals, such as copper options, will not be options unless they meet the conditions in PERG 2.6.20G (2). Moreover, where the option in question is one to which PERG 2.6.20G (2) applies, it will be an option only in relation to the investment services and activities, or ancillary services where relevant, provided by that person. The same applies in the case of options falling within PERG 2.6.20G (3), for example an option on a physically settled copper option traded on a regulated market.

01/11/2007

Futures

PERG 2.6.21

Futures is the name given to rights under a contract for the sale of a commodity, or of property of any other description, under which delivery is to be made at a future date and at a price agreed on when the contract is made.

01/07/2005

PERG 2.6.22

The key issue in determining whether something is an investment in this category for the purposes of the Regulated Activities Order is whether the contract is made for investment purposes rather than commercial purposes. Contracts which are made for commercial purposes are excluded from this specified investment category and the Regulated Activities Order contains several tests as to when that is, or is not, the case (some are conclusive, others only indicative).

01/07/2005

PERG 2.6.22A

As with options, there is an additional category of instruments which are futures only when they are the object of investment services or activities provided or performed by certain persons. These are contracts as described in PERG 2.6.21 G:

(1) that would not be regarded as having been entered into for investment purposes because they fail one of the tests mentioned in PERG 2.6.22 G;

(2) that fall within paragraphs 5, 6, 7 or 10 of Annex 1 to MiFID (see PERG 13, Q32 to Q34 for guidance about these derivatives); and

(3) in relation to which a MiFID investment firm or a third country investment firm provides or performs investment services and activities on a professional basis.

01/11/2007

See article 84(1A)-(1D) of the Regulated Activities Order

PERG 2.6.22B

The transposition of MiFID does not have the effect of turning spot or forward foreign exchange contracts into financial instruments where such instruments satisfy the commercial purpose test in article 84(2) of the Regulated Activities Order. In our view, very few instruments are likely to fall within PERG 2.6.22A G in practice, given that this category only applies in the case of instruments not falling within PERG 2.6.22 G. An example of an instrument falling within PERG 2.6.22A G could be rights under a contract for a derivative which provides for physical delivery of a commodity at a future date and which is entered into on a multilateral trading facility.

01/11/2007

Contracts for differences

PERG 2.6.23

The specified investment category of contracts for differences covers:

(1) rights under contracts for differences;

(2) rights under other contracts whose purpose or pretended purpose is to secure a profit or avoid a loss by reference to fluctuations in certain factors; and

(3) other derivative contracts (not within (1) or (2)) falling within paragraph 8 of Annex 1 to MiFID, that is derivative instruments for the transfer of credit risk (see PERG 13, Q30 to Q31 for guidance about these instruments), but only where a MiFID investment firm or a third country investment firm provides or performs investment services and activities on a professional basis.

The factors mentioned in (2) include the value or price of property of any description or an index or any 'other factor designated in the contract'. This catches a wide range of factors.

01/11/2007

PERG 2.6.23A

All contracts in this category are cash-settled instruments (as opposed to being settled by way of delivering something other than cash). Many would be unenforceable as gaming contracts were it not for section 412 of the Act (Gaming contracts). Examples of instruments that count as specified investments under this category are spread bets and interest rate swaps.

01/11/2007

PERG 2.6.24

There are a number of exclusions. These include a case where the parties intend that the profit is to be secured or the loss to be avoided by taking delivery of property. This avoids overlap with the specified investment categories of options and futures. Also excluded are index-linked deposits and rights under certain contracts connected with the National Savings Bank or National Savings products. There is also provision to ensure that the specified investment category of contracts for differences does not include rights under life policies.

01/07/2005

Lloyd's investments

PERG 2.6.25

Two types of specified investment are relevant. These are the underwriting capacity of a Lloyd's syndicate and a person's membership of a Lloyd's syndicate. There are no exclusions from these specified investment categories.

01/07/2005

Rights under a funeral plan

PERG 2.6.26

Rights under a funeral plan contract are the rights to a funeral obtained by a person who pays for the funeral before the death of the person whose funeral it will be.

01/07/2005

Rights under a regulated mortgage contract

PERG 2.6.27

In accordance with article 61(3)(a) of the Regulated Activities Order, a regulated mortgage contract is a contract which, at the time it is entered into, satisfies the following conditions:

(1) the contract is one where the lender provides credit to an individual or trustees (the "borrower");

(2) the obligation of the borrower to repay is secured by a first legal charge on land (other than timeshare accommodation) in the United Kingdom; and

(3) at least 40% of that land is used, or is intended to be used, as or in connection with a dwelling by the borrower (or, where trustees are the borrower, by an individual who is a beneficiary of the trust) or by a related person.

Detailed guidance on this is set out in PERG 4.4 (Guidance on regulated activities connected with mortgages).

01/07/2005

Rights under a home reversion plan

PERG 2.6.27A

In accordance with article 63B(3)(a) of the Regulated Activities Order, a home reversion plan is an arrangement under which, at the time it is entered into:

(1) a person (the "reversion purchaser") buys all or part of a qualifying interest in land (other than timeshare accommodation) in the United Kingdom from an individual or trustees (the "reversion occupier");

(2) the reversion occupier (or, where trustees are concerned, an individual who is a beneficiary of the trust), or a related person of either, is entitled, and intends, to use at least 40% of that land as or in connection with a dwelling; and

(3) the entitlement to occupy ends on the occurrence of any one or more of the following events:

(a) the end of a specified period of at least twenty years; or

(b) the death of the individual; or

Detailed guidance on this is set out in PERG 14.3 (Guidance on home reversion and home purchase activities).

06/04/2007

Rights under a home purchase plan

PERG 2.6.27B

In accordance with article 63F(3)(a) of the Regulated Activities Order, a home purchase plan is an arrangement under which, at the time it is entered into:

(1) a person (the "home purchase provider") buys a qualifying interest in land or an undivided share of a qualifying interest in land (other than timeshare accommodation) in the United Kingdom;

(2) where an undivided share of a qualifying interest is bought, the interest is held on trust for the home purchase provider and the individual or trustee as beneficial tenants in common;

(3) an individual or trustees (the "home purchaser") is obliged to buy the interest bought by the home purchase provider over the course of or at the end of a specified period; and

(4) the home purchaser (or, where trustees are concerned, by an individual who is a beneficiary of the trust), or a related person of either, is entitled, and intends, to use at least 40% of that land as or in connection with a dwelling.

Detailed guidance on this is set out in PERG 14.4 (Guidance on home reversion and home purchase activities).

06/04/2007

PERG 2.6.28

Rights to, or interests in, all the specified investments in PERG 2.6 (except rights to, or interests in, rights under a home finance transaction ) are themselves treated as specified investments. The effect is that, in most cases, an activity carried on in relation to rights or interests derived from any of those investments is also a regulated activity if the activity would be regulated if carried on in relation to the investment itself. The exception is where the rights or interests relate to a pure protection contract or a general insurance contract.

06/04/2007

PERG 2.6.29

There are several things that are not covered by this category (other than rights to, or interests in, rights under a mortgage contract). Anything that is covered by any other specified investment category is excluded, as are interests under the trusts of an occupational pension scheme. Finally, where a contract is excluded from the scope of the regulated activity of entering as provider into a funeral plan contract (see PERG 2.8.14 G), then rights to, or interests in, the contracts of insurance or interests under the trusts, to which the contracts relate are also excluded from this specified investment category.

01/07/2005

PERG 2.7

Activities: a broad outline

01/07/2005

PERG 2.7.1

The following paragraphs describe the various specified activities. The exclusions relating to activities are dealt with in PERG 2.8 and PERG 2.9.

01/07/2005

Accepting deposits

PERG 2.7.2

Whether or not accepting deposits is a regulated activity depends on the use to which the money is put. The activity is caught if money received by way of deposit is lent to others or if any other activity of the person accepting the deposit is financed wholly (or to a material extent) out of the capital of, or interest on, money received by way of deposit.

01/07/2005

Issuing e-money

PERG 2.7.2A

Guidance on the regulated activity of issuing e-money is given in PERG 3.

01/07/2005

Effecting or carrying out contracts of insurance as principal

PERG 2.7.3

The activities of effecting a contract of insurance or carrying out a contract of insurance are separate regulated activities, each requiring authorisation. But this only applies where they are carried on by a person who is acting as principal. This means that the activities of agents, such as loss adjusters, will not constitute this regulated activity. The activities of some agents may, however, be regulated as insurance mediation activities (see PERG 5 (Guidance on insurance mediation activities)).

01/07/2005

PERG 2.7.4

In addition, certain other activities carried on in relation to rights under contracts of insurance are regulated activities. These are where the activity is carried on in relation to:

(1) life policies, where the regulated activities concerned are:

(a) dealing in investments as principal (see PERG 2.7.5 G);

(b) managing investments (see PERG 2.7.8 G);

(d) agreeing to carry on any of those activities (see PERG 2.7.21 G); and

(2) rights under any contract of insurance, where the regulated activities concerned are:

(a) dealing in investments as agent (see PERG 2.7.5 G);

(b) arranging (bringing about) deals in investments and making arrangements with a view to transactions in investments (see PERG 2.7.7A G);

(d) advising on investments (see PERG 2.7.15 G); and

(e) agreeing to carry on any of those activities (see PERG 2.7.21 G).

PERG 5 (Insurance mediation activities) has more guidance on these regulated activities where they are insurance mediation activities.

01/07/2005

Dealing in investments (as principal or agent)

PERG 2.7.5

In relation to securities or life policies (or rights or interests in either), dealing as principal is only a regulated activity if certain conditions are satisfied (see PERG 2.8.4G (1)).

01/07/2005

PERG 2.7.6

Both the activities of dealing in investments as principal and dealing in investments as agent are defined in terms of 'buying, selling, subscribing for or underwriting' certain investments. These investments are:

(1) for dealing in investments as principal, securities or contractually based investments (except rights under a funeral plan contract); and

(2) for dealing in investments as agent, securities and relevant investments (except rights under a funeral plan contract).

01/07/2005

PERG 2.7.6A

Because of the different nature of the specified investments in relation to which these activities are carried on, 'buying' and 'selling' are defined terms that have an extended meaning. For example, some of the specified investments listed in PERG 2.6 are particular things that can be bought and sold in the ordinary meaning of the words. Others fall outside the ordinary meaning of 'buy' and 'sell' because their transfer involves an assumption of a potential liability under a bilateral contract (contracts for differences are an example of this). To deal with the possible range of circumstances, 'buying' is defined in the Regulated Activities Order to include acquiring for valuable consideration. 'Selling' is defined to include disposing for valuable consideration and 'disposing' is itself given a specified meaning that covers a range of possible transactions according to the nature of the investment being transferred (including, for example, surrendering a life insurance contract).

01/07/2005

Arranging deals in investments and arranging a home finance transaction

PERG 2.7.7

[not used]

01/07/2005

PERG 2.7.7A

There are eight arranging activities that are regulated activities under the Regulated Activities Order. These are:

(1) arranging (bringing about) deals in investments which are securities, relevant investments or the underwriting capacity of a Lloyd's syndicate or membership of a Lloyd's syndicate (article 25(1));

(2) making arrangements with a view to transactions in investments which are securities, relevant investments or the underwriting capacity of a Lloyd's syndicate or membership of a Lloyd's syndicate (article 25(2));

(3) arranging (bringing about) regulated mortgage contracts, which includes arranging for another person to vary the terms of a regulated mortgage contract entered into by him as borrower after 31 October 2004 (article 25A(1));

(4) making arrangements with a view to regulated mortgage contracts (article 25A(2));

(5) arranging (bringing about) a home reversion plan, which includes arranging for another person to vary the terms of a home reversion plan entered into by him as the original reversion provider (and not merely as a person to whom the rights or obligations or the interest in land may be transferred) or as reversion occupier on or after 6 April 2007 (article 25B(1));

(6) making arrangements with a view to a home reversion plan (article 25B(2));

(7) arranging (bringing about) a home purchase plan, which includes arranging for another person to vary the terms of a home purchase plan entered into by him as home purchaser on or after 6 April 2007 (article 25C(1)); and

(8) making arrangements with a view to a home purchase plan (article 25C(2)).

06/04/2007

PERG 2.7.7B

The activity of arranging (bringing about) deals in investments is aimed at arrangements that would have the direct effect that a particular transaction is concluded (that is, arrangements that bring it about). The activity of making arrangements with a view to transactions in investments is concerned with arrangements of an ongoing nature whose purpose is to facilitate the entering into of transactions by other parties. This activity has a potentially broad scope and typically applies in one of two scenarios. These are where a person provides facilitiesof some kind:

(1) to enable or assist investors to deal with or through a particular firm (such as the arrangements made by introducers); or

(2) to facilitate the entering into of transactions directly by the parties (such as multilateral trading facilities of any kind other than those excluded under article 25(3) of the Regulated Activities Order, exchanges, clearing houses and service companies (for example, persons who provide communication facilities for the routing of orders or the negotiation of transactions)).

06/08/2009

PERG 2.7.7BA

It is of note, however, that the regulated activity of making arrangements with a view to transactions in investments is not limited to arrangements that are participated in by investors. It is also not necessary that both the buyer and the seller under the transaction that is being arranged should participate in the arrangements. So, arrangements may come within the activity if they are participated in only by product companies with a view to their issuing investments. A person may be carrying on this regulated activity even if he is only providing part of the facilities for bringing about a transaction.

06/08/2009

PERG 2.7.7BB

It is also the FSA's view that certain arrangements may come within the activity even though the parties may have already committed to the transaction using other arrangements. This would typically apply to a clearing house whose clearing and settlement facilities may be seen to be made with a view to the members of the clearing house, as participants in its arrangements, entering into transactions (usually through an investment exchange) which must be cleared through the clearing house to be completed. The clearing house is providing an essential part of the market infrastructure that is necessary to support trading activities. The same principle applies outside the markets context. So for example if a company that wishes to raise capital from private investors tells the potential investors, in order to increase their confidence, that all aspects of paying for and issuing shares will be handled by a particular firm, that firm may come within article 25(2) when it provides those services.

06/08/2009

PERG 2.7.7BC

In the FSA's view, it is generally the case that providers of back office administration services do not carry out the regulated activity of making arrangements with a view to transactions in investments. This is based essentially on the fact that providers of back office administration services aim to assist a broker firm to deal with the aftermath of transactions it has entered into on behalf of its clients. The broker firm has assumed full responsibility to its clients for completing their transactions, thus enabling the view to be taken that the firm to whom it outsources functions is making arrangements to assist the broker to complete transactions rather than with a view to the broker entering into trades as agent for its clients. The provider of back office services does not carry out the regulated activity of making arrangements with a view to transactions in investments because the transaction has already been entered into by the time of its involvement.

06/08/2009

PERG 2.7.7BD

(1) The scope of article 25(2) of the Regulated Activities Order (the subject of PERG 2.7.7B G) was considered by the High Court in the case of Watersheds Limited v. David Da Costa and Paul Gentlemen. The judgement suggests that the activity of introducing does not itself constitute a regulated activity for the purposes of article 25(2) of the Regulated Activities Order. The FSA has considered whether the judgement necessitates any change to the views expressed in PERG 2.7.7B G and elsewhere in PERG. It appears to the FSA that the judgement should be considered in the light of the case to which it relates.

(2) Also, the court does not seem to have had the benefit of a relevant argument. The Regulated Activities Order provides an exclusion which has the effect of removing certain arrangements for making introductions from the scope of article 25(2) of the Regulated Activities Order. This exclusions can be found in article 33 of the Regulated Activities Order (guidance on this can be found in PERG 8.33 and PERG 5.6.17 G to PERG 5.6.21 G). This exclusions would not be necessary if all introductions were outside the scope of article 25(2) of the Regulated Activities Order. Support for this can also be found in the fact that article 25A(2) is very similar to article 25(2) and there is an exclusion from it for certain introductions. The exclusion is in article 33A of the Regulated Activities Order and guidance on it can be found in PERG 4.5.10 G and the following paragraphs. For these reasons, the FSA remains of the view that article 25(2) of the Regulated Activities Order includes certain types of arrangements for making introductions whilst recognising that the judgement in the Watersheds case introduces an element of doubt.

06/08/2009

PERG 2.7.7BE

In determining whether particular arrangements fall within the scope of Article 25(2) of the Regulated Activities Order, it may be necessary to consider the purpose of the arrangements. Further guidance on this can be found in PERG 8.32.3G. Although this guidance is in relation to the activities of publishers, broadcasters, website operators and telephone marketing services, the principle is not limited to those activities.

06/08/2009

PERG 2.7.7BF

In the FSA's view, a mere passive display of literature advertising investments would not amount to the article 25(2) activity. Further guidance on this point can be found in PERG 5.6.4 G. Although this guidance is in relation to contracts of insurance, the principle is not limited to them.

06/08/2009

PERG 2.7.7C

Further guidance on the arranging activities as they relate to home finance transactions and contracts of insurance is in PERG 4.5 (Arranging regulated mortgage contracts), PERG 14.3 and PERG 14.4 (Guidance on home reversion and home purchase activities) and PERG 5.6 (The regulated activities: arranging deals in, and making arrangements with a view to transactions in, contracts of insurance) respectively.

06/04/2007

Operating a multilateral trading facility

PERG 2.7.7D

Guidance on the MiFID investment service of operating a multilateral trading facility is given in PERG 13, Q24. So far as the regulated activity of operating a multilateral trading facility is concerned, this does not comprise the activities of dealing in investments as agent, dealing in investments as principal, or arranging deals in investments. Where a firm carries on one or more of these activities in addition to operating a multilateral trading facility, these are separate regulated activities for which it requires permission.

01/11/2007

Managing investments

PERG 2.7.8

The regulated activity of managing investments includes several elements.

(1) First, a person must exercise discretion. Non-discretionary portfolio management (where the manager buys and sells, as principal or agent, on the instructions of some other person) is not caught by this activity, although it may be caught by a different regulated activity such as the activity of dealing in investments as principal or dealing in investments as agent. The discretion must be exercised in relation to the composition of the portfolio under management and not in relation to some other function (such as proxy voting) carried on by the manager.

(2) Second, the property that is managed must belong beneficially to another person. This excludes from the regulated activity the management by a person of his own property. But discretionary management of assets by a person acting in his capacity as trustee will be caught even though he is the legal owner of the assets.

(3) Third, the property that is managed must consist of (or include) securities or contractually based investments. Alternatively, discretionary management will generally be caught if it is possible that the property could consist of or include such securities or investments. This is the case even if there never has been any investment in securities or contractually based investments, as long as there have been representations that there would be.

01/07/2005

Assisting in the administration and performance of a contract of insurance

PERG 2.7.8A

The activity of assisting in the administration and performance of a contract of insurance is a regulated activity that is identified in the Insurance Mediation Directive. Further guidance on this activity is in PERG 5.7 (The regulated activities: assisting in the administration and performance of a contract of insurance).

01/07/2005

Safeguarding and administering investments

PERG 2.7.9

The activity of safeguarding and administering investments belonging to another is regulated, as is providing a service under which a person undertakes to arrange on a continuing basis for others actually to carry out the safeguarding and administering. In each case, both the elements of safeguarding and administering must be present before a person will be said to carry on the activity.

(1) Safeguarding is acting as custodian of the property, for example, holding any documents evidencing the investments such as the share certificate (although it is worth noting that there is express provision that an uncertificated investment may be safeguarded and administered).

(2) Administration covers services provided to the owner or manager of the property, such as settlement of sale transactions relating to an investment, dealing with income arising from the investment and carrying out corporate actions such as voting. The nature of administration services must be such that the custodian has no discretion (otherwise he is likely to be caught by the regulated activity of managing investments (see PERG 2.7.8 G)).

01/07/2005

PERG 2.7.10

The property that is safeguarded and administered must belong beneficially to another person. It must consist of (or include) securities or contractually based investments. Alternatively, safeguarding and administration will generally be caught if it is possible that the property could consist of (or include) such securities or investments. This is the case even if the property in question has never consisted of (or included) such securities or investments, as long as there have been representations that it would do.

01/07/2005

Sending dematerialised instructions

PERG 2.7.11

The regulated activities relating to sending dematerialised instructions relate to the operation of the system for electronic transfer of title to securities or contractually based investments. This is the system maintained under the Uncertificated Securities Regulations 2001 (SI 2001/3755) (and currently operated byCREST). Sending instructions on behalf of another is a regulated activity, as is causing such instructions to be sent if the person causing the sending is a system-participant, as defined in those Regulations. A system-participant is the person who has the computer and network connection to CREST.

01/07/2005

Establishing etc collective investment schemes

PERG 2.7.12

The regulated activities carried on in relation to a collective investment scheme generally are the establishing, operating or winding up a collective investment scheme. Acting as the depositary and acting as sole director of an open-ended investment company are also separate regulated activities. In all these cases, the activities are regulated where the schemes themselves are authorised schemes for the purposes of the UK product regulation regime under Part XVII of the Act (Collective investment schemes) as well as where the schemes are unregulated schemes. The process for applying for authorisation of a collective investment scheme is described in COLLG 2 (Authorised fund applications). Guidance on whether certain types of scheme (property and land investment schemes) may amount to collective investment schemes is set out in PERG 11 (Property investment clubs and land investment schemes).

01/04/2009

PERG 2.7.13

In addition, express provision is included in the Regulated Activities Order to make acting as trustee of an authorised unit trust scheme a regulated activity. The full picture for authorised schemes (that is, schemes that can be promoted to the public) is as follows:

(1) Acting as trustee of an authorised unit trust scheme is expressly included as a regulated activity.
(2) Acting as depositary of an open-ended investment company that is authorised under regulations made under section 262 of the Act (Open-ended investment companies), is a regulated activity.
(3) Acting as a sole director of such a company is a regulated activity.
(4) Managing an authorised unit trust scheme will amount to operating the scheme and so will be a regulated activity. A person acting as manager is also likely to be carrying on other regulated activities (such as dealing (see PERG 2.7.5 G) or managing investments (see PERG 2.7.8 G)).
(5) An open-ended investment company will, once it is authorised under regulations made under section 262 of the Act, become an authorised person in its own right under Schedule 5 to the Act (Persons concerned in Collective Investment Schemes). Under ordinary principles, a company operates itself and an authorised open-ended investment company will be operating the collective investment scheme constituted by the company. It is not required to go through a separate process of authorisation as a person because it has already undergone the process of product authorisation.
(6) Operators, trustees or depositaries of UCITS schemes constituted in other EEA States are also authorised persons under Schedule 5 of the Act if those schemes qualify as recognised collective investment schemes for the purposes of section 264 of the Act.

01/07/2005

PERG 2.7.13C

A person will carry on the activity of acting as trustee or depositary of a UCITS if they act as:

(1) trustee of an authorised unit trust scheme; or

(2) depositary of an investment company with variable capital or an authorised contractual scheme;

where, in either case, the scheme or company is a UCITS.

01/07/2005

Establishing etc pension schemes

PERG 2.7.14

The regulated activities carried on in relation to pension schemes are establishing, operating or winding up a stakeholder pension scheme and establishing, operating or winding up a personal pension scheme. The identity of the operator of such a pension scheme depends on the facts. However, the scheme administrator will usually be the operator of the scheme either on its own or jointly with the scheme trustees. More detailed guidance on the scope of this activity is in PERG 12(Q4).

06/04/2007

Providing basic advice on stakeholder products

PERG 2.7.14A

This activity covers advice in the form of a recommendation given to a retail consumer. The recommendation must relate to a stakeholder product and certain conditions must be met. These conditions are based on the need for the adviser to make an assessment of the consumer's needs based on the answers that the consumer provides to a series of pre-scripted questions. A fuller description of the activity is given in PERG 2.7.14B G and explains what is meant by "retail customer". This activity is separate to the regulated activity of advising on investments (see PERG 2.7.15 G (Advising on investments)). The existence of this separate advising activity does not prevent a person from giving advice on stakeholder products in circumstances that do not satisfy the conditions set out in PERG 2.7.14B G. But such advice is likely to amount to advising on investments unless the stakeholder product is a deposit. Neither does the existence of the activity prevent a person from selling stakeholder products in any other manner provided the person has the appropriate permission.

01/07/2005

PERG 2.7.14B

A person ('P') carries on the regulated activity of providing basic advice on a stakeholder product when:

(1) P gives the advice:

(a) to a person ('C') who does not receive the advice in the course of a business that he carries on; and

(b) in the course of a business that P carries on;

(2) the advice is on the merits of C opening or buying a stakeholder product;

(3) the following conditions are met:

(a) P asks C questions to enable P to assess whether a stakeholder product is appropriate for C;

(b) if P, relying solely on the information provided by C in response to the questions referred to in (a), assesses that a stakeholder product is appropriate for C, P:

(i) describes that product to C; and

(ii) gives a recommendation of that product to C; and

(4) C has indicated to P that he has understood the description and recommendation referred to in (3)(b).

01/07/2005

Advising on investments

PERG 2.7.15

The regulated activity of advising on investments under article 53 of the Regulated Activities Order applies to advice on securities or relevant investments. It does not, for example, include giving advice about deposits, or about things that are not specified investments for the purposes of the Regulated Activities Order (such as interests under the trusts of an occupational pension scheme). Giving advice on certain other specified investments is, however, regulated under other parts of the Regulated Activities Order (see PERG 2.7.16A G and PERG 2.7.17G (2). Giving a person generic advice about specified investments (for example, invest in Japan rather than Europe) is not a regulated activity nor is giving information as opposed to advice (for example, listings or company news). However, the context in which something is communicated may affect its character; for example, if a person gives information on share price against the background that, when he does so, that will be a good time to sell, then this will constitute advising on investments.

01/07/2005

PERG 2.7.16

The advice must also be given to someone who holds specified investments or is a prospective investor (including trustees, nominees or discretionary fund managers). This requirement excludes advice given to a person who receives it in another capacity. An example of this might be a tax professional to whom advice is given to inform the practice of his profession or advice given to an employer for the purposes of setting up a group personal pension scheme. Further guidance on the meaning of advising on investments is in PERG 8.24 (Advising on investments).

01/07/2005

PERG 2.7.16A

In certain circumstances, the activity of advising on investments can also amount to providing basic advice on a stakeholder product (see PERG 2.7.14A G (Providing basic advice on stakeholder products)).

01/07/2005

Advising on regulated mortgage contracts

PERG 2.7.16B

Under article 53A of the Regulated Activities Order, giving advice to a person in his capacity as borrower or potential borrower is a regulated activity if it is advice on the merits of the person:

(1) entering into a particular regulated mortgage contract; or

(2) varying the terms of a regulated mortgage contract.

Advice on varying terms as referred to in (2) comes within article 53A only where the borrower entered into the regulated mortgage contract on or after 31 October 2004 and the variation varies the borrower's obligations under the contract. Further guidance on the scope of the regulated activity under article 53A is in PERG 4.6 (Advising on regulated mortgage contracts).

01/07/2005

Advising on home reversion plans

PERG 2.7.16C

Under article 53B of the Regulated Activities Order, giving advice to a person in his capacity as reversion occupier or reversion provider is a regulated activity if it is advice on the merits of the person:

(1) entering into a particular home reversion plan; or

(2) varying the terms of a home reversion plan.

Advice on varying terms as referred to in (2) only comes within article 53B where the plan was entered into by the person on or after 6 April 2007 and the variation varies his obligations under the plan. Where a person is entering into the plan as reversion provider purely as a result of rights or obligations, or the interest in land, being transferred to him, advice given to him on the merits of the transaction is only regulated where the plan was originally entered into on or after 6 April 2007. Further guidance on the scope of the regulated activity under article 53B is in PERG 14.3 (Guidance on home reversion and home purchase activities).

06/04/2007

Advising on a home purchase plan

PERG 2.7.16D

Under article 53C of the Regulated Activities Order, giving advice to a person in his capacity as home purchaser is a regulated activity if it is advice on the merits of the person:

(1) entering into a particular home purchase plan; or

(2) varying the terms of a home purchase plan.

Advice on varying terms as referred to in (2) only comes within article 53C where the plan is entered into by the person on or after 6 April 2007 and the variation varies the person's obligations under the plan. Further guidance on the scope of the regulated activity under article 53C is in PERG 14.4 (Guidance on home reversion and home purchase activities).

06/04/2007

Lloyd's activities

PERG 2.7.17

Certain activities carried on in connection with business at Lloyds will be regulated. In addition to those already mentioned (arranging deals in the underwriting capacity of a Lloyd's syndicate or membership of a Lloyd's syndicate), there are three other regulated activities as follows.

(1) Managing the underwriting capacity of a Lloyd's syndicate as a managing agent at Lloyd's is a regulated activity. 'Managing agent' is defined in article 3(1) of the Regulated Activities Order.

(2) Advising on syndicate participation at Lloyd's, that is advising a person to become, or continue or cease to be, a member of a particular syndicate is also caught. Giving advice about syndicate participation (such as how members should use their capital within the market and arrange their syndicate participation) is a separate regulated activity to that of providing advice in relation to securities and contractually based investments (see PERG 2.7.15 G). Appropriate permission will be needed.

(3) Arranging deals in contracts of insurance written at Lloyd's is also a regulated activity for the Society of Lloyd's itself.

01/07/2005

Entering funeral plan contracts

PERG 2.7.18

Entering as provider into a funeral plan contract is a regulated activity. The 'provider' is the person to whom the pre-payments are made and who undertakes to provide, or secure the provision of, the funeral at some future point. He may be the funeral director or a third party who arranges for another person to provide the funeral. Certain types of funeral plan contract are excluded (see PERG 2.8.14 G).

01/07/2005

PERG 2.7.19

In addition, other activities carried on in relation to rights under certain funeral plan contracts are regulated (see PERG 2.7.5 G to PERG 2.7.11 G and PERG 2.7.15 G and PERG 2.7.16 G). This is because such rights are classified as contractually based investments.

01/07/2005

Entering into and administering a regulated mortgage contract

PERG 2.7.20

Entering into as lender, and administering, a regulated mortgage contract are regulated activities under article 61 of the Regulated Activities Order (Regulated mortgage contracts). Guidance on these regulated activities is in PERG 4.7 (Entering into a regulated mortgage contract) and PERG 4.8 (Administering a regulated mortgage contract).

01/07/2005

Entering into and administering a home reversion plan

PERG 2.7.20A

Entering into a home reversion plan and administering a home reversion plan are regulated activities under article 63B of the Regulated Activities Order (Regulated home reversion plans). Guidance on these regulated activities is in PERG 14.3 (Guidance on home reversion and home purchase activities).

06/04/2007

Entering into and administering a home purchase plan

PERG 2.7.20B

Entering into a home purchase plan and administering a home purchase plan are regulated activities under article 63F of the Regulated Activities Order (Regulated home purchase plans). Guidance on these regulated activities is in PERG 14.4 (Guidance on home reversion and home purchase activities).

06/04/2007

Dormant account funds

PERG 2.7.20C

There are two regulated activities associated with the activities of a dormant account fund operator under the Dormant Bank and Building Society Accounts Act 2008:

(1) the meeting of repayment claims; and

(2) managing dormant account funds (including the investment of such funds).

06/08/2009

Agreeing

PERG 2.7.21

Agreeing to carry on most regulated activities is itself a regulated activity. But this is not the case if the underlying activities to which the agreement relates are those of accepting deposits, issuing e-money, effecting or carrying out contracts of insurance, operating a multilateral trading facility, managing dormant account funds, the meeting of repayment claims or carrying on any of the activities that are regulated in relation to collective investment schemes, stakeholder pension schemes or personal pension schemes. A person will need to make sure that he has appropriate authorisation at the stage of agreement and before he actually carries on the underlying activity (such as the dealing or arranging).

06/08/2009

PERG 2.8

Exclusions applicable to particular regulated activities

01/07/2005

PERG 2.8.1

Most regulated activities are subject to exclusions that are set out in the Regulated Activities Order directly following each activity.

01/07/2005

Accepting deposits

PERG 2.8.2

Only one exclusion applies to the regulated activity of accepting deposits. Adeposit taker providing its services as an electronic commerce activity from another EEA State into the United Kingdom (see PERG 2.9.18 G) does not carry on a regulated activity. In addition to the situations that are excluded from being 'deposits' (see PERG 2.6.2 G to PERG 2.6.4 G), several persons are exempt persons in relation to the regulated activity of accepting deposits (see PERG 2.10.8G (2)).

01/07/2005

Issuing e-money

PERG 2.8.2A

Certain 'small issuers' of e-money may apply to the FSA for a certificate to be excluded from the regulated activity of issuing e-money. To be eligible, the issuer must be a body corporate or a partnership (other than a full credit institution) with its head office in the United Kingdom and it must meet certain conditions. The FSA must give that issuer a certificate if it appears to the FSA that the issuer meets those conditions. Further guidance on those conditions and how the application is made is given in ELM 8.4 (The conditions for giving a small e-money issuer certificate).

01/07/2005

Effecting and carrying out contracts of insurance

PERG 2.8.3

The following activities are excluded from both the regulated activities of effecting and carrying out contracts of insurance.

(1) In specified circumstances, the activities of an EEA firm when participating in a Community co-insurance operation are excluded. A Community co-insurance operation is defined in the Community Co-insurance Directive.

(2) In specified circumstances, activities that are carried out in connection with the provision of on-the-spot accident or breakdown assistance for cars and other vehicles (such as repairs, vehicle retrieval, delivery of parts or fuel) are excluded.

(3) Electronic commerce activities provided by an incoming ECA provider where those activities are outside the scope of the Insurance Directives (see PERG 2.9.18 G).

01/07/2005

Dealing in investments as principal

PERG 2.8.4

The regulated activity of dealing in investments as principal applies to specified transactions relating to any security or to any contractually based investment (apart from rights under funeral plan contracts or rights to or interests in such contracts). The activity is cut back by exclusions as follows.

(1) Of particular significance is the exclusion in article 15 of the Regulated Activities Order (Absence of holding out etc). This applies where dealing in investments as principal involves entering into transactions relating to any security or assigning rights under a life policy (or rights or interests in such a contract). In effect, it superimposes an additional condition that must be met before a person's activities become regulated activities. The additional condition is that a person must hold himself out as making a market in the relevant specified investments or as being in the business of dealing in them, or he must regularly solicit members of the public with the purpose of inducing them to deal. This exclusion does not apply to dealing activities that relate to any contractually based investment except the assigning of rights under a life policy.
(2) Entering into a transaction relating to a contractually based investment is not regulated if the transaction is entered into by an unauthorised person and it takes place in either of the following circumstances (a transaction entered into by an authorised person would be caught). The first set of circumstances is where the person with whom the unauthorised person deals is either an authorised person or an exempt person who is acting in the course of a business comprising a regulated activity in relation to which he is exempt. The second set of circumstances is where the unauthorised person enters into a transaction through a non-UK office (which could be his own) and he deals with or through a person who is based outside the United Kingdom. This non-UK person must be someone who, as his ordinary business, carries on any of the activities relating to securities or contractually based investments that are generally treated as regulated activities.
(3) A person (for example, a bank) who provides another person with finance for any purpose can accept an instrument acknowledging the debt (and as security for it) without risk of dealing as principal as a result.
(4) A company does not deal as principal by issuing its own shares or share warrants and a person does not deal as principal by issuing his own debentures or debenture warrants.
(4A) A company does not carry on the activity of dealing in investments as principal by purchasing its own shares where section 162A of the Companies Act 1985 (Treasury shares) applies to the shares purchased or by dealing in its own shares held as Treasury shares, in accordance with section 162D of that Act (Treasury shares: disposal and cancellation).
(5) Risk-management activities involving options, futures and contracts for differences will not require authorisation if specified conditions are met. The conditions include the company's business consisting mainly of unregulated activities and the sole or main purpose of the risk management activities being to limit the impact on that business of certain kinds of identifiable risk.
(6) A person will not be treated as carrying on the activity of dealing in investments as principal if, in specified circumstances (outlined in PERG 2.9), he enters as principal into a transaction:
(a) while acting as bare trustee (or, in Scotland, as nominee);
(b) in connection with the sale of goods or supply of services;
(c) that takes place between members of a group or joint enterprise;
(d) in connection with the sale of a body corporate;
(e) in connection with an employee share scheme;
(f) as an overseas person;
(g) as an incoming ECA provider (see PERG 2.9.18 G).

01/07/2005

PERG 2.8.4A

Persons who enter as principal into transactions involving rights under a contract of insurance of any kind will need to consider whether they may, as a result, be carrying on the regulated activity of:

(1) arranging (bringing about) deals in investments; or

(2) making arrangements with a view to transactions in investments; or

(3) agreeing to do (1) or (2).

01/07/2005

PERG 2.8.4B

The possibility referred to in PERG 2.8.4 G will only arise where it is not the case that the person who enters into the transaction as principal either:

(1) is the only policyholder; or

(2) as a result of the transaction, would become the only policyholder.

01/07/2005

PERG 2.8.4C

The exclusions referred to in PERG 2.8.4G (1), (2), (5) and (6)(b), (c) and (d) will not be available to persons who, when carrying on the activity of dealing in investments as principal, are MiFID investment firms or third country investment firms (see PERG 2.5.4 G to PERG 2.5.5 G (Investment services and activities)).

01/11/2007

Dealing in investments as agent

PERG 2.8.5

The regulated activity of dealing in investments as agent applies to specified transactions relating to any security or to any relevant investment (apart from rights under funeral plan contracts or rights to or interests in such rights). In addition, the activity is cut back by exclusions as follows.

(1) An exclusion applies to certain transactions entered into by an agent who is not an authorised person which depend on him dealing with (or through) an authorised person. It does not apply if the transaction relates to a contract of insurance. There are certain conditions which must be satisfied for the exclusion to apply. These are that the agent must not give any relevant advice on the transaction and that he must not receive any remuneration from the transaction unless account is made to his client.

(2) There is an exclusion for risk-management transactions where the agent is dealing on behalf of a group company or a co-participant in a joint enterprise.

(3) In addition, exclusions apply in specified circumstances (outlined in PERG 2.9 (Regulated activities: exclusions available in certain circumstances)) where a person enters as agent into a transaction:

(a) in connection with the carrying on of a profession or of a business not otherwise consisting of regulated activities (see PERG 2.9.5 G );

(b) in connection with the sale of goods or supply of services (see PERG 2.9.7 G);

(d) in connection with the sale of a body corporate (see PERG 2.9.11 G );

(e) in connection with an employee share scheme (see PERG 2.9.13 G);

(f) as an overseas person (see PERG 2.9.15 G);

(g) as an incoming ECA provider (see PERG 2.9.18 G);

(h) as a provider of non-motor goods or travel services where the transaction involves a general insurance contract that satisfies certain conditions (see PERG 2.9.19 G);

(i) that involves a contract of insurance covering large risks situated outside the EEA (see PERG 2.9.19 G);

(j) on behalf of the participants of a business angel-led enterprise capital fund and that person is a body corporate as specified in article 72E(7) of the Regulated Activities Order.

(m) while acting as an insolvency practitioner (see PERG 2.9.25 G).

More detailed guidance on the exclusions that relate to contracts of insurance is in PERG 5 (Insurance mediation activities).

06/10/2006

PERG 2.8.5A

The exclusions referred to in PERG 2.8.5G (1), (2) and (3)(a),(b), (c), (d) and (j) will not be available to persons who, whencarrying on the activity of dealing in investments as agent, are MiFID investment firms or third country investment firms(see PERG 2.5.4 G to PERG 2.5.5 G (Investment services and activities)).

01/11/2007

Arranging deals in investments and arranging a home finance transaction

PERG 2.8.6

The various activities that involve arranging fall into two general types. These are:

(1) those relating to arranging a particular transaction or a contract or plan variation (articles 25(1), 25A(1), 25B(1) and 25C(1) of the Regulated Activities Order); and

(2) those relating to making arrangements with a view to persons entering into certain transactions (articles 25(2), 25A(2), 25B(2) and 25C(2) of the Regulated Activities Order).

The exclusions in relation to the regulated activities of arranging under articles 25(1) and (2) are of particular relevance in the context of raising corporate finance. Some of the exclusions outlined in PERG 2.8.6A G relate to all of the arranging activities but most relate only to certain of those activities as indicated.

06/04/2007

PERG 2.8.6A

The exclusions in the Regulated Activities Order that relate to the various arranging activities are as follows.

(1) Under article 26, arrangements that do not or would not bring about the transaction to which they relate are excluded from the arranging activities that relate to a particular transaction (see PERG 2.8.6G (1)) only. A person will bring about a transaction or a contract or plan variation only if his involvement in the chain of events leading to a transaction or contract or plan variation is of sufficient importance that, without that involvement, it would not take place. This will require something more than the mere giving of advice (although giving such advice may be the regulated activity of advising on investments or advising on home finance transactions).

(2) Under article 27, simply providing the means by which parties to a transaction (or possible transaction) are able to communicate with each other is excluded from arrangements made with a view to persons entering into certain transactions (see PERG 2.8.6G (2)) only. This will ensure that persons such as Internet service providers or telecommunications networks are excluded if all they do is provide communication facilities (and these would otherwise be considered to be arrangements made with a view to the participants entering into transactions). If a person makes arrangements that go beyond providing the means of communication, and add value to what is provided, he will lose the benefit of this exclusion.

(3) Under article 28, arranging investment transactions to which the arranger is to be a party is excluded from both article 25(1) and (2). The main purpose is to ensure that a person is not regarded as arranging deals for another when the transaction in question is one to which he intends to be a party. As a result, a person cannot both be engaging in a dealing activity (as principal or agent) and arranging deals for another as regards any particular transaction. But where the transaction involves a contract of insurance, article 28 will not apply if the person making the arrangements:

(a) is the only policyholder; or

(b) as a result of the transaction, would become the only policyholder.

Under article 28A, a person is excluded from any of the arranging activities that relate to home finance transactions if he is to enter into the contract or plan to which the arrangements relate or if he is or is to become a party to a contract or plan that is varied or to be varied.

(4) Under article 29, an unauthorised person who, on behalf of a client, arranges transactions or contract or plan variations, with or through an authorised person, is excluded from each of the arranging activities if specified conditions as to advice and remuneration are satisfied. For example, the exclusion is dependent on the client not receiving any advice on the transactions or variations from the unauthorised person making the arrangements. The exclusion does not apply where the investment is a contract of insurance.

(5) Under article 29A, an unauthorised person is excluded from the regulated activity of arranging for another person to vary the terms of a regulated mortgage contract entered into on or after 31 October 2004 (article 25A(1)(b)) or a home reversion plan or home purchase plan entered into on or after 6 April 2007 (articles 25B(1)(b) and 25C(1)(b)). This is if the arranging is the result of:

(a) anything done in the course of the administration, by an authorised person:

(i) of a regulated mortgage contract in the way set out in article 62(a);

(ii) of a home reversion plan in the way set out in article 63C(a);

(iii) of a home purchase plan in the way set out in article 63G(a); or

(b) anything done by the unauthorised person in connection with the administration:

(i) of a regulated mortgage contract in the way set out in article 62(b);

(ii) of a home reversion plan in the way set out in article 63C(b);

(iii) of a home purchase plan in the way set out in article 63G(b).

(6) Under article 30, arranging investment transactions in connection with lending on the security of contracts of insurance is excluded, from article 25(1) and (2) but only where a person is not carrying on insurance mediation or reinsurance mediation.

(7) Under article 31, making arrangements for finance (in whatever form) to be supplied to a person by a third party is excluded from article 25(1) and (2) if the finance is given in exchange for an instrument acknowledging the debt. This mirrors the exclusion from dealing in investments as principal in similar circumstances (see PERG 2.8.4G (3)).

(8) Under article 32, arrangements the only purpose of which is to provide finance to enable persons to enter into investment transactions are excluded from article 25(2) only. There is no equivalent exemption from article 25(1). But arrangements for the provision of finance will only be caught by that provision if the arrangements actually bring about the transaction.

(9) Under article 33, making arrangements under which persons will be introduced to third parties who will provide independent services (consisting of advice or the exercise of discretion in relation to certain investments) is excluded from articles 25(2), 25A(2), 25B(2) and 25C(2) only. The party to whom the introduction is made must be of a specified standing (including that of an authorised person). The exclusion does not apply where the arrangements relate to a contract of insurance.

(10) Under article 33A, making arrangements for introducing persons to:

(a) an authorised person who has permission to carry on certain regulated activities concerned with home finance transactions; or

(b) an appointed representative who is able to carry on any of those activities without breaching the general prohibition; or

is excluded from articles 25A(2), 25B(2) and 25C(2) subject to certain conditions related to the receipt of client money and the disclosure of certain information.

(11) Under article 34, a company is not carrying on a regulated activity under article 25(1) or (2) of the Regulated Activities Order(Arranging deals in investments) by arranging for the issue of its own shares or share warrants and a person is not doing so by arranging for the issue of his own debenturesor debenture warrants.

(12) Under article 35, a body carrying out international securities business of a specified type can apply to the Treasury for approval as an international securities self-regulating organisation (ISSRO). Arrangements made in order to carry out the functions of an ISSRO are excluded from article 25(1) and (2). The exclusion applies whether the arrangements are made by the ISSRO or by a person acting on its behalf.

(13) The following exclusions from both article 25(1) and (2) (outlined in PERG 2.9) apply in specified circumstances where a person makes arrangements:

(a) while acting as trustee or personal representative (see PERG 2.9.3 G);

(b) in connection with the carrying on of a profession or of a business not otherwise consisting of regulated activities (see PERG 2.9.5 G);

(d) in connection with certain transactions by a group member or by a participator in a joint enterprise (see PERG 2.9.9 G);

(e) in connection with the sale of a body corporate (see PERG 2.9.11 G);

(f) in connection with an employee share scheme (see PERG 2.9.13 G);

(g) as an overseas person (see PERG 2.9.15 G);

(h) as an incoming ECA provider (see PERG 2.9.18 G);

(i) as a provider of non-motor goods or services related to travel (see PERG 2.9.19 G);

(j) involving the provision, on an incidental basis, of information to policyholders or potential policyholders about contracts of insurance (see PERG 2.9.19 G);

(k) that involve a contract of insurance covering large risks situated outside the EEA (see PERG 2.9.19 G);

(l) for or with a view to transactions to be entered into by or on behalf of the participants of a business angel-led enterprise capital fund and that person is a body corporate as specified in article 72E(7) of the Regulated Activities Order.

(o) while acting as an insolvency practitioner (see PERG 2.9.25 G).

The exclusions referred to in (a), (b), (g) and (h) also apply to arranging activities related to home finance transactions. More detailed guidance on the exclusions that relate to contracts of insurance is in PERG 5 (Insurance mediation activities).

06/04/2007

PERG 2.8.6B

The exclusions referred to in PERG 2.8.6AG (4) and PERG 2.8.6AG (13)(b), (c), (d), (e) and (l) will not be available to persons who, whencarrying on an arranging activity, are MiFID investment firms or third country investment firms (see PERG 2.5.4 G to PERG 2.5.5 G (Investment services and activities)).

01/11/2007

Managing investments

PERG 2.8.7

The activities of persons appointed under a power of attorney are excluded under article 38 of the Regulated Activities Order, from the regulated activity of managing investments, if specified conditions are satisfied. The exclusion only applies where a person is not carrying on insurance mediation or reinsurance mediation and is subject to further limitations discussed below. In addition, the following exclusions (outlined in PERG 2.9) apply in specified circumstances where a person manages assets:

(1) While acting as trustee or personal representative; or

(2) in connection with the sale of goods or supply of services; or

(3) that belong to a group member or participator in a joint enterprise; or

(4) as an incoming ECA provider (see PERG 2.9.18 G); or

(5) belonging to the participants of a business angel-led enterprise capital fund and that person is a body corporate as specified in article 72E(7) of the Regulated Activities Order.

The exclusion in article 38 of the Regulated Activities Order and the exclusions referred to in PERG 2.8.7G (2), PERG 2.8.7G (3) and PERG 2.8.7G (5) will not be available to persons who, when carrying on the activity of managing investments, are MiFID investment firms or third country investment firms(see PERG 2.5.4 G to PERG 2.5.5 G (Investment services and activities)).

01/11/2007

Assisting in the administration and performance of a contract of insurance

PERG 2.8.7A

Assisting in the administration and performance of a contract of insurance is excluded under article 39B where it is carried on by a person acting in the capacity of:

(1) an expert appraiser; or

(2) a loss adjuster acting for a relevant insurer; or

(3) a claims manager acting for a relevant insurer.

The term 'relevant insurer' is defined in article 39B(2).

01/07/2005

PERG 2.8.7B

The following exclusions from assisting in the administration and performance of a contract of insurance also apply to a person in specified circumstances:

(1) while acting as trustee or personal representative (see PERG 2.9.3 G); or

(2) in connection with the carrying on of a profession or of a business not otherwise consisting of regulated activities (see PERG 2.9.5 G); or

(3) as an incoming ECA provider (see PERG 2.9.18 G); or

(4) as a provider of non-motor goods or services related to travel (see PERG 2.9.19 G); or

(5) that involve the provision, on an incidental basis, of information to policyholders or potential policyholders about contracts of insurance (see PERG 2.9.19G (2)); or

(6) that involve a contract of insurance covering large risks situated outside the EEA (see PERG 2.9.19 G).

(9) while acting as an insolvency practitioner (see PERG 2.9.25 G).

01/07/2005

Safeguarding and administering investments

PERG 2.8.8

The exclusions from the regulated activity of safeguarding and administering investments are as follows.

(1) Safeguarding and administration activities carried on by one person are excluded if a specified third party undertakes a responsibility for the assets which is no less onerous than it would have been if he were doing the safeguarding and administration himself. The effect of this is that an authorised person with permission to carry on this regulated activity (or in certain circumstances an exempt person) can delegate all or part of the activities without the delegate needing to be authorised and without loss of protection to the owner of the assets.

(2) Introductions to an authorised person, or to an exempt person acting within the scope of his exemption and in the course of a business, are excluded from that aspect of this regulated activity which consists of arranging safeguarding and administration of assets by another person (see PERG 2.7.9 G).

(2A) Trustees are excluded from arranging for another person to safeguard and administer assets where that other person is either:

(a) an authorised person who has permission to safeguard and administer investments; or

(b) an exempt person whose exemption permits him to safeguard and administer investments; or

(3) Certain specified activities (such as currency conversion and document handling) are excluded from being the administration of investments. A person who safeguards and administers assets will not be carrying on regulated activities if these are the only administration activities in which he engages. This is because a person must be carrying on both the activity of safeguarding and that of administration, or be arranging for both to be carried on by another, before he requires authorisation (see PERG 2.7.9 G).

(4) The following exclusions apply in specified circumstances where a person safeguards and administers assets (or arranges for another to do so):

(a) while acting as trustee or personal representative (see PERG 2.9.3 G);

(b) in connection with the carrying on of a profession or of a business not otherwise consisting of regulated activities (see PERG 2.9.5 G);

(d) which belong to a group member or participator in a joint enterprise (see PERG 2.9.9 G);

(e) in connection with an employee share scheme (see PERG 2.9.13 G);

(f) as an incoming ECA provider (see PERG 2.9.18 G);

(g) that are contracts of insurance and, in so doing, provides information to policyholders or potential policyholders on an incidental basis in the course of his carrying on a business or profession not otherwise consisting of regulated activities (see PERG 2.9.19G (2)); and

(h) belonging to the participants in a business angel-led enterprise capital fund, but only where such safeguarding and administration is carried on by a body corporate as specified in article 72E(7) of the Regulated Activities Order.

(j)

06/10/2006

Sending dematerialised instructions

PERG 2.8.9

Exclusions from the regulated activity of sending dematerialised instructions apply in relation to certain types of instructions sent in the operation of the system maintained under the Uncertificated Securities Regulations 2001 (SI 2001/3755). The various exclusions relate to the roles played by participating issuers, settlement banks and network providers (such as Internet service providers) and to instructions sent in connection with takeover offers (as long as specified conditions are met). In addition, the following exclusions (outlined in PERG 2.9) apply in specified circumstances where a person sends dematerialised instructions:

(1) while acting as trustee or personal representative (see PERG 2.9.3 G);

(2) on behalf of a group member (see PERG 2.9.3 G);

(3) as an incoming ECA provider (see PERG 2.9.18 G).

01/07/2005

Establishing etc collective investment schemes

PERG 2.8.10

There are two exclusions from the range of activities specified as being regulated in relation to collective investment schemes. These exclusions relate to incoming ECA providers (see PERG 2.9.18 G) and to business angel-led enterprise capital funds (see PERG 2.9.20 G). In other cases, the key issue is whether or not what is being done relates to something that is a collective investment scheme. Exclusions exist in relation to that issue (see PERG 2.6.18 G).

01/10/2005

Establishing etc pension schemes

PERG 2.8.11

The only exclusion from the range of activities specified as being regulated in relation to stakeholder pension schemesand personal pension schemes relates to incoming ECA providers (see PERG 2.9.18 G).

06/04/2007

Advising on investments

PERG 2.8.12

In certain circumstances, advice that takes the form of a regularly updated news or information service and advice which is given in one of a range of different media (for example, newspaper or television) is excluded from the regulated activities of:

(1) advising on investments;

(2) advising on regulated mortgage contracts;

(3) advising on a home reversion plan; and

(4) advising on a home purchase plan .

See PERG 7 (Periodical publications: news services and broadcasts: applications for certification) for further guidance on this exclusion.

06/04/2007

PERG 2.8.12A

Advice given by an unauthorised person in relation to a home finance transaction in the circumstances referred to in PERG 2.8.6AG (5)(a) or (b) (Arranging deals in investments and arranging a home finance transaction) is also excluded. In addition:

(1) the following exclusions apply in specified circumstances where a person is advising on investments or advising on a home finance transaction:

(a) while acting as trustee or personal representative (see PERG 2.9.3 G);

(b) in connection with the carrying on of a profession or of a business not otherwise consisting of regulated activities (see PERG 2.9.5 G); and

(2) the following exclusions apply in specified circumstances where a person is advising on investments:

(a) in connection with the sale of goods or supply of services (see PERG 2.9.7 G);

(b) to a group member or participator in a joint enterprise (see PERG 2.9.9 G);

(d) as an overseas person (see PERG 2.9.15 G);

(e) that are limited to certain covering risks to non-motor goods or related to travel (see );

(f) that are covering large risks situated outside the (see )

(g) to be made by or on behalf of the participants of a business angel-led enterprise capital fund, when the advice is given to the participants in that fund and that person is a as specified in article 72E(7) of the .

More detailed on certain of these exclusions is in PERG 4 (Regulated activities connected with mortgages), PERG 5 (Insurance mediation activities) and PERG 14.3 and PERG 14.4 (Guidance on home reversion and home purchase activities).

06/04/2007

PERG 2.8.12B

The exclusions referred to in PERG 2.8.12AG (1)(b) and (2)(a), (b), (c) and (g) will not be available to persons who, when carrying on the activity of advising on investments are MiFID investment firms or third country investment firms (see PERG 2.5.4 G to PERG 2.5.5 G (Investment services and activities)).

01/11/2007

Lloyd's activities

PERG 2.8.13

Electronic commerce activities provided by an incoming ECA provider are excluded from the regulated activities that relate expressly to business carried on at Lloyds (see PERG 2.9.18 G). Otherwise the only exclusions that apply concern the regulated activity of arranging deals in its application to business carried on at Lloyd's.

01/07/2005

Entering funeral plan contracts

PERG 2.8.14

Entering as provider into a funeral plan contract is not treated as a regulated activity where:

(1) the contract is one under which the sums received from the customer will be applied towards a contract of insurance on the life of the person whose funeral is to be provided or be held on trust for the purpose of providing a funeral; in each case certain specified conditions must be met for the exclusion to apply; or

(2) the customer and the provider intend or expect that the funeral will be provided within one month of the contract being entered into; or

(3) it is provided as an electronic commerce activity by an incoming ECA provider (see PERG 2.9.18 G).

01/07/2005

Administering regulated mortgage contracts

PERG 2.8.14A

Exclusions from the regulated activities that involve administering a home finance transaction are provided where an unauthorised person:

(1) arranges for administration by an authorised person who has permission for carrying on that regulated activity;

(2) carries out the administration for up to one month after an arrangement of the kind mentioned in (1) comes to an end; or

(3) carries out the administration under an agreement with an authorised person who has permission for carrying on that regulated activity.

These exclusions are subject to certain conditions and are explained in greater detail in PERG 4.8 (Administering a regulated mortgage contract) and PERG 14.3 and PERG 14.4 (Guidance on home reversion and home purchase activities).

06/04/2007

PERG 2.8.14B

The following exclusions apply in specified circumstances where a person is administering a home finance plan:

(1) while acting as trustee or personal representative (see PERG 2.9.3 G);

(2) in connection with the carrying on of a profession or of a business not otherwise consisting of regulated activities (see PERG 2.9.5 G); and

(3) as an incoming ECA provider (see PERG 2.9.18 G).

(4)

06/04/2007

Agreeing

PERG 2.8.15

A person who agrees to carry on certain other regulated activities (which is itself a regulated activity see PERG 2.7.21 G) does not require authorisation where the person concerned is an overseas person and the agreement is reached as a result of a legitimate approach (see PERG 2.9.12 G). For this exclusion to apply, the agreement must be one to arrange deals, manage investments, assist in the administration and performance of a contract of insurance, safeguard and administer investments or send dematerialised instructions. The provision of electronic commerce activities by an incoming ECA provider is also excluded from the regulated activity of agreeing to carry on certain other regulated activities (see PERG 2.7.21 G). But this is not the case where the agreement relates to the regulated activity of effecting or carrying out contracts of insurance falling under the Insurance Directives (see PERG 2.8.3 G). This is still a regulated activity when provided as an electronic commerce activity.

01/07/2005

PERG 2.8.16

To the extent that an exclusion applies in relation to a regulated activity, then 'agreeing' to carry on an activity falling within the exclusion will not be a regulated activity. This is the effect of article 4(3) of the Regulated Activities Order.

01/07/2005

PERG 2.9

Regulated activities: exclusions applicable in certain circumstances

01/07/2005

PERG 2.9.1

The various exclusions outlined below deal with a range of different circumstances.

(1) Each set of circumstances described in PERG 2.9.3 G to PERG 2.9.17 G has some application to several regulated activities relating to securities, relevant investments or home finance transactions. They have no effect in relation to the separate regulated activities of accepting deposits, issuing e-money, effecting or carrying out contracts of insurance, advising on syndicate participation at Lloyd's, managing the underwriting capacity of a Lloyd's syndicate as a managing agent at Lloyd's or entering as provider into a funeral plan contract. Within each set of circumstances, the Regulated Activities Order, in Chapter XVII of Part II of the Order, makes separate provision for each regulated activity affected. This is necessary because each exclusion has to be tailored to reflect the different nature of the regulated activity involved and the different language required (for example, some activities involve entering directly into transactions while others relate to the provision of services).

(2) The exclusion described in PERG 2.9.18 G relates to electronic commerce activities provided by an incoming ECA provider. This exclusion applies to all regulated activities except effecting or carrying out contracts of insurance.

06/04/2007

PERG 2.9.2

The exclusions grouped together in the Regulated Activities Order are described below in this chapter in general terms. The exact terms of each exclusion will need to be considered by any person who is considering whether they need authorisation. Each description is accompanied by an indication of which regulated activities are affected.

01/07/2005

Trustees, nominees or personal representatives

PERG 2.9.3

This group of exclusions applies, in specified circumstances, to the regulated activities of:

(1) dealing in investments as principal;

(2) arranging (bringing about) deals in investments and making arrangements with a view to transactions in investments ;

(2A) arranging a home finance transaction;

(3) managing investments;

(4) assisting in the administration and performance of a contract of insurance;

(5) safeguarding and administering investments;

(6) sending dematerialised instructions;

(7) advising on investments or advising on a home finance transaction;

(8) entering into a home finance transaction; and

(9) administering a home finance transaction.

06/04/2007

PERG 2.9.4

A person carrying on certain regulated activities does not require authorisation in specified circumstances if he is acting in a representative capacity. The representative capacities covered by the exclusions depend on the regulated activity concerned but, in most cases, the focus is on persons who are acting as trustee or personal representative. In broad terms, the exclusions apply to specified transactions, or activities, that are part of the discharge of his general obligations by the trustee or representative when he is acting as such. Many of the exclusions require that the trustee or representative must not hold himself out as providing services consisting of the regulated activity in question. In addition, he must not receive remuneration that is additional to any he receives for acting in the representative capacity (although a person is not to be regarded as receiving additional remuneration merely because his remuneration as trustee or representative is calculated by reference to time spent). The exclusions for entering into a home finance transaction and for administering a home finance transaction, however, work on a different basis. They apply where the activity relates to a home finance transaction under which the borrower, reversion occupier or home purchaser as the case may be is a beneficiary.

06/04/2007

Professions or business not involving regulated activities

PERG 2.9.5

This group of exclusions applies, in specified circumstances, to the regulated activities of:

(1) dealing in investments as agent;

(2) arranging (bringing about) deals in investments, and making arrangements with a view to transactions in investments ;

(2A) arranging a home finance transaction;

(3) assisting in the administration and performance of a contract of insurance;

(4) safeguarding and administering investments; and

(5) advising on investments or advising on a home finance transaction.

The exclusion is, however, disapplied where a person is carrying on insurance mediation or reinsurance mediation. This is due to article 4(4A) of the Regulated Activities Order. Guidance on exclusions relevant to insurance mediation activities is in PERG 5 (Insurance mediation activities). The exclusion is also disapplied for persons who, when carrying on the relevant regulated activity, are MiFID investment firms or third country investment firms (see PERG 2.5.4 G to PERG 2.5.5 G (Investment services and activities)).

01/11/2007

PERG 2.9.6

The exclusions apply where the regulated activity is carried out in the course of a profession or business which does not otherwise consist of the carrying on of regulated activities in the United Kingdom. However, activities are only excluded to the extent that they may reasonably be regarded as a necessary part of the other services provided in the course of the profession or business. The exclusion does not apply if separate remuneration is received in respect of any regulated activity that is carried on. (See separate guidance for authorised professional firms in PROF.)

01/07/2005

Sale of goods and supply of services

PERG 2.9.7

This group of exclusions applies, in specified circumstances, to the regulated activities of:

(1) dealing in investments as principal;

(2) dealing in investments as agent;

(3) arranging (bringing about) deals in investments and making arrangements with a view to transactions in investments;

(4) managing investments;

(5) safeguarding and administering investments; and

(6) advising on investments.

01/07/2005

PERG 2.9.8

Broadly speaking, the exclusions focus on cases where the main business of a person is to sell goods or supply services but where certain activities may have to be carried on for the purposes of that business which would otherwise be regulated activities. The exclusions are not available where the customer to whom goods are sold or services are supplied is an individual. They are also not available where what is at issue is a transaction entered into, or service provided, in relation to rights under a contract of insurance or units in a collective investment scheme (or rights to, or interests in, either). The exclusions are also disapplied for persons who, when carrying on the relevant regulated activity, are MiFID investment firms or third country investment firms(see PERG 2.5.4 G to PERG 2.5.5 G (Investment services and activities)).

01/11/2007

Group and joint enterprises

PERG 2.9.9

This group of exclusions applies, in specified circumstances, to the regulated activities of:

(1) dealing in investments as principal;

(2) dealing in investments as agent;

(3) arranging (bringing about) deals in investments and making arrangements with a view to transactions in investments;

(4) managing investments;

(5) safeguarding and administering investments;

(6) sending dematerialised instructions; and

(7) advising on investments.

01/07/2005

PERG 2.9.10

These exclusions apply to intra-group dealings and activities and to dealings or activities involving participators in a joint enterprise which take place for the purposes of, or in connection with, the enterprise. The general principle here is that, as long as activities that would otherwise be regulated activities take place wholly within a group of companies, then there is no need for authorisation. The same principle applies to dealings or activities that take place wholly within a joint enterprise entered into for commercial purposes related to the participators' unregulated business. The exclusions in PERG 2.9.9G (2), (3), (4) and (7) are disapplied where they concern a contract of insurance. Guidance on exclusions relevant to insurance mediation activities is in PERG 5 (Insurance mediation activities). The exclusions are also disapplied for persons who, when carrying on the relevant regulated activity, are MiFID investment firms or third country investment firms (see PERG 2.5.4 G to PERG 2.5.5 G (Investment services and activities)).

01/11/2007

Sale of body corporate

PERG 2.9.11

This group of exclusions applies, in specified circumstances, to the regulated activities of:

(1) dealing in investments as principal;

(2) dealing in investments as agent;

(3) arranging (bringing about) deals in investments and making arrangements with a view to transactions in investments; and

(4) advising on investments.

01/07/2005

PERG 2.9.12

The exclusions apply in relation to transactions to buy or sell shares in a body corporate where, in broad terms:

(1) the transaction involves the acquisition or disposal of a least 50 per cent of the voting shares in the body corporate and is, or is to be, between certain specified kinds of person; or

(2) the object of the transaction may otherwise reasonably be regarded as being the acquisition of day-to-day control of the affairs of the body corporate.

These exclusions also apply to transactions that are entered into for the purposes of the above transactions (such as transactions involving the offer of securities in the offeror as consideration or part consideration for the sale of the shares in the body corporate). These exclusions do not have effect in relation to shares in an open-ended investment company. The exclusions in PERG 2.9.11G (2), (3) and (4) are disapplied where they concern a contract of insurance. Guidance on exclusions relevant to insurance mediation activities is in PERG 5 (Guidance on insurance mediation activities). The exclusions are also disapplied for persons who, when carrying on the relevant regulated activity, are MiFID investment firms or third country investment firms (see PERG 2.5.4 G to PERG 2.5.5 G (Investment services and activities)).

01/11/2007

PERG 2.9.12A

The Treasury, in its consultative document Financial Services and Markets Act two year review: Changes to secondary legislation - Proposals for change, February 2004 proposed changes to these exclusions aimed primarily at limiting their scope in relation to the objective test referred to in PERG 2.9.12G (2). In its response to the comments received during the consultation, the Treasury announced, in its document Financial Services and Markets Act two year review: Changes to secondary legislation Government response, November 2004, that it intends to make certain changes to the exclusions in due course.

01/10/2005

Employee share schemes

PERG 2.9.13

This group of exclusions applies, in specified circumstance, to the regulated activities of:

(1) dealing in investments as principal;

(2) dealing in investments as agent;

(3) arranging (bringing about) deals in investments and making arrangements with a view to transactions in investments;

(4) safeguarding and administering investments.

01/07/2005

PERG 2.9.14

In broad terms, the exclusions apply to activities which further an employee share scheme, or are carried on in operation of such a scheme. They apply to activities carried on by the company whose securities or debentures (which are given an extended meaning for this exclusion) are the subject of the scheme. They also apply to activities of any company in the same group or of any trustee who holds certain types of securities or debentures under the scheme. They do not apply to the activities of a person who is neither such a company nor such a trustee (for example, a third party administration service provider).

01/11/2007

Overseas persons

PERG 2.9.15

This group of exclusions applies, in specified circumstances, to the regulated activities of:

(1) dealing in investments as principal;

(2) dealing in investments as agent;

(3) arranging (bringing about) deals in investments and making arrangements with a view to transactions in investments ;

(3A) arranging a home finance transaction;

(3B) operating a multilateral trading facility;

(4) advising on investments;

(5) entering into a home finance transaction;

(6) administering a home finance transaction; and

(7) agreeing to carry on the regulated activities of managing investments, arranging (bringing about) deals in investments, making arrangements with a view to transactions in investments, assisting in the performance and administration of a contract of insurance, safeguarding and administering investments or sending dematerialised instructions.

01/11/2007

PERG 2.9.16

An overseas person is defined as a person who carries on what would be regulated activities (including any activity that would otherwise be excluded from being a regulated activity by virtue of the exclusions for overseas persons referred to in PERG 2.9.15 G) but who does not do so, or offer to do so, from a permanent place of business maintained by him in the United Kingdom. Where a person does not have a permanent place of business in the United Kingdom, he will not, in any event, need to rely on these exclusions unless what he does is regarded as carried on in the United Kingdom (see PERG 2.4). Nor will a person be able to rely on the exclusions in PERG 2.9.15G (1) to (4) if when carrying on the relevant regulated activity it is a MiFID investment firm and its Home State is the United Kingdom.

01/11/2007

PERG 2.9.17

The exclusions are available, for regulated activities other than those that relate to home finance transactions in the two broad cases set out below. For some of these regulated activities, the exclusions apply in each case. In others, they apply in only one.

(1) The first case is where the nature of the regulated activity requires the direct involvement of another person and that person is authorised or exempt (and acting within the scope of his exemption). For example, this might occur where the person with whom an overseas person deals is an authorised person or where the arrangements he makes are for transactions to be entered into by such a person.

(2) The second case is where a particular regulated activity is carried on as a result of what is termed a 'legitimate approach'. An approach to an overseas person that has not been solicited by him in any way, or has been solicited in a way that does not contravene the restrictions on financial promotion in section 21 of the Act, is a legitimate approach. An approach that is made by him in a way that does not contravene section 21 of the Act is also a legitimate approach. In such circumstances, the overseas person can, without requiring authorisation, enter into deals with (or on behalf of) a person in the United Kingdom, give advice in the United Kingdom or enter into agreements in the United Kingdom to carry on certain regulated activities. The exemptions to the financial promotion restrictions made by the Treasury under section 21 of the Act (Restrictions on financial promotion) will be relevant to the question of whether those restrictions have been contravened (see separate guidance on financial promotion in PERG 8 (Financial promotion and related activities)).

06/04/2007

PERG 2.9.17A

The exclusions for overseas persons who carry on certain regulated activities related to home finance transactions work in a different way. They depend on the residency of the borrower or borrowers, the reversion occupier or reversion occupiers or the home purchaser or home purchasersas the case may be. In addition, some of the exclusions also depend on the residency of the reversion provider. Guidance on these exclusions is in PERG 4.11 (Link between activities and the United Kingdom) and PERG 14.6 (Guidance on home reversion and home purchase activities).

06/04/2007

Incoming ECA providers

PERG 2.9.18

(1) In accordance with article 3(2) of the E-Commerce Directive, all requirements on persons providing electronic commerce activities into the United Kingdom from the EEA are lifted, where these fall within the co-ordinated field and would restrict the freedom of such a firm to provide services. The coordinated field includes any requirement of a general or specific nature concerning the taking up or pursuit of electronic commerce activities. Authorisation requirements fall within the coordinated field. The services affected are generally those provided electronically, for example through the Internet or solicited e-mail.

(2) The Regulated Activities Order was amended by the Financial Services and Markets Act 2000 (Regulated Activities) (Amendment) (Electronic Commerce Directive) Order 2002 (SI 2002/2157). This Order creates a general exclusion from regulated activities (except for the regulated activities of effecting or carrying out contracts of insurance). Where activities consist of electronic commerce activities, an incoming ECA provider will not require authorisation for such activities in the United Kingdom. This does not extend to the regulated activity of effecting or carrying out contracts of insurance falling under the Insurance Directives (see PERG 2.8.3 G). However, services provided off-line in the United Kingdom (that is, other than as an electronic commerce activity) by such a firm which amount to regulated activities still require authorisation.

(3) Incoming ECA providers should note that notification requirements under the Single Market Directives still apply (see SUP 13A).

01/11/2007

Insurance mediation activities

PERG 2.9.19

The exclusions in this group apply to certain regulated activities involving certain contracts of insurance. The exclusions and the regulated activities to which they apply are as follows.

(1) The first exclusion of this kind relates to certain activities carried on by a provider of non-motor goods or services related to travel in connection with general insurance contracts only. The contracts must be for five years duration or less and have an annual premium of no more than 500. The contract must cover breakdown or loss of or damage to non-motor goods supplied by the provider or loss of or damage to baggage and other risks linked to certain travel services booked with the provider. The travel services must be the hire of an aircraft, vehicle or vessel which does not provide sleeping accommodation, or must relate to attendance at an event organised or managed by the provider. Where the travel services relate to an event, the exclusion does not apply if the party seeking insurance is an individual (acting in his private capacity) or a small business. A small business is a sole trader, body corporate, partnership or unincorporated association which had a turnover in the last financial year of less than 1,000,000 (but where it is a member of a group, the combined turnover of the group is used). Turnover means the amounts derived from the provision of goods and services falling within the businesss ordinary activities, after deduction of trade discounts, value added tax and any other taxes based on those amounts. There must not be any liability risk cover other than where this is ancillary to the main risk covered in a travel policy. The insurance must be complementary to the goods or services being supplied by the provider in the course of his carrying on a business or profession not otherwise consisting of regulated activities, and the policy must be in standard form. This exclusion applies where the regulated activities concerned are:

(a) dealing in investments as agent;

(b) arranging (bringing about) deals in investments and making arrangements with a view to transactions in investments;

(d) advising on investments.

(2) The second exclusion applies where information is provided to a policyholder by a person on an incidental basis in the course of that person's profession or business that does not otherwise consist of regulated activities. This exclusion applies where the regulated activities are:

(a) arranging (bringing about) deals in investments and making arrangements with a view to transactions in investments;

(b) managing investments;

(d) safeguarding and administering investments;

(3) The third exclusion applies to certain general insurance contracts covering large risks where the risk is situated outside the EEA. This exclusion applies where the regulated activities concerned are:

(a) dealing in investments as agent;

(b) arranging (bringing about) deals in investments and making arrangements with a view to transactions in investments;

(d) advising on investments.

Guidance on these and other exclusions relevant to insurance mediation activities is in PERG 5 (Insurance mediation activities).

01/01/2009

Business angel-led enterprise capital funds

PERG 2.9.20

This group of exclusions applies, in specified circumstances, to the regulated activities of:

(1) dealing in investments as agent;

(2) arranging (bringing about) deals in investments and making arrangements with a view to transactions in investments;

(3) managing investments;

(4) safeguarding and administering investments;

(5) establishing, operating or winding up a collective investment scheme; and

(6) advising on investments.

01/10/2005

PERG 2.9.21

The exclusions apply, in general terms:

(1) to a body corporate with limited liability:

(a) that is formed in accordance with the law of, and having its registered office, central administration or principal place of business in, an EEA State;

(b) that operates a business angel-led enterprise capital fund, being a fund that invests only in securities of unlisted companies and whose participants are made up solely of persons of a specified kind; and

01/10/2005

PERG 2.9.21A

The exclusions for business angel-led enterprise capital funds are also disapplied for persons who, when carrying on the relevant regulated activity, are MiFID investment firms or third country investment firms (see PERG 2.5.4 G (Investment services and activities)).

01/11/2007

PERG 2.10

Persons carrying on regulated activities who do not need authorisation

01/07/2005

PERG 2.10.1

There are various provisions that disapply the general prohibition from specific persons in relation to the carrying on by them of particular regulated activities. There is, however, no general provision for persons to apply for an exemption.

01/07/2005

PERG 2.10.2

Persons may be exempted from the general prohibition in relation to one or more particular regulated activities. The extent of any exemption may also be limited to specified circumstances (such as where another person who is authorised and has relevant permission has accepted responsibility for the regulated activities in question) or subject to specified conditions (such as a requirement that the activity is not carried on for pecuniary gain).

01/07/2005

PERG 2.10.3

The Act provides that appointed representatives (see PERG 2.10.5 G), recognised investment exchanges and recognised clearing houses (see PERG 2.10.6 G) and certain other persons exempt under miscellaneous provisions (see PERG 2.10.7 G) are exempt persons. Members of Lloyds and members of the professions are not 'exempt persons' as such, but the general prohibition in section 19 of the Act only applies to them in certain circumstances. The distinction is significant in relation to various provisions (such as those in the Regulated Activities Order) that apply only to transactions and other activities that involve exempt persons.

01/07/2005

PERG 2.10.4

Appointed representatives and the persons exempt under miscellaneous provisions cannot be exempt in relation to some regulated activities and authorised in relation to others. If a person is already authorised, and proposes to carry on additional regulated activities in respect of which he would otherwise be exempt as an appointed representative or under miscellaneous provisions, he must seek an extension to his existing permission to cover those additional activities. A person in either of these categories who would otherwise be exempt in relation to particular activities will, if he becomes authorised, no longer be able to rely on the exemption.

01/07/2005

Appointed representatives

PERG 2.10.5

A person is exempt if he is an appointed representative of an authorised person. See SUP 12 (Appointed representatives). But where an appointed representative carries on insurance mediation or reinsurance mediation he will not be exempt unless he is included on the register kept by the FSA under article 93 of the Regulated Activities Order (Duty to maintain a record of unauthorised persons carrying on insurance mediation activities) (see PERG 5.13 (Appointed representatives)).

01/07/2005

Recognised Investment Exchanges and Recognised Clearing Houses

PERG 2.10.6

Investment exchanges and clearing houses can apply for recognition under Part XVIII of the Act (Recognised investment exchanges and clearing houses.) See REC.

01/07/2005

Particular exempt persons

PERG 2.10.7

Various named persons are exempted by Order made by the Treasury under section 38 of the Act from the need to obtain authorisation (the Exemption Order). Some of the exemptions are subject to restrictions as to the circumstances in which they apply. For example, a person is only exempt when acting in a particular capacity or for particular purposes.

01/07/2005

PERG 2.10.8

The exemptions apply so as to confer exemption on persons from the general prohibition in respect of four distinct categories of regulated activities.

(1) The first category is carrying on any regulated activity, apart from effecting or carrying out contracts of insurance (or agreeing to do so). Exempt persons here are generally supranational bodies of which the United Kingdom or another EEA State is a member.

(2) The second category is the regulated activity of accepting deposits. Exempt persons here include municipal banks, local authorities, charities and industrial and provident societies.

(3) The third category is carrying on any of those regulated activities relating to securities or relevant investments or to 'any property' (or agreeing to do so). Exempt persons here include persons whose activities are subject to a certain degree of control or oversight by the Government.

(4) The fourth category is carrying on one or more specified regulated activities (or agreeing to do so). Exempt persons here cover a range of different persons.

01/07/2005

Members of Lloyd's

PERG 2.10.9

Several activities carried on in connection with business at Lloyds are regulated activities in respect of which authorisation must be obtained. These include the regulated activities of advising on syndicate participation at Lloyd's or managing the underwriting capacity of Lloyd's syndicate as a managing agent at Lloyd's or arranging (bringing about) deals in investments or making arrangements with a view to transactions in investments for another in relation to such participation or underwriting capacity.

01/07/2005

PERG 2.10.10

But under section 316 of the Act (Direction by the FSA) the general prohibition does not apply to a person who is a member of the Society of Lloyds unless the FSA has made a direction that it should apply. The general prohibition is disapplied in relation to any regulated activity carried on by a member relating to contracts of insurance written at Lloyds. Directions can be made by the FSA in relation to individual members or the members of the Society of Lloyds taken together. Alternatively, instead of being required to obtain authorisation, a member of the Society of Lloyd's may, as a result of a direction under section 316 of the Act, become subject to specific provisions of the Act even though he is not an authorised person.

01/07/2005

PERG 2.10.11

A person who ceased to be an underwriting member at any time on or after 24 December 1996 may, without authorisation, carry out contracts of insurance he has underwritten at Lloyds. But this is subject to any requirements or rules that the FSA may impose under sections 320 to 322 of the Act (Former underwriting members).

01/07/2005

Members of the professions

PERG 2.10.12

The general prohibition does not in certain circumstances apply to a person providing professional services that are supervised and regulated by a professional body designated by the Treasury under section 326 of the Act (Designation of professional bodies) (see PROF). Certain of the exclusions from regulated activities outlined in PERG 2.8 and PERG 2.9 will be relevant to members of designated professional bodies. The regime outlined below applies only where no exclusion applies and a person will be carrying on a regulated activity.

01/07/2005

PERG 2.10.13

Such a person may carry on regulated activities if the conditions outlined below are met, that is the person:

(1) is not affected by an order or direction made by the FSA under section 328 or 329 of the Act (Directions and orders in relation to the general prohibition) which has the effect of re-imposing the general prohibition in any particular case;

(2) is, or is controlled by, a member of a profession;

(3) does not receive any pecuniary reward or other advantage from the regulated activities which is given to him by any person other than his client (or if he does, he must account to his client for it);

(4) provides any service in the course of carrying on the regulated activities in a manner which is incidental to the provision of professional services;

(5) carries on only those regulated activities which are permitted by the rules of the professional body or in respect of which they are an exempt person; and

(6) Is not an authorised person.

01/07/2005

PERG 2.10.14

The regulated activities that may be carried on in this way are restricted by an Order made by the Treasury under section 327(6) of the Act (Exemption from the general prohibition) (the Non-Exempt Activities Order). Accordingly, under that section, a person may not by way of business carry on any of the following activities without authorisation:

(1) accepting deposits;

(2) effecting or carrying out contracts of insurance;

(3) dealing in investments as principal;

(4) establishing, operating or winding up a collective investment scheme;

(5) establishing, operating or winding up a stakeholder pension scheme or a personal pension scheme;

(6) managing the underwriting capacity of a Lloyd's syndicate as a managing agent at Lloyd's;

(7) entering as provider into funeral plan contracts;

(8) agreeing to do certain of the above activities.

06/04/2007

PERG 2.10.15

In addition, there are restrictions on carrying on (or agreeing to carry on) certain other regulated activities. These relate to managing investments, advising on investments, advising on a home finance transaction, advising on syndicate participation at Lloyd's , entering into a home finance transaction or administering a home finance transaction.

06/04/2007

PERG 2.10.16

A person carrying on regulated activities under the regime for members of the professions will be subject to rules made by the professional body designated by the Treasury. Such bodies are obliged to make rules governing the carrying on by their members of those regulated activities that they are able to carry on without authorisation under the Act. Where such a person is carrying on insurance mediation or reinsurance mediation, he must also be included on the register kept by the FSA under article 93 of the Regulated Activities Order (Duty to maintain a record of unauthorised persons carrying on insurance mediation activities) (see PERG 5.10 (Exemptions)).

01/07/2005

PERG 2.11

What to do now ?

01/07/2005

PERG 2.11.1

Any person who concludes or is advised that he will need to make an application for Part IV permission should look at PERG 2 Annex 2 G to determine the categories of specified investment and regulated activities that are relevant to the next step and should then refer to the FSA website How do I get authorised: http://www.fsa.gov.uk/Pages/Doing/how/index.shtmlfor details of the application process.

06/10/2007

PERG 2.11.2

As part of its application for Part IV permission, an applicant may wish to apply for certain limitations (details of which are given in the application pack).

01/11/2007

PERG 2.11.3

An example of limitations which may be applied for or imposed include a limit on the types of client that a firm may deal with including:

(1) retail (investment);

(2) professional;

(3) eligible counterparty;

These limitations correspond to the Glossary terms retail client, professional client and eligible counterparty.

01/11/2007

PERG 2 Annex 1

Authorisation and regulated activities

01/07/2005

PERG 2 Annex 1

Do you need authorisation?

01/07/2005

PERG 2 Annex 2

Regulated activities and the permission regime

01/07/2005

1 Table

1.1 G

Table 1 is designed to relate the permission regime to regulated activities. Section 42(6)of the Act gives the FSA the power to describe the regulated activity or regulated activities for which it gives permission in such manner as the FSA considers appropriate. Table 1 details how the FSA has chosen to describe the regulated activities and specified investments for the purposes of the permission regime.

1.2 G

In an application for Part IV permission , an applicant will need to state the regulated activities it requires permission to carry on. This will involve an applicant identifying the regulated activities and the specified investments associated with those activities for which it requires Part IV permission.

1.3 G

Part II of the Regulated Activities Order (Specified activities) specifies the activities for the purposes of section 22 of the Act. This section states that an activity is a regulated activity if it is an activity of a specified kind which is carried on by way of business and:

(1)

relates to an investment of a specified kind; or

(2)

in the case of an activity specified for the purposes of section 22(1)(b) of the Act, is carried on in relation to property of any kind.

Part III of the Regulated Activities Order (Specified investments) specifies the investments referred to in (1).

1.4 G

Column 1 of Table 1 lists the regulated activities and column 2 lists the associated specified investments. Descriptions of some categories of specified investments are expanded in Tables 2 and 3. There are notes to all three tables which provide further explanation where appropriate.

1.5 G

A reference to an article in the tables in PERG 2 Annex 2 G is to the relevant article in the Regulated Activities Order.

2 Table

Table 1: Regulated Activities [See note 1 to Table 1]

Regulated activity

Specified investment in relation to which the regulated activity (in the corresponding section of column one) may be carried on

Accepting deposits

(a) accepting deposits (article 5)

deposit (article 74)

Issuing electronic money

(aa) issuing electronic money (article 9B)

electronic money (article 74A)

Activities of a dormant account fund operator

(ab) the meeting of repayment claims and managing dormant account funds (including the investment of such funds) (article 63N)

See Note 8 to Table 1

Insurance business

(b) effecting contracts of insurance (article 10(1))
(c) carrying out contracts of insurance (article 10(2))

contract of insurance (article 75) [expanded in Table 2]

Designated investment business [see notes 1A and 1B to Table 1]

(d) dealing in investments as principal (article 14) [see note 2 to Table 1]
(e) dealing in investments as agent (article 21) [see notes 1B and 2 to Table 1]
(f) arranging (bringing about) deals in investments (article 25(1)) [see note 1B to Table 1] [also see Sections of Table 1 headed 'The Lloyd's market' and 'Regulated mortgage activity']
(g) making arrangements with a view to transactions in investments (article 25(2)) [ see note 1B to Table 1] [also see Sections of Table 1 headed 'The Lloyd's market' and 'Regulated mortgage activity']

(in relation to (d) to (g) and (h) to(l)) security [expanded in Table 3]; or
contractually based investment [expanded in Table 3].
(in relation to (e) to (g) and (j) only) a long-term care insurance contract which is a pure protection contract.

(ga) operating a multilateral trading facility (article 25D) [see note 2A]

securities or contractually based investments which are financial instruments (see PERG 13 Annex 2 G Table 2 and note 2A to Table 1]).

(h) managing investments (article 37) [see note 3 to Table 1]

(i) safeguarding and administering investments (article 40) [see note 3 Table 1]
For the purposes of the permission regime, this regulated activity is subdivided into:

(i)safeguarding and administration of assets (without arranging); and(ii)arranging safeguarding and administration of assets.

(j) advising on investments (article 53) [see note 1B to Table 1] [also see Section of Table 1 headed 'Regulated mortgage activity']
For the purposes of the permission regime, this regulated activity:

(i)does not apply to advice given in the course of carrying on the regulated activity of providing basic advice on a stakeholder product; and(ii)is subdivided into:(A)advising on investments (except pension transfers and pension opt- outs); and(B)advising on pension transfers and pension opt-outs [see note 4 to Table 1]

(k) sending dematerialised instructions (article 45(1))
(l) causing dematerialised instructions to be sent (article 45(2))

(m) establishing, operating or winding up a collective investment scheme (article 51)
For the purposes of the permission regime, this regulated activity is subdivided into:

(i)establishing, operating or winding up a regulated collective investment scheme; and(ii)establishing, operating or winding up an unregulated collective investment scheme.

(n) acting as trustee of an authorised unit trust scheme (article 51)
(o) acting as the depositary or sole director of an open-ended investment company (article 51)
(p) establishing, operating or winding up a stakeholder pension scheme (article 52(a))

[see note 5 to Table 1]

(pa) providing basic advice on a stakeholder product (article 52B)
(p-a) establishing, operating or winding up a personal pension scheme (article 52(b))

those specified investments that are also a stakeholder product [see note 7]

Insurance mediation activity [see note 5A to Table 1]

(pb) dealing in investments as agent (article 21)
(pc) arranging (bringing about) deals in investments (article 25(1))
(pd) making arrangements with a view to transactions in investments (article 25(2))
(pe) assisting in the administration and performance of a contract of insurance (article 39A)
(pf) advising on investments (article 53)
For the purpose of the permission regime, this regulated activity is sub-divided into:

(i)advising on investments (except pension transfers or pension opt-outs);(ii)advising on pension transfers or pension opt-outs [See note 5D to Table 1].

life policy [see note 5B to Table 1]
non-investment insurance contract [see note 5C to Table 1]
rights to or interests in investments (article 89) in so far as they relate to a life policy

The Lloyd's market [see note 6 to Table 1]

(q) advising on syndicate participation at Lloyd's (article 56)

membership of a Lloyd's syndicate (article 86(2))

(r) managing the underwriting capacity of a Lloyd's syndicate as a managing agent at Lloyd's (article 57)

underwriting capacity of a Lloyd's syndicate (article 86(1))

(s) arranging (bringing about) deals in investments (article 25(1))
(t) making arrangements with a view to transactions in investments (article 25(2))

underwriting capacity of a Lloyd's syndicate (article 86(1))
membership of a Lloyd's syndicate (article 86(2))
rights to or interests in investments (article 89) in so far as they relate to underwriting capacity of a Lloyd's syndicate or membership of a Lloyd's syndicate

Funeral plan providers

(u) entering as provider into a funeral plan contract (article 59) [see note 1A to Table 1]

funeral plan contract (article 87)

Regulated home finance activity

(v) arranging (bringing about) regulated mortgage contracts (article 25A(1))
(w) making arrangements with a view to regulated mortgage contracts (article 25A(2))
(x) advising on regulated mortgage contracts (article 53A)
(y) entering into a regulated mortgage contract (article 61(1))
(z) administering a regulated mortgage contract (article 61(2))

regulated mortgage contract (article 88)

(za) arranging (bringing about) a home reversion plan (article 25B(1))
(zb) making arrangements with a view to a home reversion plan (article 25B(2))
(zc) advising on a home reversion plan (article 53B)
(zd) entering into a home reversion plan (article 63B(1))
(ze) administering a home reversion plan (article 63B(2))

rights under a home reversion plan (article 88A)

(zf) arranging (bringing about) a home purchase plan (article 25C(1))
(zg) making arrangements with a view to a home purchase plan (article 25C(2))
(zh) advising on a home purchase plan (article 53C)
(zi) entering into a home purchase plan (article 63F(1))
(zj) administering a home purchase plan (article 63F(2))

rights under a home purchase plan (article 88B)

3 Table

Notes to Table 1

Note 1:
In addition to the regulated activities listed in Table 1, article 64 of the Regulated Activities Order specifies that agreeing to carry on a regulated activity is itself a regulated activity in certain cases. This applies in relation to all the regulated activities listed in Table 1 apart from:

•accepting deposits (article 5);•issuing electronic money (article 9B);•effecting and carrying out contracts of insurance (article 10);•operating a multilateral trading facility (article 25D)•establishing, operating or winding up a collective investment scheme (article 51(1)(a));•acting as trustee of an authorised unit trust scheme (article 51(1)(b));•acting as the sole depositary or sole director of an open-ended investment company (article 51(1)(c));•establishing, operating or winding up a stakeholder pension schemeor establishing operating or winding up a personal pension scheme(article 52): and

•the meeting of repayment claims and/or managing dormant account funds (including the investment of such funds) (article 63N).

Permission to carry on the activity of agreeing to carry on a regulated activity will be given automatically by the FSA in relation to those other regulated activities for which an applicant is given permission (other than those activities in articles 5,9B, 10,51 and 52 detailed above).

Note 1A:
Funeral plan contracts are contractually based investments. Accordingly, the following are regulated activities when carried on in relation to a funeral plan contract: (a) arranging (bringing about) deals in investments, (b) making arrangements with a view to transactions in investments, (c) managing investments, (d) safeguarding and administering investments, (e) advising on investments, (f) sending dematerialised instructions and (g) causing dematerialised instructions to be sent (as well as agreeing to carry on each of the activities listed in (a) to (g)). However, they are not designated investment business.

Note 1B:
Life policies are contractually based investments. Where the regulated activities listed as designated investment business in (e) to (g) and (j) are carried on in relation to a life policy, these activities also count as 'insurance mediation activities'. The full list of insurance mediation activities is set out in (pb) to (pf). The regulated activities of agreeing to carry on each of these activities will, if carried on in relation to a life policy, also come within both designated investment business and insurance mediation activities.

Note 2:
For the purposes of the regulated activities of dealing in investments as principal (article 14) and dealing in investments as agent (article 21), the definition ofcontractually based investments [expanded in Table 3] excludes a funeral plan contract (article 87) and rights to or interests in funeral plan contracts.

Note 2A:
PERG 13 Ann 2 Table 2 contains a map indicating which securities and contractually based investments correspond to financial instruments. A firm's permission should comprise each of the categories of security and contractually based investment in relation to which it carries on the activity of operating a multilateral trading facility.

Note 3:
The regulated activities of managing investments (article 37) and safeguarding and administering investments (article 40) may apply in relation to any assets, in particular circumstances, if the assets being managed or safeguarded and administered include, (or may include), any security or contractually based investment.

Note 4:
For the purposes of the permission regime, the activity in (j)(ii) of advising on pension transfers and pension opt-outs is carried on in respect of the following specified investments:

unit (article 81);stakeholder pension scheme (article 82(1));personal pension scheme (article 82(2));life policy (explained in note 5); andrights to or interests in investments in so far as they relate to a unit, a stakeholder pension scheme, a personal pension scheme or a life policy.

Note 5:
Article 4(2) of the Regulated Activities Order specifies the activities (m)to (p) for the purposes of section 22(1)(b) of the Act. That is, these activities will be regulated activities if carried on in relation to any property and are not expressed as relating to a specified investment.

Note 5A:
Where they are carried on in relation to a life policy, the activities listed as insurance mediation activities in (pb) to (pf) (as well as the regulated activity of agreeing to carry on those activities) are also designated investment business.

Note 5B:
In PERG, life policy is the term used in the Handbook to mean 'qualifying contract of insurance' (as defined in article 3(1) of the Regulated Activities Order). For the purpose of the permission regime, the term also includes a long-term care insurance contract which is a pure protection contract and a pension term assurance policy.

Note 5C:
Non-investment insurance contract is the term used in firms permissions to mean pure protection contract or general insurance contract. Pure protection contract is the term used in the Handbook to mean a long-term insurance contract which is not a life policy. General insurance contract is the term used in the Handbook to mean contract of insurance within column 1 of Table 2.

Note 5D:
[deleted]

Note 5E:
For the purposes of the permission regime, the activity in (pf)(ii) of advising on pension transfers and pension opt-outs is carried on in respect of the following specified investments:

life policy (explained in note 5A); andrights to or interests in investments in so far as they relate to a life policy.

Note 6:
Section 315 of the Act (The Society: authorisation and permission) states that the Society of Lloyd's has permission to carry on the regulated activities referred to in that section, one of which is specified in article 58 of the Regulated Activities Order. This permission is unique to the Society of Lloyd's.

Note 7:
A stakeholder product is defined in the Glossary as:

an investment of a kind specified in the Stakeholder Regulations:a stakeholder pension scheme; anda stakeholder CTF.

Note 8:
Article 4(2) of the Regulated Activities Order specifies the activity at (ab) for the purposes of section 22(1)(b) of the Act, that is, these activities will be regulated activities if carried on in relation to any property and are not expressed as related to a specified investment.

4 Table

Table 2: Contracts of insurance

Contract of insurance (article 75 of the RAO)

(a) general insurance contract (Part I of Schedule 1 to the Regulated Activities Order)

(b) long-term insurance contract (Part II of Schedule 1 to the Regulated Activities Order )

Number

Accident (paragraph 1)

life and annuity (paragraph I)

Sickness (paragraph 2)

marriage or the formation of a civil partnership and birth (paragraph II)

Land vehicles (paragraph 3)

linked long-term (paragraph III)

Railway rolling stock (paragraph 4)

permanent health (paragraph IV)

Aircraft (paragraph 5)

tontines (paragraph V)

Ships (paragraph 6)

capital redemption (paragraph VI)

Goods in transit (paragraph 7)

pension fund management (paragraph VII)

fire and natural forces (paragraph 8)

collective insurance (paragraph VIII)

damage to property (paragraph 9)

social insurance (paragraph IX)

motor vehicle liability (paragraph 10)

aircraft liability (paragraph 11)

liability of ships (paragraph 12)

general liability (paragraph 13)

credit (paragraph 14)

suretyship (paragraph 15)

miscellaneous financial loss (paragraph 16)

legal expenses (paragraph 17)

assistance (paragraph 18)

Notes to Table 2

Note 1:
See IPRU(INS) Ann 10.2 Part II for the groups of classes of general insurance business from the Annex to the First non-Life Directive.

Note 2:
See IPRU(INS) 11.8 and the definition of ancillary risks in IPRU(INS) for guidance on the treatment of supplementary and ancillary provisions in relation to contracts of insurance.

5 Table

Table 3: Securities, contractually based investments and relevant investments [see notes 1 and 2 to Table 3]

Security (article 3(1))

Contractually based investment (article 3(1))

Relevant investments (article 3(1))

share (article 76)
debenture (article 77)
government and public security (article 78)
warrant (article 79)
certificate representing certain security (article 80)
unit (article 81)
stakeholder pension scheme (article 82(1))
personal pension scheme (article 82(2));
rights to or interests in investments (article 89) in so far as they relate to any of the above categories of security

option (article 83)
For the purposes of the permission regime, option is subdivided into:

(i)option (excluding a commodity option and an option on a commodity future);(ii)commodity option and option on a commodity future.

future (article 84)
For the purposes of the permission regime, future is subdivided into:

(i)future (excluding a commodity future and a rolling spot forex contract);(ii)commodity future;(iii)rolling spot forex contract.

contract for differences (article 85)
For the purposes of the permission regime, contract for differences is subdivided into:

(i)contract for differences (excluding a spread bet and a rolling spot forex contract);(ii)spread bet;(iii)rolling spot forex contract.

life policy (but excluding a long-term care insurance contract which is a pure protection contract) [see note 5B to Table 1]
funeral plan contract (article 87) [see note 1A to Table 1]
rights to or interests in investments (article 89) in so far as they relate to any of the above categories of contractually based investment.

contractually based investments (article 3(1))
non-investment insurance contract [see note 5C to Table 1]

Notes to Table 3

Note 1:
Security, contractually based investment and relevant investment are not, in themselves, specified investments they are defined as including a number of specified investments as set out in Table 3. Relevant investments is the term that is used to cover contractually based investments together with rights under a general insurance contract and a pure protection contract.
Note 2:
For the purposes of the regulated activities of dealing in investments as principal (article 14) and dealing in investments as agent (article 21), the definition of contractually based investments excludes a funeral plan contract (article 87) and rights to or interests in funeral plan contracts.

06/08/2009

PERG 3

Guidance on the scope of the regulated
activity of issuing e-money

PERG 3.1

Application and purpose

01/07/2005

Application

PERG 3.1.1

This chapter applies to a person who needs to know whether a particular electronic payment product is e-money and whether the person issuing it needs to be authorised under the Act.

01/07/2005

PERG 3.1.2

This appendix also applies to a person who needs to know the extent to which section 21 of the Act (Restrictions on financial promotion) and COB 3 (Financial promotion) apply to e-money.

01/07/2005

Purpose

PERG 3.1.3

There are two main purposes of this guidance on the definition of e-money. These are:

(1) to outline the main features of the regulated activity of issuing e-money; and

(2) to explain the application of the restriction on financial promotion under section 21 of the Act so far as it concerns issuing e-money.

01/07/2005

PERG 3.1.4

01/07/2005

PERG 3.1.5

Although the guidance does not bind the courts, it may be of persuasive effect for a court considering whether it would be just and equitable to allow a contract to be enforced (see sections 28(3) and 30(4) of the Act). Anyone reading this guidance should refer to the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 (SI 2001/544) (as amended) (the Regulated Activities Order), the Financial Services and Markets Act 2000 (Regulated Activities) (Amendment) Order 2002 (SI 2002/682) and to the Financial Services and Markets Act 2000 (Financial Promotion) Order 2001 (SI 2001/1335) (as amended) (the Financial Promotion Order). These should be used to find out the precise scope and effect of any particular provision referred to in this guidance, and any reader should consider seeking legal advice if doubt remains. If a person acts in line with the guidance in the circumstances mentioned by it, then the FSA will proceed on the footing that the person has complied with the aspects of the requirement to which the guidance relates.

01/07/2005

PERG 3.2

The regulated activity of issuing e-money

01/07/2005

The Regulated Activities Order

PERG 3.2.1

Under section 19 of the Act (The general prohibition), no person may carry on a regulated activity in the United Kingdom, or purport to do so, unless he is authorised or exempt under the Act.

01/07/2005

PERG 3.2.2

A regulated activity means an activity of a kind specified in the Regulated Activities Order which is carried on by way of business and which (generally) relates to an investment of a kind specified in the Regulated Activities Order.

01/07/2005

PERG 3.2.3

Further guidance on section 19 and regulated activities can be found in PERG 2.

01/07/2005

PERG 3.2.4

Article 9B of the Regulated Activities Order says that issuing e-money is a specified activity of the kind described in PERG 3.2.2 G. Article 74A of the Regulated Activities Order says that e-money is a specified investment for that purpose.

01/07/2005

PERG 3.2.5

E-money is defined in article 3(1) of the Regulated Activities Order. It says that e-money means monetary value, as represented by a claim on the issuer, which is:

(1) stored on an electronic device;

(2) issued on receipt of funds; and

(3) accepted as a means of payment by persons other than the issuer.

01/07/2005

The E-Money Directive

PERG 3.2.6

The E-Money Directive introduces a framework for the regulation of e-money at a European level.

01/07/2005

PERG 3.2.7

The definition of e-money in the Regulated Activities Order is based on the definition of electronic money in the E-Money Directive. The definition in the E-Money Directive is that e-money is "monetary value as represented by a claim on the issuer which is:

(1) stored on an electronic device;

(2) issued on receipt of funds of an amount not less in value than the monetary value issued; and

(3) accepted as means of payment by undertakings other than the issuer".

31/12/2005

PERG 3.2.8

The main difference is that the words "of an amount not less in value than the monetary value issued" in article 1(3)(b)(ii) of the E-Money Directive are not reproduced in the Regulated Activities Order.

31/12/2005

PERG 3.2.9

The words in article 1(3)(b)(ii) omitted from the definition in the Regulated Activities Order are aimed at stopping e-money issuers from issuing e-money at a discount. They were omitted from the Regulated Activities Order to make it clear that issuing electronic monetary value at a discount is not an unregulated activity. Instead, the prohibition on issuing e-money at a discount is left to FSA rules. The FSA rules on this are in ELM 4 (Limitations on activities).

01/07/2005

PERG 3.2.10

On this basis, the FSA believes that the definition of e-money in the Regulated Activities Order should be interpreted consistently with the E-Money Directive.

01/07/2005

Exclusions

PERG 3.2.11

Article 9C of the Regulated Activities Order says that the issuing of e-money by a person to whom the FSA has given a certificate under that article is not a regulated activity provided that the certificate has not been revoked. The FSA may only issue such certificates to small or local e-money schemes. Further guidance on this topic can be found in ELM 8 (Small e-money issuers).

01/07/2005

The issuer of e-money

PERG 3.2.12

As explained in PERG 3.2.4 G, the regulated activity relating to e-money is issuing e-money.

01/07/2005

PERG 3.2.13

In some e-money schemes an originator creates e-money and then sells it to banks and other distributors. The latter then sell the e-money to the public. In the FSA's view, references to the issuer of e-money in the Regulated Activities Order are to the originator and not the distributors.

01/07/2005

PERG 3.2.14

The issuer is the issuer of the e-money rather than the issuer of the electronic device on which it is stored, if they are different.

01/07/2005

Exclusion from the definition of deposit

PERG 3.2.15

Article 9A of the Regulated Activities Order says that a sum is not a deposit if it is immediately exchanged for e-money.

01/07/2005

PERG 3.2.16

Thus if a customer pays for e-money but the e-money is not issued until later, that initial payment will be a deposit, as long as the payment comes within the definition of deposit in the Regulated Activities Order.

01/07/2005

PERG 3.2.17

PERG 2.6.2 G to PERG 2.6.4 G has guidance on the meaning of deposit.

01/07/2005

PERG 3.2.18

Some e-money products may be charged up by means of scratch cards that can be purchased from shops. The price paid for the card is the monetary value of the e-money. The card contains a number. The purchaser then enters the number on a web site to activate the e-money account. There is thus a delay between the payment for the e-money and its use by the holder.

31/12/2005

PERG 3.2.19

The delay referred to in PERG 3.2.18 G does not make the payment for the e-money a deposit. This is because the means of spending the e-money is put into the hands of the purchaser when he purchases the card.

31/12/2005

PERG 3.3

Elements of the definition of e-money

01/07/2005

Monetary value

PERG 3.3.1

The definition of e-money says that for a product to be e-money, it must be monetary value as represented by a claim on the issuer. Guidance on the meaning of issuer can be found at PERG 3.2.12 G to PERG 3.2.14 G.

01/07/2005

Storage on an electronic device

PERG 3.3.2

The definition of e-money says that for a product to be e-money, it must be stored on an electronic device.

01/07/2005

PERG 3.3.3

E-money is an electronic payment product. The value is held electronically and payments using the value are made electronically.

01/07/2005

PERG 3.3.4

The fact that the device may be magnetic does not stop it being an electronic device for the purpose of the definition of e-money. Thus, for example, value stored on a personal computer does not fall outside the definition merely because it is stored on the computer's magnetic hard disk. Similarly, value stored on a plastic card that uses magnetic stripe technology may also fall within the definition if the value is transferred for spending using electronic technology.

01/07/2005

Prepayment

PERG 3.3.5

The definition of e-money says that for a product to be e-money, it must be issued on receipt of funds.

01/07/2005

PERG 3.3.6

This part of the definition means that e-money is a prepaid product. That is, unlike credit provided through a credit card, the customer pays for the spending power in advance. This is why credit cards are excluded from the definition of e-money.

01/07/2005

PERG 3.3.7

This does not mean that e-money paid for with a credit card falls outside the definition. The purchase of the e-money represents the purchase of monetary value. The fact that the purchaser is lent the funds to buy the e-money does not affect this. There are two contracts, one for the sale of e-money and one for credit.

01/07/2005

PERG 3.3.8

Value on a debit card may be e-money or a deposit. Guidance on this is given in PERG 3.3.14 G to PERG 3.3.20 G.

01/07/2005

PERG 3.3.9

The fact that the device on which monetary value is stored is made available on a plastic card that also functions as a debit or credit card does not stop that monetary value from being e-money.

01/07/2005

Multipurpose

PERG 3.3.10

For a product to be e-money, persons other than the issuer must accept it as a means of payment.

01/07/2005

PERG 3.3.11

PERG 3.3.10 G means that the e-money holder must be able to use it to buy goods and services from persons other than the issuer.

01/07/2005

PERG 3.3.12

Thus, for example, electronic value issued by an employer to its employees that can only be used to buy food and drink from the employer in its canteen is not e-money.

01/07/2005

PERG 3.3.13

If monetary value can be spent with third parties, it does not stop being e-money just because the e-money can also be spent with the issuer. This is so even if in practice most of the e-money is spent with the issuer and only a small portion is ever spent with third parties.

31/12/2005

Accounted e-money schemes

PERG 3.3.14

An electronic payment scheme that involves prepaid monetary value that can be spent without the involvement of the issuer is likely to be e-money. However, a product does not cease to be e-money merely because the scheme is account based.

01/07/2005

PERG 3.3.15

The document published by HM Treasury in March 2002 called "Implementation of the Electronic Money Directive: A Response to Consultation" says:
"An important issue that respondents [to HM Treasury's consultation on the implementation of the E-Money Directive] requested clarification on was whether the Directive's definition should catch account-based schemes (i.e. e-money held remote from the owner and spent at the owner's direction) as well as, for example, card-based schemes (i.e. e-money in the possession of the owner, whether stored on a personal computer or a smart card, and directly spent by them). The Treasury believes that the Directive's definition does allow for the possibility of account-based schemes being e-money. Not allowing account-based e-money schemes would effectively create a regulatory gap between the e-money and deposit-taking regimes - and a difference of treatment between schemes that pose similar regulatory risks. Rather than attempting to amend the definition in the Order (which is already expressed suitably widely), the Treasury has clarified in the accompanying Explanatory Memorandum that the definition of e-money is to be interpreted as covering account-based schemes (so long as they remain distinct from deposit-taking)."

01/07/2005

PERG 3.3.16

That explanatory memorandum says:
"The Treasury believes the Directive's definition includes both e-money schemes in which value is stored on a card that is used by the bearer to make purchases, and account-based e-money schemes where value is stored in an electronic account that the user can access remotely."

01/07/2005

PERG 3.3.17

Thus monetary value issued under an account-based scheme can be e-money. On the other hand, not all monetary value recorded electronically on an account will be e-money. If all such monetary value were e-money, any deposit recorded in records maintained electronically could be e-money, thereby turning most conventional bank accounts into e-money. Thus it is necessary to distinguish between an account-based e-money scheme and a conventional bank deposit.

01/07/2005

PERG 3.3.18

Recital (3) to the E-Money Directive says that "electronic money can be considered an electronic surrogate for coins and banknotes, which is stored on an electronic device such as a chip card or computer memory and which is generally intended for the purpose of effecting electronic payments of limited amounts."

01/07/2005

PERG 3.3.19

The European Commission published an explanatory memorandum along with its proposal for a Directive about e-money. It said that it is appropriate to emphasise that e-money does not represent a deposit. Unlike a depositor, a user does not advance funds to an issuer in order to ensure their safe keeping and handling. Neither the issuer nor the customer pursues this objective. The Commission said that the underlying contract between the customer and the issuer is that the user will get value for the e-money from those merchants that accept it and that the issuer will honour his commitment to give value.

01/07/2005

PERG 3.3.20

In distinguishing e-money and deposits, relevant factors include the following.

(1) As explained in PERG 3.3.3 G, e-money is a purely electronic product. If the monetary value is kept on an account that can be used by non-electronic means, that points towards it being a deposit. For example, an account on which cheques can be drawn is unlikely to be e-money.

(2) If a product is designed in such a way that it is only likely to be used for making payments of limited amounts and not as a means of saving, that feature points towards it being e-money. Relevant features might include how long value is allowed to remain on the account, disincentives to keeping value on the account and the payment of interest on it.

(3) If an account has features on it in addition to those necessary for a pure payment facility, such as an overdraft or direct debit facility, that points towards it not being e-money.

(4) One should have regard to whether the product is sold as e-money or as a deposit.

01/07/2005

PERG 3.3.21

In other words, a deposit involves the creation of a debtor-creditor relationship under which the person who accepts the deposit stores value for eventual return. E-money, in contrast, involves the purchase of a means of payment.

01/07/2005

Substance of the scheme

PERG 3.3.22

When deciding whether a particular scheme involves issuing e-money or not, it is necessary to take into account the substance of the scheme. In particular it is necessary to consider whether:

(1) the scheme involves the issue of prepaid electronic monetary value that the holder can spend with third parties; or

(2) the provision by the issuer of some other sort of service.

31/12/2005

PERG 3.3.23

In considering the question in PERG 3.3.22 G, relevant factors include:

(1) the risks incurred by the holder of the value;

(2) the nature of the rights and obligations of the holder of the prepaid value, the issuer of the value and third parties involved in the scheme; and

(3) what the scheme allows the holder of the value to do.

31/12/2005

PERG 3.3.24

Therefore artificial features of a scheme that disguise, or try to disguise, the payment function as the supply of another sort of service are not likely to prevent the scheme from involving issuing e-money.

31/12/2005

PERG 3.3.25

The European Commission Services published a separate guidance note in January 2005 on the application of the E-money Directive to mobile network operators. The full text of this guidance is available at the following link: http://europa.eu.int/comm/internal_market/bank/docs/e-money/guidance_en.pdf. The FSA will have regard to such guidance when considering whether the issue of prepaid airtime to a mobile phone user, which can be used to pay for third party goods and services, whether delivered through or outside the telephone operator's network, constitutes the regulated activity of issuing e-money.

31/12/2005

PERG 3.4

Financial promotion

01/07/2005

PERG 3.4.1

Guidance on the restrictions on financial promotion under section 21 of the Act (Restrictions on financial promotion) can be found in PERG 8. PERG 3.4 gives further guidance on its application to e-money.

01/07/2005

PERG 3.4.2

As explained in PERG 8, section 21 of the Act applies to the communication of an invitation or inducement to engage in investment activity. Section 21(8) defines engaging in investment activity as:

(1) entering or offering to enter into an agreement the making or performance of which by either party constitutes a controlled activity; or

(2) exercising any rights conferred by a controlled investment to acquire, dispose of, underwrite or convert a controlled investment.

01/07/2005

PERG 3.4.3

Controlled activity and controlled investment are both defined by reference to Schedule 1 to the Financial Promotion Order. Issuing e-money is not included as a controlled activity and e-money is not included as a controlled investment.

01/07/2005

PERG 3.4.4

Accepting deposits is however a controlled activity and a deposit is a controlled investment. As explained in PERG 3.2.15 G, the definition of deposit under the Regulated Activities Order says that a sum is not a deposit for the purposes of the Regulated Activities Order if it is immediately exchanged for e-money.

01/07/2005

PERG 3.4.5

The definition of deposit in the Financial Promotion Order follows the definition of deposit in the Regulated Activities Order. Therefore the purchase price paid for e-money is not a deposit for the purposes of the Financial Promotion Order.

01/07/2005

PERG 3.4.6

Hence the provisions in the Act and the Handbook about financial promotions do not apply to e-money.

01/07/2005

PERG 3.4.7

However, if the purchase price for e-money is not immediately exchanged for e-money, the purchase price may be a deposit if the payment comes within the definition of deposit in the Regulated Activities Order. PERG 2.6.2 G to PERG 2.6.4 G has guidance on the meaning of deposit. In such a case, the provisions in the Act and the Handbook about financial promotions relating to deposits apply.

01/07/2005

PERG 3.5

The application of the e-money definition to various products

31/12/2005

PERG 3.5.1

This section of PERG 3 contains guidance on whether certain products involve issuing e-money.

31/12/2005

Electronic travellers cheques

PERG 3.5.2

An electronic travellers cheque is a product, based on a plastic card, designed to replace paper travellers cheques. There are two types of electronic travellers cheques:

(1) ones whose only function is to allow the holder to withdraw cash in a foreign currency from automated teller machines ("ATMs") when abroad; and

(2) ones that can also be used to buy goods and services from third parties.

31/12/2005

PERG 3.5.3

The card referred to in PERG 3.5.2 G is loaded with value. The holder pays for the value on issue. The value therefore complies with the part of the definition of e-money that says that the value must be issued on receipt of funds (see PERG 3.3.5 G - PERG 3.3.9 G). The card is likely to be an electronic device for the purpose of paragraph (a) of the definition of e-money (which is explained in PERG 3.3.2 G - PERG 3.3.4 G).

31/12/2005

PERG 3.5.4

The remaining condition that value must meet if it is to be e-money is that the value must be accepted as a means of payment by persons other than the issuer. This part of the definition is explained in PERG 3.3.10 G - PERG 3.3.13 G.

31/12/2005

PERG 3.5.5

An electronic travellers cheque falling into PERG 3.5.2 G (2) meets the part of the definition of e-money referred to in PERG 3.5.4 G.

31/12/2005

PERG 3.5.6

An electronic travellers cheque falling into PERG 3.5.2 G (1) does not meet the part of the definition of e-money referred to in PERG 3.5.4 G if the scheme is set up in such a way that:

(1) it can only be used to withdraw foreign currency from ATMs owned by the issuer of the value; or

(2) (if (1) does not apply) the withdrawal of foreign currency by a cardholder will never involve the purchase of the currency from the owner of the ATM but instead the repayment of the prepaid value by the issuer of the prepaid value.

31/12/2005

Trust accounts

PERG 3.5.7

A prepaid electronic value payment system may involve the "float" being paid into a trust account. The float is the running balance of money held by the issuer of the electronic value representing payments for the issue of electronic value less the amount of electronic value that has been redeemed.

31/12/2005

PERG 3.5.8

Holding the float on trust:

(1) does not prevent the electronic value from being monetary value as represented by a claim on the issuer (this part of the definition of e-money is described in PERG 3.3.1 G);

(2) is not relevant to the other elements of the definition of e-money; and

(3) does not mean that the person who accepts the payment for the electronic value is not the issuer of that value.

31/12/2005

PERG 3.5.9

The result of PERG 3.5.8 G is that putting the float into a trust account does not prevent the person who accepts the payment for the electronic value from issuing e-money.

31/12/2005

PERG 4

Guidance on regulated activities connected with mortgages

PERG 4.1

Application and purpose

01/07/2005

Application

PERG 4.1.1

This chapter applies to any person who needs to know whether the activities he conducts in relation to mortgages are subject to FSA regulation.

01/07/2005

Purpose of guidance

PERG 4.1.2

With effect from 31 October 2004 certain activities relating to mortgages have been regulated by the FSA. The purpose of this guidance is to help persons decide whether they need authorisation and, if they do, to determine the scope of the Part IV permission for which they will need to apply.

01/07/2005

Effect of guidance

PERG 4.1.3

This guidance is issued under section 157 of Act (Guidance). It is designed to throw light on particular aspects of regulatory requirements, not to be an exhaustive description of a person's obligations. If a person acts in line with the guidance in the circumstances contemplated by it, then the FSA will proceed on the footing that the person has complied with aspects of the requirement to which the guidance relates.

01/07/2005

PERG 4.1.4

Rights conferred on third parties cannot be affected by guidance given by the FSA . This guidance represents the FSA's view, and does not bind the courts, for example, in relation to an action for damages brought by a private person for breach of a rule (see section 150 of the Act (Action for damages)), or in relation to the enforceability of a contract where there has been a breach of the general prohibition on carrying on a regulated activity in the United Kingdom without authorisation (see sections 26 to 29 of the Act (Enforceability of agreements)). A person may need to seek his own legal advice.

01/07/2005

PERG 4.1.5

Anyone reading this guidance should refer to the Act and to the various Orders that are referred to in this guidance. These should be used to find out the precise scope and effect of any particular provision referred to in this guidance.

01/07/2005

Guidance on other activities

PERG 4.1.6

A person may be intending to carry on activities related to other forms of investment in connection with mortgages, such as advising on and arranging an endowment policy or ISA to repay an interest-only mortgage. Such a person should also consult the guidance in PERG 2 (Authorisation and regulated activities) PERG 5 (Guidance on insurance mediation activities) and PERG 8 (Financial promotion and related activities). In addition, PERG 14 (Guidance on home reversion and home purchase activities) has guidance on regulated activities relating to home reversion plans and home purchase plans.

06/04/2007

PERG 4.2

Introduction

01/07/2005

Requirement for authorisation or exemption

PERG 4.2.1

In most cases, any person who carries on a regulated activity in the United Kingdom by way of business must either be an authorised person or an exempt person. Otherwise, the person commits a criminal offence and certain agreements may be unenforceable. PERG 2.2 (Introduction) contains further guidance on these consequences.

06/10/2007

Professional firms

PERG 4.2.2

Certain professional firms are allowed to carry on some regulated activities without authorisation so long as they comply with specified conditions (see PERG 4.14 (Mortgage activities carried on by professional firms)).

01/07/2005

Questions to be considered to decide if authorisation is required

PERG 4.2.3

A person who is concerned to know whether his proposed activities may require authorisation will need to consider the following questions (these questions are a summary of the issues to be considered and have been reproduced, in slightly fuller form, in the flowchart in PERG 4.18):

(1) will I be carrying on my activities by way of business (see PERG 4.3.3 G (The business test))?

(2) if so, will my activities relate to regulated mortgage contracts (see PERG 4.4 (What is a regulated mortgage contract?))?

(3) if so, will I be carrying on any of the regulated mortgage activities (see PERG 4.5 (Arranging regulated mortgage contracts) to PERG 4.9 (Agreeing to carry on a regulated activity))?

(4) if so, there is the necessary link with the United Kingdom (see PERG 4.11 (Link between activities and the United Kingdom))?

(5) if so, will any or all of my activities be excluded (see PERG 4.5 (Arranging regulated mortgage contracts) to PERG 4.10 (Exclusions applying to more than one regulated activity))?

(6) if it is not the case that all of my activities are excluded, am I a professional firm whose activities are exempted under Part XX of the Act (see PERG 4.14 (Mortgage activities carried on by professional firms))?

(7) if not, am I exempt as an appointed representative (see PERG 4.12 (Appointed representatives))?

(8) if not, am I otherwise an exempt person (see PERG 4.13 (Other exemptions))?

If a person gets as far as question (8) and the answer to that question is 'no', that person requires authorisation and should refer to the FSA website "How do I get authorised": http://www.fsa.gov.uk/Pages/Doing/how/index.shtml for details of the application process.

06/10/2007

PERG 4.2.4

Even if the person does not require authorisation, he may still require a licence under the Consumer Credit Act 1974 to carry on the activity (see PERG 4.17 (Interaction with the Consumer Credit Act 1974)).

01/07/2005

Financial promotion

PERG 4.2.5

An unauthorised person who intends to carry on activities connected with mortgages will also need to comply with section 21 of the Act (Restrictions on financial promotion). This guidance does not cover financial promotions that relate to mortgages. Persons should refer to the general guidance on financial promotion in Appendix 1 to the Authorisation manual, PERG 8 (Financial promotion and related activities)) and, in particular, to PERG 8.17 (Financial promotions concerning agreements for qualifying credit).

01/07/2005

PERG 4.3

Regulated activities related to mortgages

01/07/2005

PERG 4.3.1

There are six regulated mortgage activities requiring authorisation or exemption if they are carried on in the United Kingdom. These are set out in the Regulated Activities Order. They are:

(1) arranging (bringing about) regulated mortgage contracts (article 25 A(1) (Arranging regulated mortgage contracts));

(2) making arrangements with a view to regulated mortgage contracts (article 25A(2) (Arranging regulated mortgage contracts));

(3) advising on regulated mortgage contracts (article 53A (Advising on regulated mortgage contracts));

(4) entering into a regulated mortgage contract as lender (article 61(1) (Regulated mortgage contracts));

(5) administering a regulated mortgage contract where that contract is entered into by way of business on or after 31 October 2004 (article 61(2) (Regulated mortgage contracts)); and

(6) agreeing to carry on any of the above (article 64 (Agreeing to carry on specific kinds of activity)).

01/07/2005

PERG 4.3.2

The scope of these activities is limited by certain exclusions contained in Parts II and III of the Regulated Activities Order. These exclusions are referred to in PERG 4.5 (Arranging regulated mortgage contracts) to PERG 4.10 (Exclusions applying to more than one regulated activity).

01/07/2005

The business test

PERG 4.3.3

A person will only need authorisation or exemption if he is carrying on a regulated activity 'by way of business' (see section 22 of the Act (Regulated activities)). There are, in fact, three different forms of business test applied to the regulated mortgage activities. In the FSA's view, however, the difference in the business tests should have little practical effect.

01/07/2005

PERG 4.3.4

There is power in the Act for the Treasury to change the meaning of the business test by including or excluding certain things. The Business Order has been made using this power (partly reflecting differences in the nature of the different activities). The result (which is summarised in PERG 4.3.5 G) is that:

(1) the 'by way of business' test in section 22 of the Act applies unchanged in relation to the activity of entering into a regulated mortgage contract;

(2) the 'by way of business' test in section 22 of the Act applies unchanged in relation to the activity of administering a regulated mortgage contract, but another 'by way of business' test arises because the contract being administered by way of business must itself have been entered into by way of business (see PERG 4.8.2 G); and

(3) in the case of arranging and advising, the effect of article 3A of the Business Order (Arranging and advising on regulated mortgage contracts) is that a person is not to be regarded as acting 'by way of business' unless he is 'carrying on the business of engaging in one or more of those activities'.

01/07/2005

PERG 4.3.5

Summary of which variant of the business test applies to the different regulated mortgage activities. This table belongs to PERG 4.3.4 G.

By way of business

Carrying on the business

Entering into a regulated mortgage contract (article 61(1))

Arranging (bringing about) regulated mortgage contracts (article 25A(1))

Administering a regulated mortgage contract (article 61(2)) (and the contract administered must have been entered into by way of business)

Making arrangements with a view to regulated mortgage contracts (article 25A(2))

Advising on regulated mortgage contracts (article 53A)

01/07/2005

PERG 4.3.6

The 'carrying on the business' test in the Business Order is a narrower test than that of carrying on regulated activities 'by way of business' in section 22 of the Act as it requires the regulated activities to represent the carrying on of a business in their own right. Whether or not the business test is satisfied in any particular case is ultimately a question of judgement that takes account of a number of factors (none of which is likely to be conclusive). The nature of the particular regulated activity that is carried on will also be relevant to the factual analysis. The relevant factors include:

(1) the degree of continuity;

(2) the existence of a commercial element; and

(3) the scale of the activity and, for the 'by way of business' test, the proportion which the activity bears to the other activities carried on by the same person but which are not regulated.

In the case of the 'carrying on the business' test, these factors will need to be considered having regard to all the activities together.

01/07/2005

PERG 4.3.7

The main factor that might cause an activity to satisfy the 'by way of business' test in section 22 but not the narrower 'carrying on the business' test in the Business Order is that of frequency or regularity. As a general rule, the activity would need to be undertaken with some degree of frequency or regularity to satisfy the narrower 'carrying on the business' test. Conversely, the 'by way of business' test in section 22 could be satisfied by an activity undertaken on an isolated occasion (provided that the activity would be regarded as done by 'way of business' in all other respects).

01/07/2005

PERG 4.3.8

It follows that whether or not any particular person may be carrying on a regulated mortgage activity 'by way of business' will depend on his individual circumstances. However, some typical examples where the applicable business test would be likely to be satisfied are where a person:

(1) enters into one or more regulated mortgage contracts as lender in the expectation of receiving interest or another form of payment that would enable him to profit from his actions;

(2) administers a regulated mortgage contract in return for a payment of some kind (whether in cash or in kind); and

(3) arranges or advises on regulated mortgage contracts, or does both, on a regular basis and receives payment of some kind (whether in cash or in kind and whether from the borrower or from some other person).

01/07/2005

PERG 4.3.9

Some typical examples where the business test is unlikely to be satisfied are:

(1) when an individual enters into or administers a one-off mortgage securing a loan to a friend or member of his family whether at market interest rates or not; or

(2) when a person provides a service without any expectation of reward or payment of any kind, such as advice given or arrangements made by many Citizens Advice Bureaux and other voluntary sector agencies (but see PERG 4.3.8G (3) where payment is received for advice).

01/07/2005

PERG 4.4

What is a regulated mortgage contract?

01/07/2005

The definition of "regulated mortgage contract"

PERG 4.4.1

Article 61(3)(a) of the Regulated Activities Order defines a regulated mortgage contract as a contract which, at the time it is entered into, satisfies the following conditions:

(1) the contract is one where a lender provides credit to an individual or trustees (the 'borrower');

(2) the contract provides for the obligation of the borrower to repay to be secured by a first legal mortgage on land (other than timeshare accommodation) in the United Kingdom; and

PERG 4.4.2 G to PERG 4.4.9 G set out the FSA's understanding of some key concepts contained in article 61(3)(a). It should be noted that, where a contract meets the necessary requirements for both a regulated mortgage contract and a home purchase plan, it will be treated as a home purchase plan only and will not be a regulated mortgage contract. Guidance on the meaning of a home purchase plan is in PERG 14.4 (Guidance on home reversion and home purchase activities).

06/04/2007

Provision of credit

PERG 4.4.1A

(1) Article 61(3)(c) of the Regulated Activities Order states that credit includes a cash loan and any other form of financial accommodation. Although 'financial accommodation' has a potentially wide meaning, its scope is limited by the terms used in the definition of a regulated mortgage contract set out in PERG 4.4.1 G. Whatever form the financial accommodation may take, article 61(3)(a) envisages that it must involve an obligation to repay on the part of the individual who receives it.

(2) In the FSA's view, an obligation to repay implies the existence, or the potential for the existence, of a debt owed by the individual to whom the financial accommodation is provided (the 'borrower') to the person who provides it (the 'lender'). Consequently, for any facility under which any form of financial accommodation is being provided, the test is whether it allows for the possibility that the person providing the financial accommodation may be placed in a position where he becomes a creditor of the individual to whom he is providing it. An example of this would be the issue of a guarantee by a bank to a third party for an individual customer (such as a rent guarantee or a performance bond) where the guarantee is secured on a first legal charge over the customer's residential property. In the FSA's view, this would amount to a regulated mortgage contract as the customer would owe a debt to the bank in the event that the bank had to pay the third party under the guarantee.

01/07/2005

Which borrowers?

PERG 4.4.2

The condition set out in PERG 4.4.1G (1) limits the range of borrowers to whom the protections of the mortgage regulation regime apply to individuals and trustees. If a company (which is not acting as a trustee) borrows money for the purpose of funding the company's business, and the loan is secured by a mortgage over the company's property, the mortgage contract is not a regulated mortgage contract. So a lender will not carry on a regulated activity by entering into that contract, nor will the lender carry on a regulated activity if it advises on, arranges or administers that contract. However, if the lender makes a loan for business purposes to an individual sole trader, or (in England and Wales) a partnership, and the loan is secured on the borrower's house or houses, the contract will be a regulated mortgage contract.

01/07/2005

Date the contract is entered into

PERG 4.4.3

In order to meet the definition of a regulated mortgage contract, a mortgage contract must meet the conditions set out in PERG 4.4.1G (1) to PERG 4.4.1G (3) at the time it was entered into. The effect is that contracts which meet those conditions at that time remain regulated mortgage contracts throughout their remaining term, even if there are periods of time when some or all of the conditions are not satisfied. Conversely, contracts that do not start out as regulated mortgage contracts cannot subsequently become so, even if they meet all the conditions set out in PERG 4.4.1G (1) to PERG 4.4.1G (3). A person that only administers mortgage contracts which did not meet those conditions at the time they were entered into will not, therefore, need permission to administer regulated mortgage contacts.

01/07/2005

PERG 4.4.4

There may, however, be instances where an existing contract, which was not a regulated mortgage contract at the time it was entered into, is replaced as a result of a variation (whether the variation is initiated by the customer or by the lender), and the new contract qualifies as a regulated mortgage contract. A person may therefore need to consider this possibility (which could affect contracts initially entered into before 31 October 2004 as well as subsequent loans) when deciding whether he needs permission to carry on any of the regulated mortgage activities.

01/07/2005

Land in the United Kingdom

PERG 4.4.5

The condition set out in PERG 4.4.1G (2) means that a regulated mortgage contract must be secured on land in the United Kingdom. Contracts which involve taking security over moveable property therefore cannot be regulated mortgage contracts. So a contract secured on a caravan will not be a regulated mortgage contract, unless the contract also involves a mortgage over the land on which the caravan stands.

01/07/2005

Occupancy requirement

PERG 4.4.6

The condition set out in PERG 4.4.1G (3) means that loans secured on property which is entirely used for business purposes (such as an office block) cannot fall within the definition. However, loans secured on 'mixed use' property could be covered, provided that the borrower (or trust beneficiary, where the borrowers are trustees) or a 'related person' uses at least 40% of the total of the land as or in connection with a dwelling. Loans secured on a six-floor property, half of which was occupied by the borrower and half let out for business purposes would therefore satisfy the definition. (Article 61(4)(b) makes it clear that 'land', in the context of a multi-storey building, means the aggregate of the floor area of each of the storeys.)

01/07/2005

PERG 4.4.7

The expression 'as or in connection with a dwelling' set out in PERG 4.4.1G (3) means that loans to buy a small house with a large garden would in general be covered. However, if at the time of entering into the contract the intention was for the garden to be used for some other purpose - for example, if it was intended that a third party were to have use of the garden - the contract would not constitute a regulated mortgage contract. Furthermore, the FSA would not regard a loan to purchase farmland and a farmhouse as constituting a regulated mortgage contract (where the farmhouse and garden amount to less than 40% of the land area), since it does not appear that the land could properly be said to be used 'in connection with' the farmhouse. The presence of the farmhouse is unconnected with the use to which the farmland is put (in contrast to a residential property's garden, which would have no existence independent of the property).

01/07/2005

PERG 4.4.8

The requirement that at least 40% of the land area be used as or in connection with a dwelling means that 'buy to let' loans secured on the property to be let will usually be excluded. However, such loans will not be excluded if:

(1) the lessee is a 'related person' to the borrower. This will be the case even if the borrower subsequently takes possession of the property, as the conditions set out in PERG 4.4.1G (1) to PERG 4.4.1G (3) were not satisfied at the outset of the contract (see PERG 4.4.3 G); or

(2) at the time the contract is entered into, the borrower has a real intention to use the land as, or in connection with, a dwelling (for example a member of the British Forces Posted Overseas who buys a property in the United Kingdom intending to live there on his return but which he lets out in the meantime).

01/07/2005

PERG 4.4.9

'Related person' is defined in article 61(4)(c) of the Regulated Activities Order as meaning the borrower's spouse, civil partner, parents, grandparents, siblings, children and grandchildren. An unmarried partner of the borrower whose relationship with the borrower has the characteristics of the relationship between a husband and wife is also included; this can include a person of the same sex as the borrower. Stepchildren, however, would seem to be excluded.

05/12/2005

Purpose of the loan is irrelevant

PERG 4.4.10

The definition of regulated mortgage contract contains no reference to the purpose for which the loan is being made. So, in addition to loans made to individuals to purchase residential property, the definition is wide enough to cover other loans secured on land, such as loans to consolidate debts, or to enable the borrower to purchase other goods and services.

01/07/2005

Type of lending

PERG 4.4.11

The definition of regulated mortgage contract also covers a variety of types of product. Apart from the normal mortgage loan for the purchase of property, the definition also includes other types of secured loan, such as secured overdraft facility, a secured bridging loan, a secured credit card facility, and so-called 'equity release loans' (defined as regulated lifetime mortgage contracts in this guidance) under which the borrower (usually an older person) takes out a loan where repayment of the capital (and in some cases the interest) is not required until the property is sold, usually on the death of the borrower.

01/07/2005

PERG 4.4.12

A number of products, however, are excluded from the definition, such as:

(1) loans secured by a second or subsequent charge (as the lender does not have a first charge);

(2) loans secured on commercial premises (as the borrower will not be using the land as or in connection with a dwelling); and

(3) so-called 'home reversion schemes', under which a property owner (usually an older person) sells some or all of his interest in the property in return for a lump sum (usually a proportion of the value of the property sold) and a right to reside at the property for the rest of his life. (It should be noted, however, that the Government announced in May 2005 that 'home reversion schemes' and 'flexible tenure products' are to be regulated by the FSA and that it would be introducing legislation to this effect.)

01/07/2005

Regulated mortgage contracts and contract variations

PERG 4.4.13

The effect of the Regulated Activities Order is that mortgage contracts which are varied can fall into one of the following categories:

(1) a contract that was entered into before 31 October 2004, and that is subsequently varied on or after that date so that is satisfies the conditions set out in PERG 4.4.1G (1) to PERG 4.4.1G (3), will not be a regulated mortgage contract (because it was not a regulated mortgage contract at the time it was entered into);

(2) a contract that was originally entered into before 31 October 2004, but is subsequently changed on or after that date such that a new contract is entered into, will be a regulated mortgage contract (provided, of course, that it meets the definition in the Regulated Activities Order); and

(3) a regulated mortgage contract that was originally entered into on or after 31 October 2004, and which is subsequently varied by, for example, making a further advance, will remain a regulated mortgage contract.

01/07/2005

PERG 4.4.14

It is possible for more than one mortgage contract to be secured by the same (first) charge. The first contract might be entered into before 31 October 2004 (and therefore not be a regulated mortgage contract) and a second contract entered into on or after 31 October 2004 (and be a regulated mortgage contract).

01/07/2005

PERG 4.5

Arranging regulated mortgage contracts

01/07/2005

Definition of the regulated activities involving arranging

PERG 4.5.1

Article 25A of the Regulated Activities Order describes two types of regulated activities concerned with arranging regulated mortgage contracts. These are:

(1) making arrangements for another person to:

(a) enter into a regulated mortgage contract as borrower; or

(b) vary the terms of a regulated mortgage contract entered into by him as borrower on or after 31 October 2004 in such a way as to vary his obligations under the contract; and

(2) making arrangements with a view to a person who participates in the arrangements entering into a regulated mortgage contract as borrower.

01/07/2005

PERG 4.5.2

The first activity (article 25A(1)) is referred to in this guidance as arranging (bringing about) regulated mortgage contracts. Various points arise:

(1) It is not necessary for the potential borrower himself to be involved in making the arrangements.
(2) This activity is carried on only if the arrangements bring about, or would bring about a regulated mortgage contract. This is because of the exclusion in article 26 (see PERG 4.5.4 G).
(3) This activity therefore includes the activities of brokers who make arrangements on behalf of a borrower to enter into or vary a regulated mortgage contract where these arrangements go beyond merely introducing (see PERG 4.5.10 G) or advising (although giving advice may be the regulated activity of advising on regulated mortgage contracts). Such arrangements might include, for instance, negotiating the terms of the regulated mortgage contract with the eventual lender, on behalf of the borrower. It also includes the activities of certain so-called 'packagers' (see PERG 4.15 (Mortgage activities carried on by 'packagers'.)
(4) PERG 4.6.2 G contains examples of variations that are, in the FSA's view, within the definition of advising on regulated mortgage contracts and would also be covered by article 25A(1) arrangements.

01/07/2005

PERG 4.5.3

The second activity (article 25A(2)) is referred to in this guidance as making arrangements with a view to regulated mortgage contracts. This activity is different from article 25A(1)) because it requires a potential borrower to actively participate by utilising the arrangements to enter into a regulated mortgage contract. It does not require that the arrangements would bring about a regulated mortgage contract. Nor does it cover arrangements leading to contract variations. It includes the activities of introducers (see PERG 4.5.10 G below) introducing potential borrowers to brokers and lenders. It may also, in certain circumstances, extend to the activities of a publisher, broadcaster, or website operator, albeit subject to exclusions in the Regulated Activities Order (see PERG 4.5.5 G and PERG 4.5.6 G).

01/07/2005

Exclusion: article 25A(1) arrangements not causing a deal

PERG 4.5.4

Article 26 of the Regulated Activities Order (Arrangements not causing a deal) excludes from article 25A(1) arrangements which do not bring about or would not bring about the regulated mortgage contract in question. In the FSA's view, a person brings about or would bring about a regulated mortgage contract if his involvement in the chain of events leading to the transaction is of enough importance that without that involvement it would not take place.

01/07/2005

Exclusion: article 25(A)2 arrangements enabling parties to communicate

PERG 4.5.5

Article 27 of the Regulated Activities Order (Enabling parties to communicate) contains an exclusion that applies to arrangements which might otherwise fall within article 25A(2) merely because they provide the means by which one party to a regulated mortgage contract (or potential regulated mortgage contract) is able to communicate with other parties. Simply providing the means by which parties to a regulated mortgage contract (or potential regulated mortgage contract) are able to communicate with each other is excluded from article 25(A)2 only. This will ensure that persons such as Internet service providers or telecommunications networks are excluded if all they do is provide communication facilities (and these would otherwise be considered to be arrangements made with a view to regulated mortgage contracts).

01/07/2005

PERG 4.5.6

In the FSA's view, the crucial element of the exclusion in article 27 is the inclusion of the word "merely". When a publisher, broadcaster or Internet website operator goes beyond what is necessary for him to provide his service of publishing, broadcasting or otherwise facilitating the issue of promotions, he may well bring himself within the scope of article 25A(2). Further detailed guidance relating to the scope of the exclusion in article 27 is contained in PERG 8.32.6 G to PERG 8.32.11 G.

01/07/2005

Exclusion: article 25A(1) and (2) arranging of contracts to which the arranger is a party

PERG 4.5.7

Arranging a regulated mortgage contract (or contract variation) to which the arranger is to be a party is excluded from both article 25A(1) and (2) by article 28A of the Regulated Activities Order (Arranging contracts to which the arranger is a party). As a result, a person cannot both be entering into a regulated mortgage contract and arranging a regulated mortgage contract under article 25A as regards a particular regulated mortgage contract. This means that a direct sale by a mortgage lender does not involve the regulated activity of arranging but, if the transaction is completed, does involve the regulated activity of entering into a regulated mortgage contract. The FSA's rules on arranging regulated mortgage contracts, however, do apply to direct sales.

01/07/2005

Exclusion: article 25A(1) and (2) arrangements with or through authorised persons

PERG 4.5.8

An unauthorised person who makes arrangements for or with a view to a regulated mortgage contract between a borrower and an authorised person, is excluded from article 25A(1) and (2) by article 29 of the Regulated Activities Order (Arranging deals with or through authorised persons) if specified conditions as to advice and remuneration are satisfied. For example, the exclusion is dependent on the borrower not receiving any advice on the regulated mortgage contract from the unauthorised person making the arrangements. Additionally, payment must not be received unless it is accounted for to the borrower (which, in the FSA's view, means that it must be paid over to, or treated as belonging to and held to the order of, the borrower).

01/07/2005

Exclusion: article 25A(1)(b) arrangements made in the course of administration by authorised person

PERG 4.5.9

Article 29A of the Regulated Activities Order excludes from article 25A(1)(b) (which covers making arrangements for another person to vary the terms of a regulated mortgage contract) certain activities of an unauthorised person who is taking advantage of the exclusion from administering a regulated mortgage contract in article 62 (Exclusion: arranging administration by authorised persons) see PERG 4.8.4 G).

01/07/2005

Exclusion: article 25A(2) arrangements and introducing

PERG 4.5.10

Article 33A of the Regulated Activities Order (Introducing to authorised persons) excludes from article 25A(2) arrangements under which a borrower is introduced to certain persons. Introducing is only a regulated activity under article 25A(2) as it does not of itself bring about regulated mortgage contracts (see PERG 4.5.2 G).

01/07/2005

PERG 4.5.11

The exclusion applies for introductions to:

(1) an authorised person who has permission to carry on a regulated activity specified in article 25A (Arranging regulated mortgage contracts) or article 53A (Advising on regulated mortgage contracts) or article 61(1) (Entering into a regulated mortgage contract as lender); introducers can check the status of an authorised person and its permission by visiting the FSA's register at http://www.fsa.gov.uk/register/;
(2) an appointed representative who is appointed to carry on a regulated activity specified in article 25A or article 53A of the Regulated Activities Order; introducers can check the status of an appointed representative by visiting the FSA's register at http://www.fsa.gov.uk/register/; the FSA would normally expect introducers to request and receive confirmation of the regulated activities that the appointed representative is appointed to carry on, prior to proceeding with an introduction; and
(3) an overseas person who carries on a regulated activity specified in article 25A (Arranging regulated mortgage contracts) or article 53A (Advising on regulated mortgage contracts) or article 61(1) (Entering into a regulated mortgage contract).

01/07/2005

PERG 4.5.12

The exclusion in article 33A only applies when the introducer satisfies two conditions:

(1) he does not receive any money paid by the borrower in connection with any transaction that the borrower enters into with or through the person to whom the borrower is introduced as a result of the introduction, other than money payable to him on his own account; and

(2) before making the introduction he discloses to the borrower all relevant information described in PERG 4.5.14 G.

01/07/2005

PERG 4.5.13

In the FSA's view, money payable to an introducer on his own account includes money legitimately due to him for services rendered to the borrower, whether in connection with the introduction or otherwise. It also includes sums payable to an introducer (for example, a housebuilder) by a buyer in connection with a transfer of property. For example, article 33A allows a housebuilder to receive the purchase price on a property that he sells to a borrower, whom he previously introduced to an authorised person or appointed representative to help him finance the purchase and still take the benefit of the exclusion. This is because the sums that the housebuilder receives in connection with the introduction and with the sale of his property to the borrower are both "payable to him on his own account". The housebuilder may also receive a commission from the person introduced to. He may not, however, receive any sums payable by the borrower to the person to whom the borrower is introduced, for example valuation fees, as those sums are not payable to the housebuilder on his own account.

01/07/2005

PERG 4.5.14

The information that the introducer must disclose to the borrower prior to making the introduction is, where relevant:

(1) that he is a member of the same group as the person (N) to whom the borrower is introduced;

(2) details of any payment which he will receive from N, by way of fee or commission, for introducing the borrower to N; and

(3) an indication of any other reward or advantage arising out of his introducing to N.

01/07/2005

PERG 4.5.15

In the FSA's view, details of fees or commission referred to in PERG 4.5.14G (2) does not require an introducer to provide an actual sum to the borrower, where it is not possible to calculate the full amount due prior to the introduction. This may arise in cases where the fee or commission is a percentage of the eventual loan taken out and the amount of the required loan is not known at the time of the introduction. In these cases, it would be sufficient for the introducer to disclose the method of calculation of the fee or commission, for example the percentage of the eventual loan to be made by N.

01/07/2005

PERG 4.5.16

In the FSA's view, the information condition in PERG 4.5.14G (3) requires the introducer to indicate to the borrower any other advantages accruing to him as a result of ongoing arrangements with N relating to the introduction of borrowers. This may include, for example, indirect benefits such as office space, travel expenses, subscription fees and this and other relevant information may be provided on a standard form basis to the borrower, as appropriate.

01/07/2005

PERG 4.5.17

The FSA would normally expect an introducer to keep a written record of disclosures made to the borrower under article 33A of the Regulated Activities Order including those cases where disclosure is made on an oral basis only.

01/07/2005

PERG 4.5.18

In addition to the exclusion in article 33A, introducers may be able to take advantage of the exclusion in article 33 of the Regulated Activities Order (Introducing). This excludes arrangements where:

(1) they are arrangements under which persons will be introduced to another person;

(2) the person to whom the introduction is to be made is:

(a) an authorised person; or

(b) an exempt person acting in the course of business comprising a regulated activity in relation to which he is exempt; or

(c) a person who is not unlawfully carrying on regulated activities in the United Kingdom and whose ordinary business involves him in engaging in certain activities; and

(3) the introduction is made with a view to the provision of independent advice or the independent exercise of discretion in relation to investments generally or in relation to any class of investments (including mortgages) to which the arrangements relate.

01/07/2005

Other exclusions

PERG 4.5.19

The Regulated Activities Order contains a number of other exclusions which have the effect of preventing certain activities from amounting to regulated activities within article 25. These are referred to in PERG 4.10 (Exclusions applying to more than one regulated activity). There is also an exclusion where both the arranger and borrower are overseas, which is referred to in PERG 4.11 (Link between activities and the United Kingdom).

01/07/2005

PERG 4.6

Advising on regulated mortgage contracts

01/07/2005

Definition of 'advising on regulated mortgage contracts'

PERG 4.6.1

Article 53A of the Regulated Activities Order (Advising on regulated mortgage contracts) makes advising on regulated mortgage contracts a regulated activity. This covers advice which is both:

(1) given to a person in his capacity as borrower or potential borrower; and

(2) advice on the merits of the borrower:

(a) entering into a particular regulated mortgage contract (whether or not the entering into is done by way of business); or

(b) varying the terms of a regulated mortgage contract entered into by the borrower on or after 31 October 2004 in such a way as to vary the borrower's obligations under the contract.

01/07/2005

PERG 4.6.2

In the FSA's view, the circumstances in which a person is giving advice on the borrower varying the terms of a regulated mortgage contract so as to vary his obligations under the contract include (but are not limited to) where the advice is about:

(1) the borrower obtaining a further advance secured on the same land as the original loan; or

(2) a rate switch or a product switch (that is, where the borrower does not change lender but changes the terms for repayment from, say, a variable rate of interest to a fixed rate of interest or from one fixed rate to another); or

(3) the borrower transferring from a repayment mortgage to an interest-only mortgage or the reverse situation.

Although advice on varying the terms of a regulated mortgage contract is not a regulated activity if the contract was entered into before 31 October 2004, there may be instances where the variation to the old contract is so fundamental that it amounts to entering into a new regulated mortgage contract (see PERG 4.4.4 G and PERG 4.4.13G (2)). In that case, giving the advice would be a regulated activity.

01/07/2005

PERG 4.6.3

For advice to fall within article 53A as set out in PERG 4.6.1 G it must:

(1) relate to a particular mortgage contract (that is, one that the borrower may enter into or, in the case of advice on a variation, one that he has already entered into);

(2) be given to a person in his capacity as a borrower or potential borrower;

(3) be advice (that is, not just information); and

(4) relate to the merits of the borrower entering into, or varying the terms of, the contract.

01/07/2005

PERG 4.6.4

Each of these aspects is considered in greater detail in PERG 4.6.5 G (Advice must relate to a particular regulated mortgage contract) to PERG 4.6.17 G (Advice must relate to the merits (of entering into as borrower or varying)). Additionally, the following should be borne in mind:

(1) a person may be carrying on regulated activities involving arranging, whether or not that person is advising on regulated mortgage contracts (see PERG 4.5);

(2) the provision of advice or information may involve the communication of a financial promotion (see PERG 8 (Financial promotion and related activities); and

(3) PERG 8.25 ((Advice must relate to an investment which is a security or contractually based investment) to PERG 8.29 (Advice must relate to the merits (of buying or selling a particular investment)) will be relevant to any person who may be advising on other forms of investment at the same time as he advises on regulated mortgage contracts; this includes, for example, a person advising on the merits of using a particular endowment policy or ISA as the means for repaying the capital under an interest-only mortgage.

01/07/2005

Advice must relate to a particular regulated mortgage contract

PERG 4.6.5

Advice will come within the regulated activity in article 53A of the Regulated Activities Order only if it relates to a particular regulated mortgage contract (or several different regulated mortgage contracts). The question is whether a recommendation is made to a customer which either explicitly or implicitly steers the customer to a particular regulated mortgage contract because of its features.

01/07/2005

PERG 4.6.6

Advice would not relate to a particular contract if it consisted of a recommendation that a person should take out a mortgage with ABC building society without (expressly or by implication) specifying what kind of mortgage.

01/07/2005

PERG 4.6.7

Typical recommendations and whether they will be regulated as advice under article 53A of the Regulated Activities Order
This table belongs to PERG 4.6.5 G and PERG 4.6.6 G.

Recommendation

Regulated or not?

I recommend you take out the ABC Building Society 2 year fixed rate mortgage at 5%.

Yes. This is advice which steers the borrower in the direction of a particular mortgage which the borrower could enter into.

I recommend you do not take out the ABC Building Society 2 year fixed rate mortgage at 5%.

Yes. This is advice which steers the borrower away from a particular mortgage which the borrower could have entered into.

I recommend that you take out either the ABC Building Society 2 year fixed rate mortgage at 5% or the XYZ Bank standard variable rate mortgage.

Yes. This is advice which steers the borrower in the direction of more than one particular mortgage which the borrower could enter into.

I recommend you take out (or do not take out) an ABC Building Society fixed rate mortgage.

This will depend on the circumstances. If, for example, the society only offers one such mortgage, this would be a recommendation intended implicitly to steer the borrower in the direction of that particular mortgage which the borrower could enter into and therefore would be advice.

I suggest you take out (or do not take out) a mortgage with ABC Building Society.

No. This is not advice which steers the borrower in the direction of a particular mortgage which the borrower could enter into. However, if the society only offers one mortgage, this would be a recommendation intended implicitly to steer the borrower in the direction of that particular mortgage which the borrower could enter into and therefore would be advice.

I suggest you change (or do not change) your current mortgage from a variable rate to a fixed rate.

No in respect of the advice about rate type, as this does not steer the borrower in the direction of a particular mortgage which the borrower could enter into.
Yes in respect of the advice about varying the terms of the particular mortgage that the borrower had already entered into.

I suggest you take out (or do not take out) a variable rate mortgage.

No. This is not advice which steers the borrower in the direction of a particular mortgage which the borrower could enter into.

I recommend you take out (or do not take out) a mortgage.

No. This is not advice which steers the borrower in the direction of a particular mortgage which the borrower could enter into.

I would always recommend buying a house and taking out a mortgage as opposed to renting a property.

No. This is an example of generic advice which does not steer the borrower in the direction of a particular mortgage that he could enter into.

I recommend you do not borrow more than you can comfortably afford.

No. This is an example of generic advice.

If you are looking for flexibility with your mortgage I would recommend you explore the possibilities of either a flexible mortgage or an off-set mortgage. There are a growing number of lenders offering both.

No. This is an example of generic advice.

01/07/2005

PERG 4.6.8

Generic or general advice will not fall under article 53A. Examples of generic advice are shown in PERG 4.6.7 G.

01/07/2005

PERG 4.6.9

In the FSA's view, guiding a person through scripted questions or a decision tree should not, of itself, involve advice within the meaning of article 53A (it should be generic advice). But the combination of advice, which in isolation may properly be considered generic, with the identification of a particular or several particular regulated mortgage contracts may well, in the FSA's view, cause the person to be advising on regulated mortgage contracts; the FSA considers that it is necessary to look at the process as a whole; this is considered in more detail, in the context of scripted questioning, in PERG 4.6.22 G (Scripted questioning (including decision trees)).

01/07/2005

Advice given to a person in his capacity as a borrower or potential borrower

PERG 4.6.10

For the purposes of article 53A, advice must be given to or directed at someone who is acting as borrower or potential borrower. As indicated in PERG 4.4.2 G (Which borrowers?), this means the individual or trustee to whom the credit has been provided by the lender or who is looking to obtain the credit on the security of his property. Advice given to a body corporate will not generally be caught because the advice will not concern a regulated mortgage contract, as defined. But this does not apply where the body corporate is acting as trustee.

01/07/2005

PERG 4.6.11

Article 53A will not, for example, apply where advice is given to persons who receive it as:

(1) a lender under or administrator of a regulated mortgage contract; or

(2) an adviser who may use it to inform advice given by him to others; or

(3) a journalist or broadcaster; or

(4) an agent of a borrower unless appointed as the borrower's attorney and therefore entering into the regulated mortgage contract as agent (or proxy) for the borrower.

01/07/2005

PERG 4.6.12

Advice will still be covered by article 53A even though it may not be given to or directed at a particular borrower (for example advice given in a periodical publication or on a website).

01/07/2005

Advice or information

PERG 4.6.13

In the FSA's view, advice requires an element of opinion on the part of the adviser which steers or is intended to steer a borrower or potential borrower in the direction of one or more particular mortgages. In effect, it is a recommendation as to a course of action. Information on the other hand, involves objective statements of facts and figures.

01/07/2005

PERG 4.6.14

In general terms, simply giving balanced and neutral information without making any comment or value judgement on its relevance to decisions which a borrower may make is not advice.

01/07/2005

PERG 4.6.15

Information relating to entering into regulated mortgage contracts may often involve one or more of the following:

(1) an explanation of the terms and conditions of a regulated mortgage contract, whether given orally or in writing or by providing leaflets and brochures;

(2) a comparison of the features and benefits of one regulated mortgage contract with another;

(3) the production of scripted questions for the borrower to use in order to exclude options that would fail to meet his requirements; such questions may often go on to identify a range of regulated mortgage contracts with characteristics that appear to meet the borrower's requirements and to which he might wish to give detailed consideration (scripted questioning is considered in more detail in PERG 4.6.21 G to PERG 4.6.25 G (Scripted questioning (including decision trees));

(4) tables that compare the interest rates and other features of different mortgages;

(5) leaflets or illustrations that help borrowers to decide which type of mortgage to take out;

(6) the provision, in response to a request from a borrower who has identified the main features of the type of mortgage he seeks, of several leaflets together with an indication that all the regulated mortgage contracts described in them have those features.

01/07/2005

PERG 4.6.16

In the FSA's opinion, however, such information is likely take on the nature of advice if the circumstances in which it is provided give it the force of a recommendation as described in PERG 4.6.10 G. Examples of situations where information provided by a person ('P') are likely to take the form of advice are given below.

(1) P provides information on a selected, rather than balanced and neutral, basis that would tend to influence the decision of the borrower. This may arise where P offers to provide information about mortgages that contain features specified by the borrower but then exercises discretion as to which mortgages to offer to the borrower.

(2) P, as a result of going through the sales process, discusses the merits of one regulated mortgage contract over another, resulting in advice to enter into or not enter into a particular one.

01/07/2005

Advice must relate to the merits (of entering into as borrower or varying)

PERG 4.6.17

Advice under article 53A must relate to the pros or cons of entering into a regulated mortgage contract as borrower.

01/07/2005

PERG 4.6.18

A neutral and balanced explanation of the implications under a regulated mortgage contract of, for example, exercising certain rights or failing to make interest payments on time, need not, itself, involve advice on the merits of entering into that contract or varying its terms.

01/07/2005

PERG 4.6.19

Neither does advice on the merits of using a particular mortgage broker or adviser in his capacity as such amount to advice for the purposes of article 53A. It is not advice on the merits of entering into or varying the terms of a regulated mortgage contract.

01/07/2005

PERG 4.6.20

Without explicit or implicit advice on the merits of entering into as borrower or varying the terms of a regulated mortgage contract, advice will not fall under article 53A if it is advice on the likely meaning of uncertain provisions in a regulated mortgage contract or on how to complete an application form.

01/07/2005

Scripted questioning (including decision trees)

PERG 4.6.21

Scripted questioning involves using any form of sequenced questions in order to extract information from a person with a view to facilitating the selection by that person of a mortgage or other product that meets his needs. A decision tree is an example of scripted questioning. The process of going through the questions will usually narrow down the range of options that are available. Scripted questions must be prepared in advance of their actual use.

01/07/2005

PERG 4.6.22

Undertaking the process of scripted questioning gives rise to particular issues concerning advice. These mainly involve two aspects of this regulated activity. These are that advice must relate to a particular regulated mortgage contract (see PERG 4.6.5 G) and the distinction between information and advice (see PERG 4.6.13 G). Whether or not scripted questioning in any particular case is advising on regulated mortgage contracts will depend on all the circumstances. If the process involves identifying one or more particular regulated mortgage contracts then, in the FSA's view, to avoid advising on regulated mortgage contracts, the critical factor is likely to be whether the process is limited to, and likely to be perceived by the borrower as, assisting the borrower to make his own choice of product which has particular features which the borrower regards as important. The questioner will need to avoid making any judgement on the suitability of one or more products for the borrower. See also PERG 4.6.4 G for other matters that may be relevant.

01/07/2005

PERG 4.6.23

The potential for variation in the form, content and manner of scripted questioning is considerable, but there are two broad types. The first type involves providing questions and answers which are confined to factual matters (for example, whether a borrower wishes to pay a fixed or variable rate of interest or the size of deposit available). In the FSA's view, this does not of itself amount to advising on regulated mortgage contracts, as it involves the provision of information rather than advice. There are various possible scenarios, including the following:

(1) the questioner may go on to identify several regulated mortgage contracts which match features identified by the scripted questioning; provided these are presented in a balanced and neutral way (for example, they identify all the matching regulated mortgage contracts, without making a recommendation as to a particular one) this need not of itself involve advising on regulated mortgage contracts;

(2) the questioner may go on to advise the borrower on the merits of one particular regulated mortgage contract over another; this would be advising on regulated mortgage contracts;

(3) the questioner may, before or during the course of the scripted questioning, give a recommendation or opinion which influences the choice of mortgage contract and, following the scripted questioning, identify one or more particular regulated mortgage contracts; the key issue then is whether the advice can be said to relate to a particular regulated mortgage contract (see further PERG 4.6.22 G)).

01/07/2005

PERG 4.6.24

The second type of scripted questioning involves providing questions and answers incorporating opinion, judgement or recommendations (for example, whether a repayment mortgage or interest-only mortgage is a better option or whether interest rates are likely to rise). There are various possible scenarios, including the following:

(1) the scripted questioning may not lead to the identification of any particular regulated mortgage contract; in this case, the questioner has provided advice, but it is generic advice and does not amount to advising on regulated mortgage contracts; or

(2) the scripted questioning may lead to the identification of one or more particular regulated mortgage contracts; the key issue then is whether the advice can be said to relate to a particular regulated mortgage contract (see further PERG 4.6.22 G).

01/07/2005

PERG 4.6.25

In the scenarios identified in PERG 4.6.23G (3) and PERG 4.6.24G (2) , the FSA considers that it is necessary to look at the process and outcome of scripted questioning as a whole. It may be that the element of advice incorporated in the questioning may properly be viewed as generic advice if it were considered in isolation. But, although the actual advice may be generic, the process has ended in identifying one or more particular regulated mortgage contracts. The combination of the generic advice and the identification of a particular or several particular regulated mortgage contracts to which it leads may well, in the FSA's view, cause the questioner to be advising on regulated mortgage contracts. Factors that may be relevant in deciding whether the process involves advising on regulated mortgage contracts may include:

(1) any representations made by the questioner at the start of the questioning relating to the service he is to provide;

(2) the context in which the questioning takes place;

(3) the stage in the questioning at which the opinion is offered and its significance;

(4) the role played by any questioner who guides a person through the scripted questions;

(5) the outcome of the questioning (whether particular regulated mortgage contracts are highlighted, how many of them, who provides them, their relationship to the questioner and so on); and

(6) whether the scripted questions and answers have been provided by, and are clearly the responsibility of, an unconnected third party (for example, the FSA), and all that the questioner has done is help the borrower understand what the questions or options are and how to determine which option applies to his particular circumstances.

06/10/2007

Medium used to give advice

PERG 4.6.26

With the exception of periodicals, broadcasts and other news or information services (see PERG 4.6.30 G (Exclusion: periodical publications, broadcasts and websites)) the medium used to give advice should make no material difference to whether or not the advice is caught by article 53A.

01/07/2005

PERG 4.6.27

Advice can be provided in many ways including:

(1) face to face;

(2) orally to a group;

(3) by telephone;

(4) by correspondence (including e-mail);

(5) in a publication, broadcast or website; and

(6) through the provision of an interactive software system.

01/07/2005

PERG 4.6.28

Taking electronic commerce as an example, the use of electronic decision trees does not present any novel problems. The same principles apply as with a paper version (see PERG 4.6.21 G to PERG 4.6.25 G (Scripted questioning (including decision trees))).

01/07/2005

PERG 4.6.29

Advice in publications, broadcasts and websites is subject to a special regime - see PERG 4.6.30 G (Exclusion: periodical publications, broadcasts and websites) and PERG 7 (Periodical publications, news services and broadcasts: applications for certification).

01/07/2005

Exclusion: periodical publications, broadcasts and websites

PERG 4.6.30

The main exclusion from advising on regulated mortgage contracts relates to advice given in periodical publications, regularly updated news and information services and broadcasts (article 54 of the Regulated Activities Order (Advice given in newspapers etc)). The exclusion applies if the principal purpose of any of these is neither to give advice of the kind to which article 53 (Advising on investments) or article 53A applies nor to lead or enable persons to:

(1) acquire or dispose of securities or contractually based investments; or

(2) enter as borrower into regulated mortgage contracts or vary the terms of regulated mortgage contracts entered into by such persons as the borrower.

This is explained in greater detail, together with the provisions on the granting of certificates, in PERG 7 (Periodical publications, news services and broadcasts: applications for certification).

01/07/2005

Exclusion: advice in the course of administration by authorised person

PERG 4.6.31

Article 54A of the Regulated Activities Order excludes from advising on regulated mortgage contracts certain activities of an unauthorised person which is taking advantage of the exclusion from administering a regulated mortgage contract in article 62 (see PERG 4.8.4 G).

01/07/2005

Other exclusions

PERG 4.6.32

The Regulated Activities Order contains a number of other exclusions which have the effect of preventing certain activities from amounting to advising on regulated mortgage contracts. These are referred to in PERG 4.10 (Exclusions applying to more than one regulated activity).

01/07/2005

PERG 4.7

Entering into a regulated mortgage contract

01/07/2005

Definition of 'entering into a regulated mortgage contract'

PERG 4.7.1

Article 61(1) of the Regulated Activities Order makes entering into a regulated mortgage contract as lender a regulated activity.

01/07/2005

Exclusions

PERG 4.7.2

The Regulated Activities Order contains an exclusion which has the effect of preventing certain activities of trustees, nominees and personal representatives from amounting to entering into a regulated mortgage contract. This is referred to in PERG 4.10 (Exclusions applying to more than one regulated activity). There is also an exclusion where both the lender and borrower are overseas, which is referred to in PERG 4.11 (Link between activities and the United Kingdom).

01/07/2005

Transfer of lending obligations

PERG 4.7.3

A person who provides credit to a borrower under a regulated mortgage contract will enter into a regulated mortgage contract, even if the lending obligations under that contract are subsequently transferred to a third party. Consequently, a person who acts as a so-called 'correspondent lender' in the mortgage market will need to seek authorisation.

01/07/2005

PERG 4.8

Administering a regulated mortgage contract

01/07/2005

Definition of 'administering a regulated mortgage contract'

PERG 4.8.1

Article 61(2) of the Regulated Activities Order makes administering a regulated mortgage contract a regulated activity 'where the contract was entered into by way of business' on or after 31 October 2004.

01/07/2005

PERG 4.8.2

The definition does not include administration of a regulated mortgage contract which was not entered into by way of business. See PERG 4.3.3 G for a discussion of the 'by way of business' test. The definition also does not include administration of a mortgage which was entered into before 31 October 2004. See, however, PERG 4.4.4 G and PERG 4.4.13 G for a discussion of how a variation of a mortgage contract entered into before 31 October 2004 could amount to the entry into a new regulated mortgage contract on or after 31 October 2004.

01/07/2005

PERG 4.8.3

Under article 61(3)(b) of the Regulated Activities Order, administering a regulated mortgage contract is defined as either or both of:

(1) notifying the borrower of changes in interest rates or payments due under the contract, or of other matters of which the contract requires him to be notified; and

(2) taking any necessary steps for the purposes of collecting or recovering payments due under the contract from the borrower;

but does not include merely having or exercising a right to take action to enforce the regulated mortgage contract, or to require that action is or is not taken.

01/07/2005

Exclusion: arranging administration by authorised persons

PERG 4.8.4

Article 62 of the Regulated Activities Order provides that a person who is not an authorised person does not administer a regulated mortgage contract if he:

(1) arranges for a firm with permission to administer a regulated mortgage contract (a 'mortgage administrator') to administer the contract; or
(2) administers the regulated mortgage contract itself, provided that the period of administration is no more than one month after the arrangement in (1) has come to an end.

01/07/2005

PERG 4.8.5

This exclusion may be of a particular interest to a special purpose vehicle which administers regulated mortgage contracts transferred to it as part of a securitisation transaction.

01/07/2005

PERG 4.8.6

If an unauthorised administrator makes arrangements for a mortgage administrator to administer its regulated mortgage contracts, the exclusion may cease to be available because the mortgage administrator ceases to have the required permission, or because the arrangement is terminated. The exclusion gives the unauthorised administrator a one-month grace period during which it may administer the contracts itself. If the period of administration exceeds one month, the unauthorised administrator will be in breach of the general prohibition, and the FSA may take proceedings in respect of the breach. However:

(1) under section 23(3) of the Act, it is a defence in such proceedings for a person to show that 'he took all reasonable precautions and exercised all due diligence to avoid committing the offence';

(2) the FSA would consider whether a person had taken 'all reasonable precautions and exercised all due diligence' on a case-by-case basis; what is reasonable is a matter for the senior management of the unauthorised administrator to decide in each case, taking account of, for example, the financial standing of the mortgage administrator and its ability to perform its obligations under the administration contract;

(3) factors that the FSA would take into account in assessing whether an unauthorised administrator has taken 'all reasonable precautions and exercised all due diligence' would include:

(a) the level of the person's preparedness for a mortgage administrator to cease providing administration services; and

(b) the reasons for, and the circumstances of, the termination of arrangements with a mortgage administrator;

(4) whether any agreement made by an unauthorised administrator would be enforceable under section 26 of the Act (Agreements made by unauthorised persons) depends on whether the court is satisfied that this would be just and equitable; in this context, the court may have regard to the extent to which the administrator has complied with the FSA's guidance.

01/07/2005

Exclusion: administration pursuant to agreement with authorised person

PERG 4.8.7

Under article 63 of the Regulated Activities Order, a person who is not an authorised person does not administer a regulated mortgage contract if he administers the contract under an agreement with a firm with permission to administer a regulated mortgage contract. A firm with permission to administer a regulated mortgage contract may thus outsource or delegate the administration function to an unauthorised third party. A firm that proposes to do this should however note, as set out in SYSC 8.1.6 R and 8.1.8 R, that the FSA will continue to hold it responsible for the way in which the administration is carried on.

01/04/2009

Other exclusions

PERG 4.8.8

The Regulated Activities Order contains an exclusion which has the effect of preventing certain activities of trustees, nominees and personal representatives from amounting to administering regulated mortgage contracts. This is referred to in PERG 4.10 (Exclusions applying to more than one regulated activity). There is also an exclusion where both the administrator and borrower are overseas, which is referred to in PERG 4.11 (Link between activities and the United Kingdom).

01/07/2005

PERG 4.9

Agreeing to carry on a regulated activity

01/07/2005

PERG 4.9.1

Under article 64 of the Regulated Activities Order (Agreeing to carry on specific kinds of activity), in addition to the regulated activities of arranging (bringing about), making arrangements with a view to, advising on, entering into and administering regulated mortgage contracts, agreeing to do any of these things is itself a regulated activity. In the FSA's opinion, this activity concerns the entering into of a legally binding agreement to provide the services that it concerns. So a person is not carrying on a regulated activity involving agreeing merely because he makes an offer to do so.

01/07/2005

PERG 4.9.2

To the extent that an exclusion applies in relation to a regulated activity, then 'agreeing' to carry on an activity within the exclusion will not be a regulated activity. This is the effect of article 4(3) of the Regulated Activities Order.

01/07/2005

PERG 4.10

Exclusions applying to more than one regulated activity

01/07/2005

Exclusion: Activities carried on in the course of a profession or non-investment business

PERG 4.10.1

The exclusion in article 67 of the Regulated Activities Order (Activities carried on in the course of a profession or non-investment business) applies to the regulated activities of arranging (bringing about), making arrangements with a view to and advising on regulated mortgage contracts. PERG 4.14 contains further guidance on mortgage activities carried on by professional firms.)

01/07/2005

PERG 4.10.2

Arranging (bringing about), making arrangements with a view to and advising on regulated mortgage contracts are excluded if they are carried on by a person in the course of carrying on a profession or business (other than a regulated activity). This is the case if it may reasonably be regarded as necessary for him to make the arrangements or give the advice in order to provide his professional or other services and he is not separately paid for making the arrangements or giving the advice.

01/07/2005

PERG 4.10.3

In the FSA's view, for arranging or advice to be a necessary part of other services it must, as a general rule, be the case that it is not possible for the other services to be provided unless the arranging or advising are also provided.

01/07/2005

PERG 4.10.4

Situations where this exclusion might apply, in the FSA's view, are set out below:

(1) Advice by solicitors: the provision of legal services may involve a solicitor advising his client on the legal effects and consequences of entering into a particular regulated mortgage contract. To the extent that this may involve advice on the merits of entering into the contract it is likely to be a necessary part of the legal advice. But it would not be necessary for the solicitor to go on to recommend that his client would be better to enter into a different particular regulated mortgage contract.

(2) Advice by licensed conveyancers: as a necessary part of conveyancing work and under their duty of care to the client, a licensed conveyancer may state that the mortgage the client has applied for is right for them or not. If the client has already applied for a mortgage and the conveyancer just says that their choice is right or wrong but does not recommend alternatives, then that advice is likely to be excluded. But if the conveyancer recommends an alternative then that advice is unlikely to be excluded.

(3) Conveyancing as arranging: the provision of pure conveyancing services (whether performed by a solicitor or a licensed conveyancer) will, themselves, be arrangements within the scope of article 25A. So they will be excluded under article 67. But if the client does not yet have a mortgage, an introduction to or other arrangement involving a lender is unlikely to be a necessary part of conveyancing services.

(4) Debt counselling services: The provision of debt counselling services may involve the counseller advising his client on the merits of varying the terms of an existing regulated mortgage contract and, in certain cases, assisting a distressed borrower in corresponding with a lender. Such advice and arrangements are likely to be a necessary part of the debt counselling services. But it would not be a necessary part of those services for the counsellor to offer advice on the merits of his client entering into a new particular regulated mortgage contract.

01/07/2005

Exclusion: Trustees, nominees and personal representatives

PERG 4.10.5

There are exclusions that apply, in certain circumstances, in relation to each of the regulated mortgage activities if the person carrying on the activity is acting in the capacity of trustee or personal representative. Article 66 of the Regulated Activities Order (Trustees, nominees and personal representatives) sets out the circumstances in which the exclusions apply. The terms of these differ slightly depending on the regulated activity.

01/07/2005

PERG 4.10.6

For each of the regulated activities of arranging (bringing about), making arrangements with a view to and advising on regulated mortgage contracts, the exclusions apply if the trustee or personal representative is acting in that capacity and:

(1) the arrangements he makes concern the entering into or variation of regulated mortgage contracts and the contracts are to be entered into or varied either by himself and a fellow trustee or personal representative or by the beneficiary under the trust, will or estate on behalf of which he is acting; or

(2) the advice is given to such trustees or personal representatives or beneficiaries.

01/07/2005

PERG 4.10.7

For each of the regulated activities of entering into a regulated mortgage contract and administering a regulated mortgage contract , the exclusions apply if the trustee or personal representative is acting in that capacity and the borrower is a beneficiary under the trust, will or estate on behalf of which he is acting.

01/07/2005

PERG 4.10.8

In every case, the trustee or personal representative must not receive any remuneration that is additional to any he receives for acting in his capacity as trustee or personal representative. But a person is not to be regarded as receiving additional remuneration merely because his remuneration as trustee or personal representative is calculated by reference to time spent.

01/07/2005

PERG 4.11

Link between activities and the United Kingdom

01/07/2005

Introduction

PERG 4.11.1

Section 19 of the Act (The general prohibition) provides that the requirement to be authorised under the Act only applies in relation to regulated activities which are carried on 'in the United Kingdom'. In many cases, it will be quite straightforward to identify where an activity is carried on. But when there is a cross-border element, for example because a borrower is outside the United Kingdom or because some other element of the activity happens outside the United Kingdom, the question may arise as to where the activity is carried on. This section describes the legislation that is relevant to this question and gives the FSA's views on various scenarios.

01/07/2005

PERG 4.11.2

Even if a person concludes that he is not carrying on a regulated activity in the United Kingdom, he will need to ensure that he does not contravene other provisions of the Act that apply to unauthorised persons. These include the controls on financial promotion (section 21 (Financial promotion) of the Act) (see PERG 8 (Financial promotion and related activities)), and on giving the impression that a person is authorised (section 24 (False claims to be authorised or exempt)).

01/07/2005

Legislative provisions: definition of "regulated mortgage contract"

PERG 4.11.3

A contract is only a regulated mortgage contract if the land is in the United Kingdom (see PERG 4.4.5 G (Land in the United Kingdom EEA )).

01/07/2005

Legislative provisions: section 418 of the Act

PERG 4.11.4

Section 418 of the Act deals with the carrying on of regulated activities in the United Kingdom. It extends the meaning that 'carry on a regulated activity in the United Kingdom' would ordinarily have by setting out additional cases. The Act states that in these cases a person who is carrying on a regulated activity but would not otherwise be regarded as carrying on the activity in the United Kingdom is, for the purposes of the Act, to be regarded as carrying on the activity in the United Kingdom.

01/07/2005

PERG 4.11.5

For the purposes of regulated mortgage activities, sections 418(2), (4), (5), (5A) and (6) are relevant, as follows:

(1) Section 418(2) refers to a case where a UK-based person carries on a regulated activity in another EEA State in the exercise of rights under a Single Market Directive. The only Single Market Directive which is relevant to mortgages is the Banking Consolidation Directive .

(2) Section 418(4) refers to the case where a UK-based person carries on a regulated activity and the day-to-day management of the activity is the responsibility of an establishment in the United Kingdom.

(3) Section 418(5) refers to the case where a regulated activity is carried on by a person who is not based in the United Kingdom but is carried on from an establishment maintained by him in the United Kingdom.

(4) Section 418(5A) refers to the case where an electronic commerce activity is carried on with or for a person in an EEA State from an establishment in the United Kingdom. See further PERG 4.11.21 G (E-Commerce Directive).

(5) Section 418(6) makes it clear that for the purposes of sections 418(2) to (5A), it is irrelevant where the person with whom the activity is carried on is situated.

01/07/2005

Legislative provisions: overseas persons exclusion

PERG 4.11.6

The exclusions in article 72(5A) to (5F) of the Regulated Activities Order (Overseas persons) provide that an overseas person does not carry on the regulated activities of:

(1) arranging (bringing about) or making arrangements with view to a regulated mortgage contract;

(2) entering into a regulated mortgage contract; or

(3) administering a regulated mortgage contract;

if the borrower (and each of them, if more than one) is an individual and is normally resident overseas. In the case of arranging a variation of, or administration of, an existing regulated mortgage contract, each borrower must be an individual who was normally resident overseas when he entered into the contract. In the FSA's view, normal residence for the purposes of this exclusion envisages physical presence with a degree if continuity, making allowance for occasional temporary absences (e.g. holiday). An overseas person under article 3 of the Regulated Activities Order (Interpretation) is a person who carries on certain regulated activities albeit not from a permanent place of business maintained by him in the United Kingdom.

01/07/2005

PERG 4.11.7

An overseas person might advise a person in the United Kingdom on an endowment assurance at the same time as advising on a regulated mortgage contract. If so, whilst the overseas person exclusion in article 72(5) will apply in relation to the advice on the endowment assurance, there will be no 'overseas persons exclusion' for the advice on the regulated mortgage contract.

01/07/2005

Territorial scenarios: general

PERG 4.11.8

The FSA's view of the effect of the Act and Regulated Activities Order in various territorial scenarios is set out in the remainder of this section. In those scenarios:

(1) the term "service provider" is used to describe a person carrying on any of the regulated mortgage activities;

(2) the term "borrower" refers to a borrower who is an individual and not a trustee; the position of a borrower acting as a trustee is not considered; and

(3) it is assumed that the activity is not an electronic commerce activity (as to which, see PERG 4.11.21 G (E-Commerce Directive)).

PERG 4.11.9 G contains a simplified tabular summary of those views, which should be used only in conjunction with the more detailed analysis.

01/07/2005

PERG 4.11.9

Simplified summary of the territorial scope of the regulated mortgage activities, to be read in conjunction with the rest of this section.
This table belongs to PERG 4.11.8 G

Individual borrower resident and located:

in the UK

outside the UK

Service provider carrying on regulated activity from establishment:

in the UK

Yes

outside the UK

Yes

Yes = authorisation or exemption required
No = authorisation or exemption not required

01/07/2005

Service provider in the United Kingdom

PERG 4.11.10

Where a person is carrying on any of the regulated mortgage activities from an establishment maintained by him in the United Kingdom, that person will be 'carrying on a regulated activity in the United Kingdom'. The location and residence of the borrower is irrelevant. That is the practical effect of sections 418(4), (5) and (6) of the Act.

01/07/2005

PERG 4.11.11

There may also be situations where a lender, who does not maintain an establishment in the United Kingdom, provides services in the United Kingdom. For instance, a lender might attend a property exhibition in the United Kingdom at which he sets up a loan with a borrower. A lender might also attend the offices of its UK-based lawyers, or appoint them as its agent, to enter into a contract with a borrower. In these cases, the overseas lender would only be carrying on a regulated activity in the United Kingdom if he subsequently enters into a regulated mortgage contract with a UK resident. This is because arrangements made with borrowers at the exhibition would be subject to the exclusion in article 28 of the Regulated Activities Order (Arranging transactions to which the arranger is a party) (see PERG 4.5.7 G ). As regards entering into a regulated mortgage contract with a borrower resident overseas, this would be subject to the overseas persons exclusion.

06/10/2007

Service provider overseas: general

PERG 4.11.12

If a service provider is overseas, the question of whether that person is carrying on a regulated activity in the United Kingdom will depend upon:

(1) the type of regulated activity being carried on;

(2) section 418 of the Act;

(3) the residence and location of the borrower;

(4) the application of the overseas persons exclusion in article 72(5A) to (5F) of the Regulated Activities Order; and

(5) whether the service provider is carrying on an electronic commerce activity.

The factors in (1), (3) and (4) are considered in relation to each regulated activity in PERG 4.11.13 G to PERG 4.11.20 G. The factor in (5) is considered in PERG 4.11.21 G.

01/07/2005

Service provider overseas: arranging regulated mortgage contracts

PERG 4.11.13

When a person is arranging (bringing about) regulated mortgage contracts or making arrangements with a view to regulated mortgage contracts from overseas, the question of whether he will be carrying on regulated activities in the United Kingdom will depend on the relevant circumstances. In the FSA's view, factors to consider include:

(1) the territorial limitation in the definition of regulated mortgage contract so that regulation only applies if the land is in the United Kingdom;

(2) the overseas persons exclusion in article 72(5A) to (5C) of the Regulated Activities Order; and

(3) where the arrangements are in fact made.

01/07/2005

PERG 4.11.14

In the FSA's view:

(1) if the borrower is normally resident in the United Kingdom, the clear territorial limitation in the definition of regulated mortgage contract carries most weight in determining where regulation should apply; it is likely that the arranger will be carrying on regulated activities in the United Kingdom;

(2) if the borrower is normally resident overseas, the arrangements are excluded by the overseas persons exclusion.

In the case of arranging (bringing about) regulated mortgage contracts, the normal residence of the borrower at the time the arrangements are made is the determining factor, except in the case of arranging (bringing about) a variation of a contract, in which case it is the normal residence of the borrower at the time that the regulated mortgage contract was entered into. In the case of making arrangements with a view to regulated mortgage contracts, the normal residence of the borrower at the time he participates in the arrangements is the determining factor.

01/07/2005

Service provider overseas: advising on regulated mortgage contracts

PERG 4.11.15

In the FSA's view, advising on regulated mortgage contracts is carried on where the borrower receives the advice. Accordingly:

(1) if the borrower is located in the United Kingdom, a person advising that borrower on regulated mortgage contracts is carrying on a regulated activity in the United Kingdom; but

(2) if the service provider and borrower are both located overseas, the regulated activity is not carried on in the United Kingdom.

01/07/2005

Service provider overseas: entering into a regulated mortgage contract

PERG 4.11.16

The effect of article 72(5D) of the Regulated Activities Order is that an overseas person does not carry on the regulated activity of entering into a regulated mortgage contract if the borrower is resident overseas at the time the contract is entered into.

01/07/2005

PERG 4.11.17

In the FSA's view, in circumstances other than those excluded by article 72(5D) of the Regulated Activities Order, an overseas lender is likely to carry on the regulated activity of entering into regulated mortgage contracts in the United Kingdom. This is because of:

(1) the territorial limitation in the definition of regulated mortgage contract so that regulation applies only if the land is in the United Kingdom;

(2) the general principle and practice that contracts relating to land are usually governed by the law of the place where the land is situated;

(3) practical issues of conveyancing; a lender is likely to use the services of a solicitor or licensed conveyancer operating from the United Kingdom, who enters into the regulated mortgage contract as agent for the lender in the United Kingdom; and

(4) the existence of the overseas persons exclusion in article 72(5D).

01/07/2005

Service provider overseas: administering a regulated mortgage contract

PERG 4.11.18

The effect of article 72(5E) and (5F) of the Regulated Activities Order is that an overseas person who administers a regulated mortgage contract, where the borrower was resident overseas at the time that the contract was entered into, does not carry on the regulated activity of administering a regulated mortgage contract.

01/07/2005

PERG 4.11.19

In the FSA's view, in circumstances other than those excluded by article 72(5E) of the Regulated Activities Order, an overseas administrator is likely to carry on the regulated activity of administering a regulated mortgage contract in the United Kingdom. This is because:

(1) the territorial limitation in the definition of regulated mortgage contract means that regulation applies only if the land is in the United Kingdom;

(2) when administrators notify borrowers resident in the United Kingdom of matters pursuant to a regulated mortgage contract, such notification is likely to be carried on in the United Kingdom;

(3) the steps involved in collecting or recovering payments will generally include giving notice to the borrower at his UK address;

(4) legal action to recover sums due under regulated mortgage contracts will in many cases require proceedings before courts in the United Kingdom, either to enforce regulated mortgage contracts subject to the jurisdiction of these courts or to register and enforce judgements obtained elsewhere, in the case of contracts subject to non-UK jurisdictions; and

(5) of the existence of the exclusion in article 72(5E) (Overseas persons).

01/07/2005

Service provider: agreeing to carry on a regulated activity

PERG 4.11.20

In most cases, there will be no preliminary agreement to enter into a regulated mortgage contract in advance of entering into the contract itself. Moreover, the exclusions relevant to a regulated activity are taken into account to determine whether a person is agreeing to carry on that regulated activity. So, for example, agreeing to arrange regulated mortgage contracts in cases where borrower and service provider are overseas, would not be regulated activities because the activities themselves are outside the scope of regulation. Otherwise, in the FSA's view, the issue of where agreeing to carry on a regulated activity takes place will depend on such factors as a contractual analysis of where the agreement is entered into, including where appropriate the general position at common law (see, for example, PERG 4.11.17 G).

01/07/2005

E-Commerce Directive

PERG 4.11.21

The E-Commerce Directive removes restrictions on the cross-border provision of services by electronic means, introducing a country of origin approach to regulation. This requires EEA States to impose their requirements on the outward provision of such services and to lift them from inward providers. The E-Commerce Directive contains only a few exceptions, termed derogations, from this principle. The E-Commerce Directive defines an e-commerce service (termed an information society service) as any service, normally provided for remuneration, at a distance, by electronic means, and at the individual request of the recipient of the service. So, for example, it includes services provided over the internet, by solicited e-mail, and interactive digital television.

01/11/2007

Distance marketing directive

PERG 4.11.22

The FSA will be responsible for implementing the Distance Marketing Directive for those firms and activities it regulates. The FSA and the Treasury agree that the Distance Marketing Directive is intended to operate on a country of origin basis, except where a firm is marketing into the UK from an establishment in an EEA State which has not implemented the Directive.

01/07/2005

PERG 4.12

Appointed representatives

01/07/2005

What is an appointed representative?

PERG 4.12.1

Section 39 of the Act makes provision exempting appointed representatives from the need to obtain authorisation. An appointed representative is a person who is a party to a contract with an authorised person which permits or requires the appointed representative to carry on certain regulated activities. SUP 12 (Appointed representatives) contains guidance relating to appointed representatives.

01/07/2005

PERG 4.12.2

A person who is an authorised person cannot be an appointed representative (see section 39(1) of the Act (Exemption of appointed representatives)).

01/07/2005

Business for which an appointed representative is exempt

PERG 4.12.3

An appointed representative can carry on only those regulated activities which are specified in the Appointed Representatives Regulations. As respects regulated mortgage contracts, these are arranging (bringing about), making arrangements with a view to and advising on regulated mortgage contracts (as well as agreeing to do so).

01/07/2005

Persons who are not already appointed representatives

PERG 4.12.4

A person who is not already an appointed representative for designated investment business activities, and who may wish to become one in relation to the regulated activities of arranging (bringing about), making arrangements with a view to or advising on regulated mortgage contracts, can do so. He must be appointed under a written contract by an authorised person, who has permission to carry on those regulated activities, and who accepts responsibility for the appointed representative's actions when acting for him. SUP 12.4 (What must a firm do when it appoints an appointed representative?) and SUP 12.5 (Contracts: required terms) set out the detailed requirements that must be met for an appointment to be made.

01/07/2005

Persons who are already appointed representatives

PERG 4.12.5

Where a person is already an appointed representative (in relation to any non-mortgage activities) and he proposes to carry on any regulated mortgage activities, he will need to consider the following matters.

(1) He must become authorised if his proposed mortgage activities include either entering into a regulated mortgage contract or administering a regulated mortgage contract. These activities may not be carried on by appointed representatives and the Act does not permit any person to be exempt for some activities and authorised for others. Once authorised, the person may only carry on the regulated activities that are covered by his permission. He will therefore need to apply for a permission to cover all the regulated activities that he proposes to carry on.

(2) If he proposes to carry on the regulated activities of arranging (bringing about), making arrangements with a view to or advising on regulated mortgage contracts, he may be able to do so as an appointed representative. But this will depend on a number of issues.

(a) He will need to be appointed by an authorised person who is prepared to accept responsibility for the appointed representative's regulated mortgage activities when acting for him. The authorised person must have permission to carry on these regulated mortgage activities.

(b) If these regulated mortgage activities are to be carried on for the same authorised person who has already appointed him for his non-mortgage regulated activities, the contract between them will need to be amended to reflect the additional activities. Other amendments to the contract may be required.

(d) If the regulated mortgage activities relating to arranging are to be limited to making introductions, he may be able to operate within the exclusion for introducers described at PERG 4.5.10 G. This is different from the exclusions for introductions relating to securities and contractually based investments, which are described at PERG 8.33.

01/07/2005

PERG 4.13

Other exemptions

01/07/2005

PERG 4.13.1

Certain named persons are exempted by the Exemption Order from the need to obtain authorisation. The following bodies are exempt in relation to carrying on by them of any of the regulated mortgage activities:

(1) local authorities (paragraph 47 of the Schedule to the Exemption Order) but not their subsidiaries;

(2) registered social landlords in England and Wales within the meaning of Part I of the Housing Act 1996 (paragraph 48(a) of the Schedule to the Exemption Order) but not their subsidiaries;

(3) registered social landlords in Scotland within the meaning of the Housing (Scotland) Act 2001 (paragraph 48(2)(b) of the Schedule to the Exemption Order) but not their subsidiaries;

(4) The Housing Corporation (paragraph 48(c) of the Schedule to the Exemption Order);

(5) Scottish Homes (paragraph 48(d) of the Schedule to the Exemption Order); and

(6) The Northern Ireland Housing Executive (paragraph 48(e) of the Schedule to the Exemption Order).

01/07/2005

PERG 4.14

Mortgage activities carried on by professional firms

01/07/2005

Introduction

PERG 4.14.1

Professional firms (broadly, firms of solicitors, accountants and actuaries) may carry on regulated mortgage activities in the course of their usual professional activities. The regulated activities of advising on, arranging (bringing about), making arrangements with a view to and administering regulated mortgage contracts are those most likely to be relevant.

01/07/2005

PERG 4.14.2

In the FSA's view, the following exclusions are likely, in many cases, to exclude the normal activities of professional firms from amounting to regulated mortgage activities:

(1) article 67 of the Regulated Activities Order (Activities carried on in the course of a profession or non-investment business), which applies in relation to the advising and arranging activities (see PERG 4.10.1 G);

(2) article 66 of the Regulated Activities Order (Trustees, nominees and personal representatives) which applies in relation to each of the regulated mortgage activities (see PERG 4.10.5 G); and

(3) article 63 of the Regulated Activities Order (Administration pursuant to agreement with authorised person) which applies in relation to administering a regulated mortgage contract (see PERG 4.8.7 G); in the FSA's view, this would exclude steps taken by a solicitor to recover payments due under a regulated mortgage contract if his instructions come from an authorised person with permission to administer a regulated mortgage contract.

01/07/2005

PERG 4.14.3

In addition, a professional firm may, in certain circumstances, be able to use the Part XX exemption to avoid any need for authorisation. PROF 2 (Status of exempt professional firm) contains general guidance on the Part XX exemption. In particular, PROF 2.1.9 G explains that the Treasury have specified certain regulated activities to which the Part XX exemption cannot apply in the Financial Services and Markets Act 2000 (Professions) (Non-Exempt Activities Order 2001 ("the Non-Exempt Activities Order"). PERG 4.14.4 G to PERG 4.14.6 G explain which of the regulated activities relating to regulated mortgage contracts have been so specified.

01/07/2005

Part XX exemption: arranging regulated mortgage contracts

PERG 4.14.4

Arranging (bringing about) a regulated mortgage contract and making arrangements with a view to a regulated mortgage contract have not been specified in the Non-Exempt Activities Order. Accordingly, a professional firm may carry on these regulated activities without authorisation, provided the other conditions of the Part XX exemption are complied with.

01/07/2005

Part XX exemption: advising on regulated mortgage contracts

PERG 4.14.5

Advising on regulated mortgage contracts has been specified in the Non-Exempt Activities Order. However, a professional firm is prevented from using the Part XX exemption to advise on regulated mortgage contracts only if the advice it gives consists of a recommendation. This will be the case if the recommendation is made to an individual to enter into a regulated mortgage contract with a lender who would, in entering into the contract, carry on the regulated activity of entering into a regulated mortgage contract, irrespective of whether the lender is an authorised or exempt person or would carry on the activity by way of business. However, a professional firm is allowed to give advice that involves a recommendation of this kind provided the advice endorses a corresponding recommendation given to the borrower by an authorised person who has permission to advise on regulated mortgage contracts or an exempt person whose exemption covers that activity.

01/07/2005

Part XX exemption: entering into and administering a regulated mortgage contract

PERG 4.14.6

Entering into a regulated mortgage contract and administering a regulated mortgage contract have both been specified in the Non-Exempt Activities Order. As an exception, a professional firm is allowed under the Part XX exemption to carry on these regulated activities if the firm is acting as a trustee or personal representative. But this is provided that the borrower is a beneficiary under the trust, will or intestacy.

01/07/2005

PERG 4.15

Mortgage activities carried on by 'packagers'

01/07/2005

Introduction

PERG 4.15.1

The term 'packagers' is used variously to describe a range of intermediaries and their different activities in the mortgage process. Depending on the nature of their activities, these intermediaries may carry on regulated mortgage activities. The regulated activities likely to be of most relevance are arranging (bringing about) or making arrangements with a view to regulated mortgage contracts (described in more detail at PERG 4.5) and advising on regulated mortgage contracts (described in more detail at PERG 4.6). It is important to note that it is the nature of the relevant activities and not an entity's own description of itself or its activities that will determine the need for authorisation. This section describes the activities of various types of 'packagers'.

01/07/2005

Mortgage Clubs (sometimes called mortgage wholesalers)

PERG 4.15.2

So-called 'mortgage clubs' or 'wholesalers' essentially act as a distribution function for lenders, providing information to intermediaries about current deals available from a range of lenders. They provide information (often through an electronic sourcing system) in a way that helps intermediaries search the market effectively and, as such, do not deal directly with individual borrowers. If only engaged in these activities and without direct contact with individual borrowers, in the FSA's view these entities are unlikely to carry on a regulated mortgage activity because they will not:

(1) arrange (bring about) regulated mortgage contracts; their involvement is too indirect to bring about the contract;

(2) make arrangements with a view to regulated mortgage contracts; borrowers will not be participating in the arrangements which they make; or

(3) advise on regulated mortgage contracts, because they provide information not advice and the information is, in any event, directed to intermediaries rather than borrowers.

01/07/2005

Mortgage packaging companies

PERG 4.15.3

So-called 'mortgage packaging companies' may undertake certain parts of the mortgage process for lenders on an outsourced basis, ensuring that a complete set of documentation is collated and sent to the lender. This might include receiving application forms from intermediaries, undertaking credit reference checks and instructing a valuer. Other activities might include a product placement service for other intermediaries who provide product advice or recommendations to their clients. In the FSA's view, mortgage packaging companies engaged in these activities are unlikely to be carrying on a regulated activity where they have no have no direct contact or contract with potential borrowers (for the reasons given in PERG 4.15.2 G).

01/07/2005

Broker packagers (sometimes called 'intermediary brokers')

PERG 4.15.4

The term 'broker packagers' is typically used to describe intermediaries who either market their services directly to borrowers or who offer other intermediaries a complete mortgage outsourcing service. They are often involved in the sales and advice process, including helping the borrower complete application forms. In the FSA's view, broker packagers carrying on these types of activity in direct contact with the borrower are likely to be carrying on the regulated activities ofarranging (bringing about) and making arrangements with a view to regulated mortgage contracts. They may also be advising on regulated mortgage contracts depending on the circumstances.

01/07/2005

PERG 4.16

Mortgage activities

01/07/2005

Introduction

PERG 4.16.1

It is common practice in the mortgage industry for the original lender which makes the loan to pass on ownership of the loan to a third party through securitisation. Securitisation transactions take different forms, but the essence is that the original lender sells the beneficial interest (with or without the legal interest) in a mortgage portfolio to a special purpose vehicle ('SPV'), which raises finance to pay for the portfolio by selling its own securities. The original lender may (or may not) retain the first legal charge on each mortgage in the portfolio. There may also be other parties to the transaction, for example a security trustee to whom the SPV in turn charges the portfolio. Invariably, the SPV will also appoint either the original lender or a third party to administer the portfolio on its behalf. This section discusses whether, on a typical securitisation transaction, a SPV (and similarly a security trustee) carries on a regulated mortgage activity.

01/07/2005

PERG 4.16.2

The government's intention behind the regulatory regime for mortgages was "to ensure that, at any one time, it would be possible for each mortgage to be linked to one and only one FSA authorised firm (with mortgage permission) to have the ongoing regulatory responsibility towards consumers" (HM Treasury, Regulating Mortgages, February 2002, paragraph 47). In other words, it should be possible to arrange a securitisation transaction so that the SPV and other third parties do not carry on regulated activities, so long as an authorised person (with appropriate permission) is involved.

01/07/2005

Entering into a regulated mortgage contract

PERG 4.16.3

A SPV does not carry on the regulated activity of entering into a regulated mortgage contract (or agreeing to do so), merely by acquiring the legal or beneficial interest in the contract from the original lender, or by providing funding to the original lender. If the contract is subsequently varied, a SPV should take care to avoid the original contract being replaced with a new regulated mortgage contract (see PERG 4.4.4 G and PERG 4.4.13 G). The original lender is, of course, likely to require authorisation.

01/07/2005

Administering, arranging and advising on a regulated mortgage contract

PERG 4.16.4

If an unauthorised SPV arranges for an authorised person with permission to administer a regulated mortgage contract to administer its regulated mortgage contracts, it can avoid carrying on the regulated activities of:

(1) administering a regulated mortgage contract, because of the exclusion in article 62 of the Regulated Activities Order (described in PERG 4.8.4 G);

(2) arranging (bringing about) or making arrangements with a view to regulated mortgage contracts, because any arrangements that may be made by the authorised person in administering the contract are excluded, for the SPV, by article 29A of the Regulated Activities Order (referred to at PERG 4.5.9 G); in addition, making the original securitisation arrangements is unlikely to be a regulated activity, as it is unlikely to "bring about" the entering into of the contract and the borrower is unlikely to participate in the arrangements;

(3) advising on regulated mortgage contracts, because any advice given by the authorised person in administering the contract is excluded, for the SPV, by article 54A of the Regulated Activities Order (referred to at PERG 4.6.28 G); and

(4) agreeing to carry on any of the activities in (1) to (3) because agreeing to carry on an activity is only a regulated activity if the activity to be carried on would itself be a regulated activity.

01/07/2005

PERG 4.17

Interaction with the Consumer Credit Act

01/07/2005

Entering into and administering a regulated mortgage contract

PERG 4.17.1

Article 90 of the Regulated Activities Order essentially carves out regulated mortgage contracts from regulation under the Consumer Credit Act 1974 (CCA). Many loans that fall within the regulated mortgage contract definition are already exempt from much of the detail required under the CCA.

01/07/2005

PERG 4.17.2

Some loans that will fall within the regulated mortgage contract definition are also currently classified as regulated agreements under the CCA. In these cases, the impact of the carve-out in article 90 of the Regulated Activities Order is likely to be more significant. In particular, most of the CCA controls in respect of entering into, operation and termination of agreements will not apply. Article 90 also, however, provides that section 126 of the CCA (Enforcement of land mortgages) and other provisions relating to it, apply to agreements which would otherwise be regulated agreements. In the FSA's view, it follows that section 126 of the CCA and related provisions including sections 129, 130, 131, 135 and 136 (dealing amongst other things with extension of time and protection of property pending proceedings) will apply to these regulated mortgage contracts.

01/07/2005

PERG 4.17.3

Regulated mortgage contracts that were in place at 31 October 2004 and which are subject to the CCA will remain subject to that regime and will come within the FSA's remit. But there may be instances where a variation of an existing contract amounts to entering into a new regulated mortgage contract (see PERG 4.4.4 G and PERG 4.4.13 G).

01/07/2005

PERG 4.17.4

Unsecured loans, as well as loans secured on second charges on property, are not subject to the article 90 carve-out. Many of these loans are currently covered by the CCA and the position will not change.

01/07/2005

PERG 4.17.5

In some cases, lenders may provide a flexible mortgage product comprising both a secured first charge loan and unsecured borrowing, for example credit card facilities. In this example, in addition to considering the need for authorisation, the lender will also require a CCA licence in respect of the unsecured lending, even where the product is sold under a single agreement.

01/07/2005

Advising on and arranging a regulated mortgage contract

PERG 4.17.6

The CCA also regulates persons who carry on certain types of ancillary credit business including "credit brokerage", "debt-adjusting" and "debt-counselling", as defined by section 145 of the CCA. One aspect of the CCA regime is that a licence is required for these activities. Article 20 of the Financial Services and Markets Act 2000 (Regulated Activities) (Amendment) (No. 1) Order 2003 (SI 2003/1475) adds new exceptions to section 145 of the CCA in relation to these activities.

01/07/2005

PERG 4.17.7

Article 20(2) of the Financial Services and Markets Act 2000 (Regulated Activities) (Amendment) (No. 1) Order 2003 amends section 146 of the CCA (Exceptions from section 145) so that it is not "credit brokerage" for a person to introduce an individual seeking to obtain credit if the introduction is made (a) to an authorised person who has permission to enter as lender into "relevant agreements"; or (b) to a "qualifying broker", with a view to that individual obtaining credit under a "relevant agreement".

01/07/2005

PERG 4.17.8

Amended section 146 of the CCA defines "relevant agreement" as meaning a consumer credit agreement secured by a land mortgage, where entering into that agreement as lender is a regulated activity. "Qualifying broker" is defined in the same section as meaning a person who may effect introductions of the kind mentioned in PERG 4.17.7 G without contravening the general prohibition under section 19 of the Act. "Credit brokerage" itself includes introducing an individual seeking to obtain credit to finance the acquisition of a dwelling to be occupied by himself or his relatives, to any person carrying on a business in the course of which he provides credit secured on land (for full definition see section 145(2) of the CCA).

01/07/2005

PERG 4.17.9

In addition to the provisions of the exception under amended section 146 of the CCA, introducers are referred to the guidance in PERG 4.5.10 G dealing with the provisions relating to introducing in the Regulated Activities Order.

01/07/2005

PERG 4.17.10

Article 20(2) amends section 146 of the CCA by providing that it is not "debt adjusting" to carry on an activity which would otherwise be "debt adjusting" under section 146(5) of the CCA if (a) the debt in question is due under a "relevant agreement"; and (b) that activity constitutes a regulated activity. "Debt adjusting" includes in relation to debts due under consumer credit agreements (a) negotiating with the creditor, on behalf of the debtor, terms for discharge of the debt, or (b) taking over, in return for payments by the debtor, his obligation to discharge a debt, or (c) any similar activity concerned with the liquidation of the debt (see full definition in section 145(5) of the CCA).

01/07/2005

PERG 4.17.11

In addition to the provisions of the exception under amended section 146 of the CCA, debt adjusters and arrangers are referred to the guidance in PERG 4.5 dealing with the provisions relating to arranging and, in particular, PERG 4.5.1G (1)(b) dealing with varying a regulated mortgage contract.

01/07/2005

PERG 4.17.12

Article 20(2) amends section 146 CCA by providing that it is not "debt-counselling" for a person to give advice to debtors if (a) the debt in question is due under a "relevant agreement"; and (b) giving that advice constitutes a regulated activity. "Debt-counselling" includes the giving of advice to debtors about the liquidation of debts due under consumer credit agreements (see the full definition in section 145(6) of the CCA).

01/07/2005

PERG 4.17.13

In addition to the provisions of the exception under amended section 146 of the CCA, debt counsellors and advisers are referred to the guidance in PERG 4.6 dealing with advising on regulated mortgage contracts and, in particular, PERG 4.6 (Definition of 'advising on regulated mortgage contracts') dealing with varying a regulated mortgage contract.

01/07/2005

PERG 4.17.14

The CCA's licensing regime will still apply to credit brokers, debt adjusters and debt counsellors in respect of non-regulated mortgages and other loans, as well as to authorised persons or appointed representatives who carry on ancillary credit business in addition to regulated activities. Accordingly, mortgage intermediaries requiring authorisation may also need to retain their CCA licences.

01/07/2005

Financial Promotion and advertisements

PERG 4.17.15

Articles 90 and 91 of the Regulated Activities Order include provisions that have the effect of removing from CCA regulation financial promotions about qualifying credit. Such promotions will not therefore be subject to Part IV of the CCA or regulations made under that Part.

01/07/2005

PERG 4.17.16

For more detailed guidance concerning the interface between the financial promotion regime and the regulation of credit advertisements under the CCA, see PERG 8.17.17 G.

01/07/2005

PERG 4.18

Regulated activities related to mortgages: flowchart

01/07/2005

Do you need authorisation?

PERG 4.18.1

01/07/2005

PERG 5

Guidance on insurance mediation activities

PERG 5.1

Application and purpose

01/07/2005

Application

PERG 5.1.1

This chapter applies principally to any person who needs to know whether he carries on insurance mediation activities and is thereby subject to FSA regulation. As such it will be of relevance among others to:

(1) insurance brokers;

(2) insurance advisers;

(3) insurance undertakings; and

(4) other persons involved in the sale and administration of contracts of insurance, even where these activities are secondary to their main business.

01/07/2005

Purpose of guidance

PERG 5.1.2

[not used]

01/07/2005

PERG 5.1.3

[not used]

01/07/2005

PERG 5.1.4

[not used]

01/07/2005

PERG 5.1.5

[not used]

01/07/2005

PERG 5.1.6

The purpose of this guidance is to help persons consider whether they need authorisation or a variation of their Part IV permission . Businesses new to regulation who act only as introducers of insurance business are directed in particular to PERG 5.6.2 G (article 25(1): arranging (bringing about) deals in investments) to PERG 5.6.9 G (Exclusion: Article 72C (Provision of information on an incidental basis)) and PERG 5.15.6 G (Flow chart: Introducers) to help consider whether they require authorisation. This guidance also explains the availability to persons carrying on insurance mediation activities of certain exemptions from FSA regulation, including the possibility of becoming an appointed representative (see PERG 5.13.1 G to PERG 5.13.6 G (Appointed representatives)).

01/07/2005

Effect of guidance

PERG 5.1.7

01/07/2005

PERG 5.1.8

Rights conferred on third parties cannot be affected by guidance given by the FSA . This guidance represents the FSA's view, and does not bind the courts, for example, in relation to the enforceability of a contract where there has been a breach of the general prohibition on carrying on a regulated activity in the United Kingdom without authorisation (see sections 26 to 29 of the Act (Enforceability of Agreements)).

01/07/2005

PERG 5.1.9

A person reading this guidance should refer to the Act and the various Orders that are referred to in this guidance. These should be used to find out the precise scope and effect of any particular provision referred to in this guidance. A person may need to seek his own legal advice.

01/07/2005

PERG 5.1.10

[not used]

01/07/2005

Guidance on other activities

PERG 5.1.11

A person may wish to carry on activities related to other forms of investment in connection with contracts of insurance, such as advising on and arranging regulated mortgage contracts. Such a person should also consult the guidance in PERG 2 (Authorisation and Regulated Activities), PERG 4 (Regulated activities connected with mortgages) and PERG 8 (Financial Promotion and Related Activities).

01/07/2005

PERG 5.2

Introduction

01/07/2005

PERG 5.2.1

This guidance is based on the statutory instruments made as part of implementing the IMD in the United Kingdom. This legislation includes the Financial Services and Markets Act 2000 (Regulated Activities) (Amendment) (No.2) Order 2003 (S.I. 2003/1476), which amends among others the Regulated Activities Order, the Financial Services and Markets Act 2000 (Appointed Representatives) Regulations 2001 (S.I. 2003/1217), the Non-Exempt Activities Order and the Business Order. Other legislation that forms the basis of this guidance includes the Financial Services and Markets Act 2000 (Exemption) (Amendment) (No.2) Order 2003 (S.I. 2003/1675), the Financial Services and Markets Act 2000 (Financial Promotion) (Amendment) Order 2003 (S.I. 2003/1676) and the Insurance Mediation Directive (Miscellaneous Amendments) Regulations 2003 (S.I. 2003/1473). For ease of reference, references to the Regulated Activities Order below adopt the revised Regulated Activities Order numbering indicated in the Financial Services and Markets Act 2000 (Regulated Activities) (Amendment) (No.2) Order 2003.

01/07/2005

Requirement for authorisation or exemption

PERG 5.2.2

Any person who carries on a regulated activity in the United Kingdom by way of business must either be an authorised person or exempt from the need for authorisation. Otherwise, the person commits a criminal offence and certain agreements may be unenforceable. PERG 2.2 (Authorisation and regulated activities) has further guidance on these consequences.

06/10/2007

Questions to be considered to decide if authorisation is required

PERG 5.2.3

A person who is concerned to know whether his proposed insurance mediation activities may require authorisation will need to consider the following questions (these questions are a summary of the issues to be considered and have been reproduced, in slightly fuller form, in the flow chart in PERG 5.15.2 G (Flow chart: regulated activities related to insurance mediation - do you need authorisation?):

(1) will the activities relate to contracts of insurance (see PERG 5.3(Contracts of insurance))?

(2) if so, will I be carrying on any insurance mediation activities (see PERG 5.5 (The regulated activities: dealing in contracts as agent) to PERG 5.11 (Other aspects of exclusions))?

(3) if so, will I be carrying on my activities by way of business (see PERG 5.4 (The business test))?

(4) if so, is there the necessary link with the United Kingdom (see PERG 5.12 (Link between activities and the United Kingdom))?

(5) if so, will any or all of my activities be excluded (see PERG 5.3.7 G (Connected contracts of insurance) to PERG 5.3.8 G (Large risks); PERG 5.6.5 G (Exclusion: article 72C provision of information on an incidental basis) to PERG 5.6.23 G (Other exclusions); PERG 5.7.7 G (Exclusions); PERG 5.8.24 G (Exclusion: periodical publications, broadcasts and web-sites) to PERG 5.8.26 G (Other exclusions); PERG 5.11 (Other aspects of exclusions) and PERG 5.12.9 G to PERG 5.12.10 G (Overseas persons))?

(6) if it is not the case that all of my activities are excluded, am I a professional firm whose activities are exempted under Part XX of the Act (see PERG 5.14.1 G to PERG 5.14.4 G (Professionals))?

(7) if not, am I exempt as an appointed representative (see PERG 5.13 (Appointed representatives))?

(8) if not, am I otherwise an exempt person (see PERG 5.14.5 G (Other exemptions))?

If a person gets as far as question (8) and the answer to that question is "no", that person requires authorisation and should refer to the FSA website "How do I get authorised": http://www.fsa.gov.uk/Pages/Doing/how/index.shtml for details of the application process. The order of these questions considers firstly whether a person is carrying on insurance mediation activities before dealing separately with the questions "will I be carrying on my activities by way of business?" (3) and "if so, will any or all of my activities by excluded?" (5).

06/10/2007

PERG 5.2.4

It is recognised pursuant to section 22 of the Act that a person will not be carrying on regulated activities in the first instance, including insurance mediation activities, unless he is carrying on these activities by way of business. Similarly, where a person's activities are excluded he cannot, by definition, be carrying on regulated activities. To this extent, the content of the questions above does not follow the scheme of the Act. For ease of navigation, however, the questions are set out in an order and form designed to help persons consider more easily, and in turn, issues relating to:

(1) the new activities;

(2) the business test; and

(3) the exclusions.

01/07/2005

Approach to implementation of the IMD

PERG 5.2.5

The IMD imposes requirements upon EEA States relating to the regulation of insurance and reinsurance mediation. The IMD defines "insurance mediation" and "reinsurance mediation" as including the activities of introducing, proposing or carrying out other work preparatory to the conclusion of contracts of insurance and reinsurance, or of concluding such contracts, or of assisting in the administration and performance of such contracts, in particular in the event of a claim (the text of article 2.3 IMD is reproduced in full in PERG 5.16.2 G (article 2.3 of the Insurance Mediation Directive)).

01/07/2005

PERG 5.2.6

The United Kingdom's approach to implementing the IMD by domestic legislation is, in part, through secondary legislation, which will apply pre-existing regulated activities (slightly amended) in the Regulated Activities Order to the component elements of the insurance mediation definition in the IMD (see PERG 5.2.5 G and the text of article 2.3 IMD in PERG 5.16.2 G (article 2.3 of the Insurance Mediation Directive)).

01/07/2005

PERG 5.2.7

The effect of the IMD and its implementation described in PERG 5.2.5 G to PERG 5.2.6 G is to vary the application of the existing regulated activities set out in PERG 5.2.8G (1) to PERG 5.2.8G (3), PERG 5.2.8G (5) and PERG 5.2.8G (6), principally by applying these regulated activities to general insurance contracts and pure protection contracts and by making changes to the application of the various exclusions to these regulated activities. These regulated activities applied prior to 14 January 2005 to qualifying contracts of insurance (as defined by article 3 of the Regulated Activities Order and referred to in the Handbook as life policies (which includes pension policies)). The legislation implementing the IMD introduced a new regulated activity set out in PERG 5.2.8G (4), which potentially applies to all contracts of insurance.

01/07/2005

PERG 5.2.8

It follows that each of the regulated activities below potentially apply to any contract of insurance:

(1) dealing in investments as agent (article 21 (Dealing in investments as agent));

(2) arranging (bringing about) deals in investments (article 25(1) (Arranging deals in investments));

(3) making arrangements with a view to transactions in investments (article 25(2) (Arranging deals in investments));

(4) assisting in the administration and performance of a contract of insurance (article 39A (Assisting in the administration and performance of a contract of insurance));

(5) advising on investments (article 53 (Advising on investments));

(6) agreeing to carry on any of the above regulated activities (article 64 (Agreeing to carry on specified types of activity)).

01/07/2005

PERG 5.2.9

It is the scope of the Regulated Activities Order rather than the IMD which will determine whether a person requires authorisation or exemption. However, the scope of the IMD is relevant to the application of certain exclusions under the Regulated Activities Order (see, for example, the commentary on article 67 in PERG 5.11.9 G (Activities carried on in the course of a profession or non-investment business)).

01/07/2005

Financial promotion

PERG 5.2.10

An unauthorised person who intends to carry on activities connected with contracts of insurance will need to comply with section 21 of the Act (Restrictions on financial promotion). This guidance does not cover financial promotions that relate to contracts of insurance. Persons should refer to the general guidance on financial promotion in PERG 8 (Financial promotion and related activities). (See in particular PERG 8.17A (Financial promotions concerning insurance mediation activities) for information on financial promotions that relate to insurance mediation activities.)

01/07/2005

PERG 5.3

Contracts of insurance

01/07/2005

PERG 5.3.1

A person who is concerned to know whether his proposed activities may require authorisation will wish to consider whether those activities relate to contracts of insurance or contracts of reinsurance, or to insurance business or reinsurance business, which is the business of effecting or carrying out contracts of insurance or reinsurance as principal.

01/07/2005

Definition

PERG 5.3.2

The Regulated Activities Order does not attempt an exhaustive definition of a 'contract of insurance'. Instead, article 3(1) of the order (Interpretation) makes some specific extensions and limitations to the general common law meaning of the concept. For example, article 3(1) expressly extends the concept to fidelity bonds and similar contracts of guarantee, which are not contracts of insurance at common law, and it excludes certain funeral plan contracts, which would generally be contracts of insurance at common law.

01/07/2005

PERG 5.3.3

One consequence of this is that common law judicial decisions about whether particular contracts amount to 'insurance' or their being effected or carried out amounts to 'insurance business' are relevant in defining the regulatory scope of the Act.

01/07/2005

PERG 5.3.4

As with any other contract, a contract of insurance that is not effected by way of a deed will only be legally binding if, amongst other things, it is entered into for valuable consideration. Determining what amounts to sufficient consideration in any given case is a matter for the courts. In practice, however, the legal definition of consideration is very wide. In particular, just because a contract of insurance is 'free' in the colloquial sense does not mean that there is no consideration for it. In the vast majority of cases, therefore, 'free' insurance policies (such as policies that act as loss leaders for an insurance undertaking) will be binding contracts and will amount to specified investments and therefore be subject to FSA regulation.

01/07/2005

PERG 5.3.5

The Regulated Activities Order does not define a reinsurance contract. The essential elements of the common law description of a contract of insurance are also the essential elements of a reinsurance contract. Whilst the IMD addresses insurance and reinsurance separately, throughout this guidance the term 'contract of insurance' (italicised or otherwise) also applies to contracts of reinsurance.

01/07/2005

PERG 5.3.6

Guidance describing how the FSA identifies contracts of insurance is in PERG 6 (Guidance on the Identification of Contracts of Insurance).

01/07/2005

Connected contracts of insurance

PERG 5.3.7

Article 72B of the Regulated Activities Order (Activities carried on by a provider of relevant goods or services) excludes from FSA regulation certain regulated activities carried on by providers of non-motor goods and services related to travel in relation to contracts of insurance that satisfy a number of conditions. Details about the scope of this exclusion can be found at PERG 5.11.13 G to PERG 5.11.15 G (Activities carried on by a provider of relevant goods or services).

01/07/2005

Large risks

PERG 5.3.8

Large risks situated outside the EEA are also excluded (described in more detail at PERG 5.11.16 G (Large risks)). The location of the risk or commitment may be determined by reference to the EEA State in which the risk is situated, defined in article 2(d) of the Second Non-Life Directive (88/357/EEC) or the EEA State of the commitment, defined in article 1(1)(g) of the Consolidated Life Directive (2002/83/EC).Broadly put, this is:

(1) for insurance relating to buildings and/or their contents, the EEA State in which the property is situated;

(2) for insurance relating to vehicles, the EEA State of registration;

(3) for policies of four months or less duration covering travel or holiday risks, where the policy was taken out;

(4) in all other cases (including those determined by reference to the EEA State of the commitment), the EEA State where the policyholder has his habitual residence, or if the policyholder is a legal person, where his establishment, to which the contract relates, is situated.

01/07/2005

Specified investments

PERG 5.3.9

For an activity to be a regulated activity, it must be carried on in relation to 'specified investments' (see section 22 of the Act Regulated activities) and Part III of the Regulated Activities Order (Specified investments)). For the purposes of insurance mediation activity, specified investments include the following 'relevant investments' defined in article 3(1) of the Regulated Activities Order (Interpretation):

(1) rights under any contract of insurance (see article 75 (Contracts of insurance)); and

(2) rights to or interests in rights under life policies (see article 89 (Rights to or interests in investments)).

'Relevant investments' is the term used in articles 21 (Dealing in investments as agent), 25 (Arranging deals in investments) and 53 (Advising on investments) of the Regulated Activities Order to help define the types of investment to which the activities in each of these articles relate.

01/07/2005

PERG 5.3.10

A person will have rights under a contract of insurance when he is a policyholder. The question of whether a person has rights under a contract of insurance may require careful consideration in the case of group policies (with reference to the Glossary definition of policyholder). In the case, in particular, of general insurance contracts and pure protection contracts, the existence or otherwise of rights under such policies may be relevant to whether a person is carrying on insurance mediation activities.

01/07/2005

PERG 5.3.11

A person may also have rights to or interests in rights under a life policy where he is not a policyholder, but this will again depend on the terms of the individual policy.

01/07/2005

PERG 5.4

The business test

01/07/2005

PERG 5.4.1

A person will only need authorisation or exemption if he is carrying on a regulated activity 'by way of business' (see section 22 of the Act (Regulated Activities)).

01/07/2005

PERG 5.4.2

There is power in the Act for the Treasury to specify the circumstances in which a person is or is not to be regarded as carrying on regulated activities by way of business. The Business Order has been made using this power (partly reflecting differences in the nature of the different activities). As such, the business test for insurance mediation activity is distinguished from the standard test for 'investment business' in article 3 of the Business Order. Under article 3(4) of the Business Order, a person is not to be regarded as carrying on by way of business any insurance mediation activity unless he takes up or pursues that activity for remuneration. Accordingly, there are two principal elements to the business test in the case of insurance mediation activities:

(1) does a person receive remuneration for these activities?

(2) if so, does he take up or pursue these activities by way of business?

01/07/2005

PERG 5.4.3

As regards PERG 5.4.2G (1), the Business Order does not provide a definition of 'remuneration', but, in the FSA's view, it has a broad meaning and covers both monetary and non-monetary rewards. This is regardless of who makes them. For example, where a person pays discounted premiums for his own insurance needs in return for bringing other business to an insurance undertaking, the discount would amount to remuneration for the purposes of the Business Order. Remuneration can also take the form of an economic benefit which the person expects to receive as a result of carrying on insurance mediation activities. In the FSA's view, the remuneration does not have to be provided or identified separately from remuneration for other goods or services provided. Nor is there a minimum level of remuneration.

01/07/2005

PERG 5.4.4

As regards PERG 5.4.2G (2), in the FSA's view, for a person to take up or pursue insurance mediation activity by way of business, he will usually need to be carrying on those activities with a degree of regularity. The person will also usually need to be carrying on the activities for commercial purposes. That is to say, he will normally be expecting to gain a direct financial benefit of some kind. Activities carried on out of friendship or for altruistic purposes will not normally amount to a business. However, in the FSA's view:

(1) it is not necessarily the case that services provided free of charge will not amount to a business; for example, advice (including advice available on a website) may be provided free of charge to potential policyholders but in the course of a business funded by commission payments; and

(2) the 'by way of business' test may very occasionally be satisfied by an activity undertaken on an isolated occasion (provided that the activity would be regarded as done 'by way of business' in other respects, for example, because of the size of reward received or its relevance to other business activities).

01/07/2005

PERG 5.4.5

It follows that whether or not any particular person is acting 'by way of business' for these purposes will depend on his individual circumstances. However, a typical example of where the applicable business test would be likely to be satisfied by someone whose main business is not insurance mediation activities, is where a person recommends or arranges specific insurance policies in the course of carrying on that other business and receives a fee or commission for doing so.

01/07/2005

PERG 5.4.6

Some typical examples of where the business test is unlikely to be satisfied, assuming that there is no direct financial benefit to the arranger, include:

(1) arrangements which are carried out by a person for himself, or for members of his family;

(2) where employers provide insurance benefits for staff; and

(3) where affinity groups or clubs set up insurance benefits for members.

01/07/2005

PERG 5.4.7

PERG 5.4.8 G contains a table that summarises the main issues surrounding the business test as applied to insurance mediation activities and that may assist persons to determine whether they will need authorisation or exemption. The approach taken in the table involves identifying factors that, in the FSA's view, are likely to play a part in the analysis. Indicators are then given as to the significance of each factor to the person's circumstances. By analysing the indicators as a whole, a picture can be formed of the likely overall position. The table provides separate indicators for the two elements of remuneration and by way of business. As a person has to satisfy both elements, a clear overall indication against either element being satisfied should mean that the test is failed. This approach cannot be expected to provide a clear conclusion for everyone. But it should enable persons to assess the relevant aspects of their activities and to identify where changes could, if necessary, be made so as to make their position clearer. The person to whom the indicators are applied is referred to in the table as 'P'.

01/07/2005

PERG 5.4.8

Table: Carrying on insurance mediation activities 'for remuneration' and 'by way of business'

Carrying on insurance mediation activities 'for remuneration' and 'by way of business'

'For remuneration'

Factor

Indicators that P does not carry on activities "for remuneration"

Indicators that P does carry on activities "for remuneration"

Direct remuneration, whether received from the customer or the insurer/broker (cash or benefits in kind such as tickets to the opera, a reduction in other insurance premiums, a remission of a debt or any other benefit capable of being measured in money's worth)

P does not receive any direct remuneration specifically identified as a reward for his carrying on insurance mediation activities.

P receives direct remuneration specifically identified as being a reward for his carrying on insurance mediation activities.

Indirect remuneration (such as any form of economic benefit as may be explicitly or implicitly agreed between P and the insurer/broker or P's customer - including, for example, through the acceptance of P's terms and conditions or mutual recognition of the economic benefit that is likely to accrue to P). An indirect economic benefit can include expectation of making a profit of some kind as a result of carrying on insurance mediation activities as part of other services.

P does not obtain any form of indirect remuneration through an economic benefit other than one which is not likely to have a material effect on P's ability to make a profit from his other activities.

P obtains an economic benefit that: (a) is explicitly or implicitly agreed between P and the insurer/broker or P's customer; and (b) has the potential to go beyond mere cost recovery through fees or other benefits received for providing a package of services that includes insurance mediation activities but where no particular part of the fees is attributable to insurance mediation activities. This could include where insurance mediation activities are likely to:

•play a material part in the success of P's other business activities or in P's ability to make a profit from them; or•provide P with a materially increased opportunity to provide other goods or services; or•be a major selling point for P's other business activities; or•be essential for P to provide other goods or services.

P charges his customers a greater amount for other goods or services than would be the case if P were not also carrying on insurance mediation activities for those customers and this:

•is explicitly or implicitly agreed between P and the insurer/broker or P's customer; and•has the potential to go beyond mere cost recovery.

Recovery of costs

P receives no benefits of any kind (direct or indirect) in respect of his insurance mediation activities beyond the reimbursement of his actual costs incurred in carrying on the activity (including receipt by P of a sum equal to the insurance premium that P is to pass on to the insurer or broker).

P receives benefits of any kind (direct or indirect) in respect of his insurance mediation activities which go beyond the reimbursement of his actual costs incurred in carrying on the activity.

'By way of business'

Factor

Indicators that P does not carry on activities "by way of business"

Indicators that P does carry on activities "by way of business"

Regularity/ frequency

Involvement is one-off or infrequent (for instance, once or twice a year) provided that the transaction(s) is not of such size and importance that it is essential to the success of P's other business activities.
Transactions do not result from formal arrangements (for instance, occasional involvement purely as a result of an unsolicited approach).

Involvement is frequent (for instance, once a week).
Involvement is infrequent but the transactions are of such size or importance that they are essential to the success of P's other business activities.
P has formal arrangements which envisage transactions taking place on a regular basis over time (whether or not such transactions turn out in practice to be regular).

Holding out

P does not hold himself out as providing a professional service that includes insurance mediation activities (by professional is meant not the services of a layman).

P holds himself out as providing a professional service that includes insurance mediation activities.

Relevance to other activities/ business

Insurance mediation activities:

•have no relevance to P's other activities; or•have some relevance but could easily be ceased without causing P any difficulty in carrying on his main activities; or•would be unlikely to result in a material reduction in income from P's main activities if ceased

Insurance mediation activities:

•are essential to P in carrying on his main activities; or•would cause a material disruption to P carrying on his main activities if ceased; or•would be likely to reduce P's income by a material amount.

Commercial benefit

P receives no direct or indirect pecuniary or economic benefit.
P is a layman and acting in that capacity.
P would not obtain materially less income from his main activities if they did not include insurance mediation activities.

P receives a direct or indirect pecuniary or economic benefit from carrying on insurance mediation activities - such as a fee, a benefit in kind or the likelihood of materially enhanced sales of other goods or services that P provides.
P would obtain materially less income from his main activities if they did not include insurance mediation activities.

01/07/2005

PERG 5.5

The regulated activities: dealing in contracts as agent

01/07/2005

PERG 5.5.1

Article 21 of the Regulated Activities Order (Dealing in investments as agent) makes dealing in contracts of insurance as agent a regulated activity. The activity is defined in terms of buying, selling, subscribing for or underwriting contracts as agent, that is, on behalf of another. Examples include:

(1) where an intermediary, by accepting on the insurance undertaking's behalf to provide the insurance, commits an insurance undertaking to provide insurance for a prospective policyholder; or

(2) where the intermediary agrees, on behalf of a prospective policyholder, to buy an insurance policy.

01/07/2005

PERG 5.5.2

Intermediaries with delegated authority to bind insurance undertakings are likely to be dealing in investments as agent. It should be noted, in particular, that this is a regulated activity:

(1) whether or not any advice is given (see PERG 5.8 (The regulated activities: advising on contracts of insurance); and

(2) whether or not the intermediary deals through an authorised person (for example, where he instructs another agent who is an authorised person to enter into a contract of insurance on his client's behalf).

01/07/2005

PERG 5.5.3

There are also certain exclusions which are relevant to whether a person is carrying on the activity of dealing in investments as agent (see PERG 5.11 (Other aspects of exclusions)).

01/07/2005

PERG 5.6

The regulated activities: arranging deals in, and making arrangements with a view to transactions in, contracts of insurance

01/07/2005

PERG 5.6.1

Article 25 of the Regulated Activities Order (Arranging deals in investments) describes two types of regulated activities concerned with arranging deals in respect of contracts of insurance. These are:

(1) arranging (bringing about) deals in investments (article 25(1) (Arranging deals in investments)); and

(2) making arrangements with a view to transactions in investments (article 25(2) (Arranging deals in investments)).

01/07/2005

Article 25(1): arranging (bringing about) deals in investments

PERG 5.6.2

The activity in article 25(1) is carried on only if the arrangements bring about, or would bring about, the transaction to which the arrangement relates. This is because of the exclusion in article 26 of the Regulated Activities Order (Arrangements not causing a deal). Article 26 excludes from article 25(1) arrangements which do not bring about or would not bring about the transaction to which the arrangements relate. In the FSA's view, a person would bring about a contract of insurance if his involvement in the chain of events leading to the contract of insurance were important enough that, without it, there would be no policy. Examples of this type of activity would include negotiating the terms of the contract of insurance on behalf of the customer with the insurance undertaking and vice versa, or assisting in the completion of a proposal form and sending it to the insurance undertaking. Other examples include where an insurance undertaking enters into a contract of insurance as principal or an intermediary enters into a contract of insurance as agent.

01/07/2005

Article 25(2): making arrangements with a view to transactions in investments

PERG 5.6.3

The activity within article 25(2) contrasts with article 25(1) in that it is not limited by the requirement that the arrangements would bring about the transaction to which they relate.

01/07/2005

PERG 5.6.4

Article 25(2) may, for instance, include activities of persons who help potential policyholders fill in or check application forms in the context of ongoing arrangements between these persons and insurance undertakings. A further example of this activity would be a person introducing customers to an intermediary either for advice or to help arrange an insurance policy. The introduction might be oral or written. By contrast, the FSA considers that a mere passive display of literature advertising insurance (for example, leaving leaflets advertising insurance in a dentist's or vet's waiting room and doing no more) would not amount to the article 25(2) activity.

01/07/2005

Exclusion: article 72C (Provision of information on an incidental basis)

PERG 5.6.5

The Regulated Activities Order provides an important potential exclusion, however, for persons whose principal business is other than insurance mediation activities.

01/07/2005

PERG 5.6.6

In broad terms, article 72C of the Regulated Activities Order excludes from the activities of arranging and assisting in the administration and performance of a contract of insurance activities that:

(1) consist of the provision of information to the policyholder or potential policyholder;

(2) are carried on by a person carrying on any profession or business which does not otherwise consist of regulated activities; and

(3) amount to the provision of information that may reasonably be regarded as being incidental to that profession or business.

01/07/2005

PERG 5.6.7

In the FSA's view, 'incidental' in this context means that the activity must arise out of, be complementary to or otherwise be sufficiently closely connected with the profession or business. In other words, there must be an inherent link between the activity and the firm's main business. For example, introducing dental insurance may be incidental to a dentist's activities; introducing pet insurance would not be incidental to his activities. In addition, to be considered 'incidental', in the FSA's view, the activity must not amount to the carrying on of a business in its own right.

01/07/2005

PERG 5.6.8

This exclusion applies to a person whose profession or business does not otherwise consist of regulated activities. In the FSA's view, the fact that a person may carry on regulated activities in the course of the carrying on of a profession or business does not, of itself, mean that the profession or business consists of regulated activities. This is provided that the main focus of the profession or business does not involve regulated activities and that the regulated activities that are carried on arise in a way that is incidental and complementary to the carrying on of the profession or business. So, the exclusion may be of relevance to exempt professional firms. It might also, for example, be relied on by doctors, vets and dentists as well as many businesses in the non-financial sector, even if they have permission to carry on regulated activities or are appointed representatives. This is assuming that their activities for which they are seeking to use the exclusion in article 72C are limited to providing information in a way which is incidental to their main profession or business. The exclusion only extends to information given to the policyholder or potential policyholder and not to the insurance undertaking. An intermediary who forwards a proposal form to an insurance undertaking would not be able to take the benefit of the exclusion. Similarly, where a person does more than provide information (for example, by helping a potential policyholder fill in an application form), he cannot take the benefit of this exclusion. Nor does it cover the activity of advising a customer under article 53 of the Regulated Activities Order (Advising on investments).

01/07/2005

PERG 5.6.9

The exclusion will be of assistance to introducers who would otherwise be carrying on the regulated activity of making arrangements with a view to transactions in investments (assuming, as mentioned in PERG 5.6.8 G, that they provide information only to policyholders or potential policyholders, and not to the intermediary or insurance undertaking to whom they introduce these policyholders or potential policyholders). In order to assist such introducers determine whether or not they are likely to require authorisation, a simplified flowchart is included in PERG 5.15.6 G (Flow chart: introducers). Introducers may also find the guidance at PERG 5.9.2 G (The regulated activities: agreeing to carry on a regulated activity) helpful. PERG 5.6.17 G (Exclusion from article 25(2) for introducing) has guidance to assist persons determine whether their introducing activities amount to making arrangements with a view to transactions in investments.

01/07/2005

Exclusion from article 25(2): arrangements enabling parties to communicate

PERG 5.6.10

Article 27 of the Regulated Activities Order (Enabling parties to communicate) contains an exclusion that applies to arrangements which might otherwise bring within article 25(2) those who merely provide the means by which one party to a transaction (or potential transaction) is able to communicate with other parties. Simply providing the means by which parties to a transaction (or potential transaction) are able to communicate with each other is excluded from article 25(2) only. This will ensure that persons such as internet service providers or telecommunications networks are excluded if all they do is provide communication facilities (and these would otherwise be considered to fall within article 25(2)).

01/07/2005

PERG 5.6.11

In the FSA's view, the crucial element of the exclusion in article 27 is the inclusion of the word 'merely'. When a publisher, broadcaster or internet website operator goes beyond what is necessary for him to provide his service of publishing, broadcasting or otherwise facilitating the issue of promotions, he may well bring himself within the scope of article 25(2). Further detailed guidance relating to the scope of the exclusion in article 27 is contained in PERG 2.8.6G (2) (Arranging deals in investments) and PERG 8.32.6 G to PERG 8.32.11 G (Arranging deals in investments).

01/07/2005

Exclusion from article 25(2): transactions to which the arranger is a party

PERG 5.6.12

Article 28 of the Regulated Activities Order (Arranging transactions to which the arranger is a party) excludes from the regulated activities in article 25(1) and 25(2) arrangements made for or with a view to contracts of insurance when:

(1) the person (P) making the arrangements is the only policyholder; or

(2) P, as a result of the transaction, would become the only policyholder.

01/07/2005

PERG 5.6.13

Market makers in traded endowment policies may be able to rely on this exclusion to avoid the need to be authorised. They must ensure, however, that where they are carrying on the regulated activity of dealing in investments as principal (article 14) they are also able to rely on the exclusions in articles 15 or 16 (see the guidance in PERG 2.8.4 G (Dealing in investments as principal)).

01/07/2005

PERG 5.6.14

Insurance undertakings do not fall within the terms of this exclusion and so will be arranging contracts of insurance, in addition to effecting and carrying out contracts of insurance.

01/07/2005

PERG 5.6.15

In some cases, a person may make arrangements to enter into a contract of insurance as policyholder on its own behalf and also arrange that another person become a policyholder under the same contract of insurance. If so, the person should be aware that the effect of the narrower exclusion in article 28 as part of implementation of the IMD is that he may be arranging on behalf of the other policyholder. This may be relevant, for example, to a company which arranges insurance for itself (not arranging) as well as other companies in a group or loan syndicate (potentially arranging).

01/07/2005

PERG 5.6.16

The restriction in the scope of article 28 raises an issue where there is a trust with co-trustees, where each trustee will be a policyholder with equal rights and obligations. If the activities of one of the trustees include arranging in respect of contracts of insurance, that trustee could be viewed as arranging on behalf of his co-trustees who will also be policyholders. Similar issues also arise in respect of trustees assisting in the administration and performance of a contract of insurance. The FSA is of the view, however, that trustees should not be regarded as carrying on regulated activities where they are acting as joint policyholders in arranging or assisting in the administration and performance of a contract of insurance. In this respect, trustees differ from policyholders under a group policy, where each person covered under the group policy may make claims on the policy in relation to his own risks. In that situation, a policyholder who is providing services to other policyholders of arranging or assisting in the administration and performance of a contract of insurance will be carrying on a regulated activity.

01/07/2005

Exclusion from article 25(2) for introducing

PERG 5.6.17

Article 33 of the Regulated Activities Order (Introducing) excludes arrangements which would otherwise fall under article 25(2) where:

(1) they are arrangements under which persons will be introduced to another person;

(2) the person to whom introductions are to be made is:

(a) an authorised person; or

(b) an exempt person acting in the course of business comprising a regulated activity in relation to which he is exempt; or

(c) a person who is not unlawfully carrying on regulated activities in the United Kingdom and whose ordinary business involves him in engaging in certain activities;

(4) the arrangements do not relate to transactions relating to contracts of insurance.

01/07/2005

PERG 5.6.18

The effect of PERG 5.6.17G (4) is that some persons who, in making introductions, are making arrangements with a view to transactions in investments under article 25(2) of the Regulated Activities Order, cannot use the introducing exclusion. This is if, in general terms, the arrangements for making introductions relate to contracts of insurance (PERG 5.6.19 G has further guidance on when arrangements for introductions may be regarded as relating to contracts of insurance). However, this does not mean that all introducers whose introductions relate directly or indirectly to contracts of insurance will necessarily require authorisation if they cannot use the exclusion in article 72C of the Regulated Activities Order for merely passing information. For this to be the case, a person must first be carrying on the business of making arrangements with a view to transactions in investments. In the FSA's view, the following points will be relevant in determining whether this is the case.

(1) Article 25(2) applies to ongoing arrangements made with a view to transactions taking place from time to time as a result of persons having taken part in the arrangements. So, they will not apply to one-off introductions or introductions that are not part of an ongoing pre-existing arrangement between introducer and introducee. An introducer who merely suggests to a person that he seeks advice or assistance from an authorised person or an exempt person with whom the introducer has no pre-existing agreement that anticipates introductions will be made, will not be making arrangements at all. He will simply be offering general advice or information.

(2) The purpose of the arrangements must be for the person who is introduced to, in general terms, enter into a transaction to buy or sell securities or relevant investments. So, arrangements for introducing persons for advice only will not be caught (for example, introductions to a financial planner or to the publisher of an investment newsletter). In other cases, it may be likely that transactions will be entered into following the provision of advice. Provided the introducer is completely indifferent as to whether or not a contract of insurance may ultimately be bought (or sold) as a result of the advice given to the person he has introduced, the introducer will not be making arrangements with a view to transactions in investments. This is likely to be the case where the introducer does not receive any pecuniary reward that is linked to the volume of business done as a result of his introductions.

01/07/2005

PERG 5.6.19

Where a person is making arrangements with a view to transactions in investments by way of making introductions, and he is not completely indifferent to whether or not transactions may result, it may still be the case that the exclusion in article 33 will apply. In the FSA's view, this is where:

(1) the introduction is for independent advice on investments generally; and

(2) the introducer is indifferent as to whether or not a contract of insurance may ultimately be bought (or sold) rather than any other type of investment.

This is because the arrangements for making introductions do not specifically relate to a contract of insurance or to any other type of investment but to investments generally. Whether or not a person is making arrangements for introductions for the purpose of the provision of independent advice on investments generally will depend on the facts in any particular case. But, in the FSA's view, it is very unlikely that article 33 could apply where introductions are made to a person for the purposes of that person giving advice on and then arranginggeneral insurance.

01/07/2005

PERG 5.6.20

The table in PERG 5.6.21 G has examples of the application of article 33 to arrangements for making introductions.

01/07/2005

PERG 5.6.21

Application of article 33 to arrangements for making introductions. This table belongs to PERG 5.6.20 G.

Type of introduction

Applicability of exclusion

Introductions are purely for the purpose of the provision of independent advice - Introducer is completely indifferent to whether or not transactions take place after advice has been given.

Exclusion not relevant as introducer is not arranging under article 25(2).

Introduction is one-off or otherwise not part of pre-existing ongoing arrangements that envisage such introduction being made.

Exclusion not relevant as introducer is not arranging under article 25(2).

Introducer is not indifferent to whether or not transactions take place after advice has been given, but is indifferent to whether or not the transactions may involve a contract of insurance.

Exclusion will be available provided the introduction was made with a view to the provision of independent advice on investments generally.

Introducer is not indifferent to whether or not transactions take place after advice has been given (for example, because he expects to receive a percentage of the commission), and introductions specifically relate to contracts of insurance.

Exclusion is not available.
If introducer is an unauthorised person, he will need authorisation or exemption as an appointed representative.
If introducer is an authorised person (such as an IFA introducing to a general insurance broker), he will need to vary his Part IV permission accordingly. If introducer is an appointed representative, he will need to ensure that his agreement covers making such arrangements.

01/07/2005

Exclusion from article 25(2): arrangements for the provision of finance

PERG 5.6.22

An unauthorised person who makes arrangements with a view to a person who participates in the arrangements buying or selling contracts of insurance may be excluded from article 25(2) by article 32 of the Regulated Activities Order (Provision of finance). This is provided the sole purpose of the arrangements is the provision of finance to enable the person to buy the contract of insurance. Premium finance companies may be able to rely on this exclusion provided the arrangements they put in place, taken as a whole, have as their sole purpose the provision of finance to fund premiums.

01/07/2005

Other exclusions

PERG 5.6.23

The Regulated Activities Order contains some other exclusions which have the effect of narrowing or limiting the application of regulated activities within article 25 by preventing certain activities from amounting to regulated activities. These are referred to in PERG 5.11.8 G (Exclusions applying to more than one regulated activity).

01/07/2005

PERG 5.7

The regulated activities: assisting in the administration and performance of a contract of insurance

01/07/2005

PERG 5.7.1

The regulated activity of assisting in the administration and performance of a contract of insurance (article 39A) relates, in broad terms, to activities carried on by intermediaries after the conclusion of a contract of insurance and for or on behalf of policyholders, in particular in the event of a claim. Loss assessors acting on behalf of policyholders in the event of a claim are, therefore, likely in many cases to be carrying on this regulated activity. By contrast, claims management on behalf of certain insurers is not a regulated activity (see PERG 5.7.7 G (Exclusions)).

01/07/2005

PERG 5.7.2

Neither assisting in the administration nor assisting in the performance of a contract alone will fall within this activity. Generally, an activity will either amount to assisting in the administration or assisting in the performance but not both. Occasionally, however, an activity may amount to both assisting in the administration and performance of a contract of insurance. For example, where a person assists a claimant in filling in a claims form, in the FSA's view this amounts to assisting in the administration of a contract of insurance. In some instances, however, this may also amount to assisting in the performance of a contract of insurance. In the FSA's view, an example of when a person may be assisting in the performance of a contract is where a person fills in the whole or a significant part of a claims form on behalf of a claimant. This is because, by helping complete a claims form, a person may be assisting the policyholder to perform his contractual obligation to notify the insurance undertaking in the event of a claim and provide details of the claim in the manner and form required by the contract.

01/07/2005

PERG 5.7.3

Put another way, where an intermediary's assistance in filling in a claims form is material to whether performance takes place of the contractual obligation to notify claims, it is more likely to amount to assisting in the administration and performance of a contract of insurance. Conversely, in the FSA's view, a person who merely gives pointers about how to fill in the claims form or merely supplies information in support of a claim will not be assisting in the performance of a contract of insurance. Instead, the person will only be facilitating rather than assisting in the performance of a contract of insurance.

01/07/2005

PERG 5.7.4

More generally, an example of an activity that, in the FSA's view, is likely to amount to assisting a policyholder in both the administration and the performance of a contract of insurance is notifying a claim under a policy and then providing evidence in support of the claim, or helping negotiate its settlement on the policyholder's behalf. Notifying an insurance undertaking of a claim assists the policyholder in discharging his contractual obligation to do so (assisting in the performance); providing evidence in support of the claim or negotiating its settlement assists management of the claim (assisting in the administration).

01/07/2005

PERG 5.7.5

On the other hand, where a person does no more than advise a policyholder generally about making a claim or provide evidence in support of a claim, this is unlikely to amount to both assisting in the administration and performance. Similarly, the mere collection of premiums from policyholders is unlikely, without more, to amount to assisting in the administration and performance of a contract of insurance. The collection of premiums from customers or clients at the pre-contract stage, however, may amount to arranging (see example in PERG 5.15.4 G (Types of activity - are they regulated activities and, if so, why?)).

01/07/2005

PERG 5.7.6

Where a person receives funds on behalf of a policyholder in settlement of a claim, in the FSA's view, the act of receipt is likely to amount to assisting in the performance of a contract. By giving valid receipt, the person assists the insurance undertaking to discharge its contractual obligation to provide compensation to the policyholder. He may also be assisting the policyholder to discharge any obligations he may have under the contract to provide valid receipt of funds, upon settlement of a claim. Where a person provides valid receipt for funds received on behalf of the policyholder, he is also likely to be assisting in the administration of a contract of insurance (for example, making prior arrangements relating to transmission and receipt of payment).

01/07/2005

Exclusions

PERG 5.7.7

By article 39B of the Regulated Activities Order (Claims management on behalf of an insurer etc):

(1) loss adjusting on behalf of a relevant insurer (see PERG 5.7.8 G);

(2) expert appraisal; and

(3) managing claims for a relevant insurer;

are also excluded from the regulated activity of assisting in the administration and performance of a contract of insurance. This is where the activity is carried on in the course of carrying on any profession or business (see also PERG 5.14 (Exemptions)). In determining whether they are carrying on the regulated activity of assisting in the administration and performance of a contract of insurance, therefore, persons should consider whether they are acting on behalf of the relevant insurer and not the policyholder.

01/07/2005

PERG 5.7.8

A 'relevant insurer' for the purposes of article 39B means:

(1) an authorised person who has permission for effecting and carrying out contracts of insurance; or

(2) a member of the Society of Lloyd's or the members of the Society of Lloyd's taken together; or

(3) an EEA firm that is an insurer; or

(4) a reinsurer, being a person whose main business consists of accepting risks ceded by a person falling under (1), (2) or (3) or a person who is established outside the United Kingdom and who carries on the activity of effecting and carrying out contracts of insurance.

So, a person whose activities are excluded under article 12 of the Regulated Activities Order (Breakdown insurance) will not be a relevant insurer for these purposes and any person who performs loss adjusting or claims management on behalf of such a person will not be able to use the exclusion in article 39B.

01/07/2005

PERG 5.8

The regulated activities: advising on contracts of insurance

01/07/2005

PERG 5.8.1

Article 53 of the Regulated Activities Order (Advising on Investments) makes advising on contracts of insurance a regulated activity. This covers advice which is both:

(1) given to a person in his capacity as an insured or potential insured, or as agent for an insured or a potential insured; and

(2) advice on the merits of the insured or his agent:

(a) buying, selling, subscribing for or underwriting a particular contract of insurance; or

(b) exercising any right conferred by a contract of insurance to buy, sell, subscribe for or underwrite a contract of insurance.

01/07/2005

PERG 5.8.2

For advice to fall within article 53, it must:

(1) relate to a particular contract of insurance (that is, one that a person may enter into);

(2) be given to a person in his capacity as an investor or potential investor;

(3) be advice (that is, not just information); and

(4) relate to the merits of a person buying, selling, subscribing for or underwriting (or exercising any right to do so) a contract of insurance or rights to or interests in life policies.

01/07/2005

PERG 5.8.3

Each of these aspects is considered in greater detail in the table in PERG 5.8.5 G. Where an activity is identified as not amounting to advising on investments it could still form part of another regulated activity. This will depend upon whether a person's activities, viewed as a whole, amount to arranging. Additionally, it should be borne in mind that the provision of advice or information may involve the communication of a financial promotion (see PERG 8 (Financial promotion and related activities)).

01/07/2005

Advice must relate to a particular contract of insurance

PERG 5.8.4

Advice about contracts of insurance will come within the regulated activity in article 53 of the Regulated Activities Order only if it relates to a particular contract of insurance. So, generic or general advice will not fall under article 53. In particular:

(1) advice would come within article 53 if it took the form of a recommendation that a person should buy the ABC Insurers motor insurance;

(2) advice would not relate to a particular contract if it consists of a recommendation only that a person should take out insurance of a particular class without identifying any particular insurance undertaking , or with ABC Insurers provided that the kind of insurance is not specified (either expressly or by implication): a recommendation only that a person should buy insurance from ABC Insurers could amount to advice if a specific insurance policy would be implied from the context;

(3) the table in PERG 5.8.5 G identifies several typical recommendations and indicates whether they will be regarded as advice under article 53.

01/07/2005

PERG 5.8.5

Typical recommendations and whether they will be regulated as advice on contracts of insurance under article 53 of the Regulated Activities Order. This table belongs to PERG 5.8.4 G

Recommendation

Regulated under article 53 or not?

I recommend you take the ABC Insurers motor insurance policy

Yes

I recommend that you take out the GHI Insurers life insurance policy

Yes

I recommend that you do not take out the ABC Insurers motor insurance policy

Yes

I recommend that you do not take out the GHI Insurers life insurance policy

Yes

I recommend that you take out either the ABC Insurers motor insurance policy or the DEF Insurers motor insurance policy

Yes

I recommend that you take out either the GHI Insurers life insurance policy or the JKL Insurers life insurance policy

Yes

I recommend that you take out (or do not take out) insurance with ABC Insurers

Possibly (depending on whether or not the circumstances relating to the recommendation, including the range of possible products, is such that this amounts to an implied recommendation of a particular policy)

I recommend that you take out (or do not take out) contents insurance

No, unless a specific insurance policy is implied by the context

I recommend that you take out (or do not take out) life insurance

No, unless a specific insurance policy is implied by the context

01/07/2005

Advice given to a person in his capacity as an investor or potential investor

PERG 5.8.6

For the purposes of article 53, advice must be given to a person in his capacity as an investor or potential investor (which, in the context of contracts of insurance, will mean as policyholder or potential policyholder). So, article 53 will not apply where advice is given to persons who receive it as:

(1) an adviser who will use it only to inform advice given by him to others; or

(2) a journalist or broadcaster who will use it only for journalistic purposes.

01/07/2005

PERG 5.8.7

Advice will still be covered by article 53 even though it may not be given to any particular policyholder (for example, advice given in a periodical publication or on a website).

01/07/2005

Advice or information

PERG 5.8.8

In the FSA's view, advice requires an element of opinion on the part of the adviser. In effect, it is a recommendation as to a course of action. Information, on the other hand, involves statements of facts or figures.

01/07/2005

PERG 5.8.9

In general terms, simply giving information, without making any comment or value judgement on its relevance to decisions which a person may make, is not advice. In this respect, it is irrelevant that a person may be providing information on a single contract of insurance or on two or more. This means that a person may provide information on a single contract of insurance without necessarily being regarded as giving advice on it. PERG 5.8.11 G has guidance on the circumstances in which information can assume the form of advice.

01/07/2005

PERG 5.8.10

In the case of article 53, information relating to buying or selling contracts of insurance may often involve one or more of the following:

(1) an explanation of the terms and conditions of a contract of insurance whether given orally or in writing or by providing leaflets and brochures;

(2) a comparison of the features and benefits of one contract of insurance compared to another;

(3) the production of pre-purchase questions for a person to use in order to exclude options that would fail to meet his requirements; such questions may often go on to identify a range of contracts of insurance with characteristics that appear to meet the person's requirements and to which he might wish to give detailed consideration (pre-purchase questioning is considered in more detail in PERG 5.8.15 G to PERG 5.8.19 G (Pre-purchase questioning (including decision trees));

(4) tables that compare the costs and other features of different contracts of insurance;

(5) leaflets or illustrations that help persons to decide which type of contract of insurance to take out; and

(6) the provision, in response to a request from a person who has identified the main features of the type of contract of insurance he seeks, of several leaflets together with an indication that all the contracts of insurance described in them have those features.

01/07/2005

PERG 5.8.11

In the FSA's opinion, however, such information is likely to take on the nature of advice if the circumstances in which it is provided give it the force of a recommendation. Examples of situations where information provided by a person (P) might take the form of advice are given below.

(1) P may provide information on a selected, rather than balanced and neutral, basis that would tend to influence the decision of a person. This may arise where P offers to provide information about contracts of insurance that contain features specified by the person, but then exercises discretion as to which complying contract of insurance to offer to that person.

(2) P may, as a result of going through the sales process, discuss the merits of one contract of insurance over another, resulting in advice to enter into a particular one. In contrast, advice on how to complete an application form, without an explicit or implicit recommendation on the merits of buying or selling the contract of insurance whilst 'advice' in the general sense of the word, is not, in the view of the FSA, advice within the meaning of article 53. Such advice may, however, amount to arranging (for which see PERG 5.6.1 G to PERG 5.6.4 G (The regulated activities: arranging deals in, and making arrangements with a view to transactions in, contracts of insurance)).

01/07/2005

Advice must relate to the merits (of buying or selling a contract of insurance)

PERG 5.8.12

Advice under article 53 relates to the advantages and disadvantages of buying, selling, subscribing for or underwriting a particular contract of insurance. It is worth noting that, in this context, 'buying' and 'selling' are defined widely under article 3 of the Regulated Activities Order (Interpretation). 'Buying' includes acquiring for valuable consideration, and 'selling' includes surrendering, assigning or converting rights under a contract of insurance.

01/07/2005

PERG 5.8.13

The requirements imposed by the IMD (see PERG 5.2.5 G (Approach to implementation of the IMD)) and the text of article 2.3 IMD in PERG 5.16.1 G (article 2.3 of the Insurance Mediation Directive) are narrower than the scope of the Regulated Activities Order (see PERG 5.2.7 G (Approach to implementation of the IMD)). This is that, unlike the Regulated Activities Order, they do not relate to the assignment of contracts of insurance. This is of relevance to, amongst others, persons involved in the 'second-hand' market for contracts of insurance such as traded endowment policies and certain viatical instruments (that is, arrangements by which a terminally ill person can obtain value from his life policy) (see also PERG 5.6.12 G (Exclusion from article 25(2): transactions to which the arranger is a party)). Persons advising on or arranging assignments of these contracts of insurance are therefore potentially carrying on regulated activities although they may be able to take the benefit of article 67 of the Regulated Activities Order (Activities carried on in the course of a profession or non-investment business) in certain circumstances (see PERG 5.11.9 G to PERG 5.11.12 G (Activities carried on in the course of a profession or non-investment business)).

01/07/2005

PERG 5.8.14

Generally speaking, advice on the merits of using a particular insurance undertaking, broker or adviser in their capacity as such, does not amount to advice for the purpose of article 53. It is not advice on the merits of buying or selling a particular contract of insurance (unless, in the circumstances, the advice amounts to an implied recommendation of a particular policy).

01/07/2005

Pre-purchase questioning (including decision trees)

PERG 5.8.15

Pre-purchase questioning involves putting a sequence of questions in order to extract information from a person with a view to facilitating the selection by that person of a contract of insurance or other product that meets his needs. A decision tree is an example of pre-purchase questioning. The process of going through the questions will usually narrow down the range of options that are available.

01/07/2005

PERG 5.8.16

A key issue for those firms proposing to use pre-purchase questioning is whether the specific questioning used may amount to advice. There are two main aspects:

(1) advice must relate to a particular contract of insurance (see PERG 5.8.4 G (Advice must relate to a particular contract of insurance)); and

(2) the distinction between information and advice (see PERG 5.8.8 G to PERG 5.8.11 G (Advice or information)).

Whether or not pre-purchase questioning in any particular case is advising on contracts of insurance will depend on all the circumstances. The process may involve identifying one or more particular contracts of insurance. If so, to avoid advising on contracts of insurance, the critical factor is likely to be whether the process is limited to, and likely to be perceived by the person as, assisting the person to make his own choice of product which has particular features which the person regards as important. The questioner will need to avoid providing any judgement on the suitability of one or more products for that person and in this respect should have regard to the factors set out in PERG 5.8.2 G to PERG 5.8.4 G (Advice must relate to a particular contract of insurance) and the table in PERG 5.8.5 G. See also PERG 5.8.12 G to PERG 5.8.14 G (Advice must relate to the merits (of buying or selling a contract of insurance)) for other matters that may be relevant.

01/07/2005

PERG 5.8.17

The potential for variation in the form, content and manner of pre-purchase questioning is considerable, but there are two broad types. The first type involves providing questions and answers which are confined to factual matters (for example, the amount of the cover). In the FSA's view, this does not itself amount to advising on contracts of insurance, if it involves the provision of information rather than advice. There are various possible scenarios, including the following:

(1) the questioner may go on to identify one or more particular contracts of insurance which match features identified by the pre-purchase questioning; provided these are selected in a balanced and neutral way (for example, they identify all the matching contracts of insurance available without making a recommendation as to a particular one) this need not involve advising on contracts of insurance; and

(2) the questioner may go on to advise a person on the merits of one particular contract of insurance over another; this would be advising on contracts of insurance.

01/07/2005

PERG 5.8.18

The second type of pre-purchase questioning involves providing questions and answers incorporating opinion, judgement or recommendation. There are various possible scenarios, including the following:

(1) the pre-purchase questioning may not lead to the identification of any particular contract of insurance; in this case, the questioner has provided advice, but it is generic advice and does not amount to advising on contracts of insurance; and

(2) the pre-purchase questioning may lead to the identification of one or more particular contracts of insurance; the key issue then is whether the advice can be said to relate to a particular contract of insurance (see further PERG 5.8.4 G (Advice must relate to a particular contract of insurance)).

01/07/2005

PERG 5.8.19

In the case of PERG 5.8.18G (2) and similar scenarios, the FSA considers that it is necessary to look at the process and outcome of pre-purchase questioning as a whole. It may be that the element of advice incorporated in the questioning can properly be viewed as generic advice if it were considered in isolation. But although the actual advice may be generic, the process has ended in identifying one or more particular contracts of insurance. The combination of the generic advice and the identification of a particular or several particular contracts of insurance to which it leads may well, in the FSA's view, cause the questioner to be advising on contracts of insurance. Factors that may be relevant in deciding whether the process involves advising on contracts of insurance may include:

(1) any representations made by the questioner at the start of the questioning relating to the service he is to provide;

(2) the context in which the questioning takes place;

(3) the stage in the questioning at which the opinion is offered and is significant;

(4) the role played by the questioner who guides a person through the pre-purchase questions;

(5) the outcome of the questioning (whether particular contracts of insurance are highlighted, how many of them, who provides them, their relationship to the questioner and so on); and

(6) whether the pre-purchase questions and answers have been provided by, and are clearly the responsibility of, an unconnected third party, and all that the questioner has done is help the person understand what the questions or options are and how to determine which option applies to his particular circumstances.

01/07/2005

Medium used to give advice

PERG 5.8.20

With the exception of:

(1) periodicals, broadcasts and other news or information services (see PERG 5.8.24 G to PERG 5.8.25 G (Exclusion: periodical publications, broadcasts and web-sites)); and

(2) situations involving an overseas element (see, generally, PERG 5.12 (Link between activities and the United Kingdom) and, in particular, PERG 5.12.8 G (Where is insurance mediation carried on?));

the use of the medium itself to give advice should make no material difference to whether or not the advice is caught by article 53.

01/07/2005

PERG 5.8.21

Advice can be provided in many ways including:

(1) face to face;

(2) orally to a group;

(3) by telephone;

(4) by correspondence (including e-mail);

(5) in a publication, broadcast or web-site; and

(6) through the provision of an interactive software system.

01/07/2005

PERG 5.8.22

Taking electronic commerce as an example, the use of electronic decision trees does not present any novel problem. The same principles apply as with a paper version (see PERG 5.8.15 G to PERG 5.8.19 G (Pre-purchase questioning (including decision trees))).

01/07/2005

PERG 5.8.23

Advice in publications, broadcasts and web-sites is subject to a special regime (see PERG 5.8.24 G (Exclusion: periodical publications, broadcasts and web-sites) and PERG 7 (Periodical publications, news services and broadcasts: applications for certification)).

01/07/2005

Exclusion: periodical publications, broadcasts and web-sites

PERG 5.8.24

An important exclusion from advising on contracts of insurance relates to advice given in periodical publications, regularly updated news and information services and broadcasts (article 54 of the Regulated Activities Order (Advice given in newspapers etc)). The exclusion applies if the principal purpose of the publication or service taken as a whole (including any advertising content) is neither to give advice of a kind mentioned in article 53 (Advising on investments) or article 53A (Advising on regulated mortgage activities) nor to lead or enable persons to buy, sell, subscribe for or underwrite relevant investments or, as borrower, to enter into or vary the terms of a regulated mortgage contract.

01/07/2005

PERG 5.8.25

This is explained in greater detail, together with the provisions on the granting of certificates by the FSA on the application of the proprietor of a periodical publication or news or information service or broadcast, in PERG 7 (Periodical publications, news services and broadcasts: applications for certification).

01/07/2005

Other exclusions

PERG 5.8.26

The Regulated Activities Order contains other limited exclusions which have the effect of preventing certain activities from amounting to advice on contracts of insurance. These are referred to in PERG 5.11.8 G (Exclusions applying to more than one regulated activity) to PERG 5.11.16 G (Large risks).

01/07/2005

PERG 5.9

The Regulated Activities: agreeing to carry on a regulated activity

01/07/2005

PERG 5.9.1

Under article 64 of the Regulated Activities Order (Agreeing to carry on specified kinds of activity), in addition to the regulated activities of:

(1) dealing in investments as agent;

(2) arranging (bringing about) deals in investments;

(3) making arrangements with a view to transactions in investments;

(4) assisting in the administration and performance of a contract of insurance; and

(5) advising on investments;

agreeing to do any of these things is itself a regulated activity. In the FSA's opinion, this activity concerns the entering into of a legally binding agreement to provide the services to which the agreement relates. So, a person is not carrying on a regulated activity under article 64 merely because he makes an offer to do so.

01/07/2005

PERG 5.9.2

To the extent that an exclusion applies in relation to a regulated activity, 'agreeing' to carry on an activity within the exclusion will not be a regulated activity. This is the effect of article 4(3) of the Regulated Activities Order (Specified activities: general). So, for example, a vet can, without carrying on a regulated activity, enter into an agreement with an insurance undertaking to distribute marketing literature provided that the vet can rely on the exclusion in article 72C (Provision of information on an incidental basis) in relation to the activity of distributing the literature (see also PERG 5.6.6 G and PERG 5.6.9 G (Exclusion: article 72C (Provision of information on an incidental basis))). However, to be able to rely on the exclusion in article 72C, the vet must not be viewed as providing information to the insurance undertaking. More specifically, an unauthorised introducer can enter into standing arrangements with insurance undertakings or brokers to make introductions, provided that these arrangements do not envisage subsequent provision of information to these insurance undertakings or brokers with a view to arranging (bringing about) deals in investments or making arrangements with a view to transactions in investments.

01/07/2005

PERG 5.10

Renewals

01/07/2005

PERG 5.10.1

It must be emphasised that activities which concern invitations to renew policies and the subsequent effecting of renewal of policies are likely to fall within insurance mediation activity. Those considering the need for authorisation or variation of their permissions will wish to consider whether a process of tacit renewal operates: that is, where a policyholder need take no action if he wishes to maintain his insurance cover by having his policy 'renewed'. This process will typically result in the issue of a new contract of insurance, not an extension of the period of the existing one. It may involve the activities of advising on investments, arranging and dealing in investments as agent. More specifically, preparing a 'tacit renewal' letter on behalf of an insurance undertaking is likely to amount to arranging. Where it contains a recommendation to renew existing cover this is likely to constitute advising on investments (under article 53 of the Regulated Activities Order). If the contract takes effect on the date stipulated in the renewal letter, a contract is concluded with the effect that the letter writer may be dealing in investments as agent. The process may also involve a regulated activity under article 64 (Agreeing to carry on a regulated activity).

01/07/2005

PERG 5.11

Other aspects of exclusions

01/07/2005

PERG 5.11.1

This part of the guidance deals with:

(1) exclusions which are disapplied where the regulated activity relates to contracts of insurance;

(2) exclusions which are disapplied where a person carries on insurance mediation; and

(3) the following exclusions applying to more than one regulated activity:

(a) activities carried on in the course of a profession or non-investment business (article 67 (Activities carried on in the course of a profession or non-investment business));

(b) activities carried on by a provider of relevant goods or services (article 72B (Activities carried on by a provider of relevant goods or services)); and

(f) activities carried on by a person acting as an insolvency practitioner (article 72H).

01/07/2005

PERG 5.11.2

There are a number of 'pre-IMD' exclusions that have the effect of restricting the scope of the regulated activities referred to in this guidance. Several of these are disapplied or modified as part of implementation of the IMD.

01/07/2005

Exclusions disapplied where activities relate to contracts of insurance

PERG 5.11.3

The exclusions outlined in (1) to (7) were available to intermediaries (and in some cases insurance undertakings) acting in connection with life policies before 14 January 2005. In essence, however, the following exclusions do not apply if they concern transactions relating to contracts of insurance:

(1) dealing in investments as agent with or through authorised persons (article 22 of the Regulated Activities Order (Deals with or through authorised persons));

(2) arranging transactions to which the arranger is to be a party, where the arranger enters into or is to enter into the transaction:

(a) as agent for another person; or

(b) as principal, unless the arranger is the only policyholder or will, as a result of the transaction, become the only policyholder (article 28 (Arranging transactions to which the arranger is a party));

(3) arranging deals with or through authorised persons (article 29 (Arranging deals with or through authorised persons));

(4) introducing (article 33 (Introducing));

(5) activities carried on in connection with the sale of goods and supply of services (article 68 (Activities carried on in connection with the sale of goods and supply of services));

(6) groups and joint enterprises (article 69 (Groups and joint enterprises)) (see PERG 5.11.6 G); and

(7) activities carried on in connection with the sale of a body corporate (article 70 (Activities carried on in connection with the sale of a body corporate)).

01/07/2005

PERG 5.11.4

The restrictions placed on the exclusions listed in PERG 5.11.3 G on 14 January 2005 have the following effects.

(1) Unauthorised persons who:

(a) introduce clients or customers to an independent financial adviser with a view to a transaction; or

(b) deal as agent on behalf of their clients or customers with or though an authorised person; or

will not be able to rely on articles 29 or 33 to avoid the need for authorisation where the transaction relates to a contract of insurance.

(2) Unauthorised persons may, however, be able to rely on the exclusion for the provision of information on an incidental basis in article 72C to continue to avoid the need for authorisation (see PERG 5.6.5 G to PERG 5.6.9 G (Exclusion: article 72C (Provision of information on an incidental basis))).

(3) Authorised persons who themselves introduce clients or customers to others for the purposes of buying or selling any kind of contract of insurance are likely to require a variation of their Part IV permission, as neither article 33 nor generally, article 72C (see PERG 5.6.5 G toPERG 5.6.9 G (Exclusion: article 72C (Provision of information on an incidental basis))) will apply where this activity amounts to arranging.

01/07/2005

PERG 5.11.5

Insurance undertakings are referred to MIPRU 5 (Insurance undertakings and mortgage lenders using insurance or mortgage mediation services) as regards their obligations relating to the use of intermediaries generally.

01/01/2007

PERG 5.11.6

(1) The removal of the exclusion for groups and joint enterprises in article 69 of the Regulated Activities Order (Groups and joint enterprises) may have implications for a company providing services for:

(a) other members of its group; or

(b) other participants in a joint enterprise of which it is a participant.

(2) Such companies might typically provide risk or treasury management or administration services which may include regulated activities relating to a contract of insurance. If so, such companies will need authorisation or exemption if they conduct the activities by way of business (see PERG 5.4 (The business test) generally and (3) and (4)). This is unless another exclusion applies.

(3) In the FSA's view, particular issues arise in applying the by way of business test to group companies. Recital 11 of the Insurance Mediation Directive states that the Directive should apply to persons whose activity consists in providing insurance mediation services to third parties for remuneration. This suggests that the Directive is intended to apply only where the service is provided to a third party. The expression 'third party' is not defined in the Directive. The FSA considers that a group company that is providing services solely for the benefit of other group companies would not normally be regarded as providing services to a third party. The FSA also considers that, as a result, a group company providing services solely for the benefit of other group companies should not normally be regarded as satisfying the requirement that it be remunerated for providing insurance mediation services to third parties. Were a group company to be remunerated other than by another group company, however, the situation may be different. For example, if the group company receives commission from an insurer or broker, the fact would tend to suggest that the company has been rewarded for providing a service to the insurer or broker. In the FSA's view, it is appropriate to apply this principle to a group as defined in section 421 (Group) of the Act.

(4) The FSA considers that similar principles to those applied to a group company in (2) may be applied to the participants in a joint enterprise. This would be where one participant in the joint enterprise is providing services solely for the benefit of another participant and for the purposes of the joint enterprise and who provides insurance mediation services to one or more participants for the purposes of or in connection with the joint enterprise.

01/07/2005

Exclusions disapplied in connection with insurance mediation

PERG 5.11.7

Article 4(4A) of the Regulated Activities Order (Specified activities: general) disapplies certain exclusions where a person, for remuneration, takes up or pursues insurance mediation (as defined in article 2.3 of the IMD (see PERG 5.2.5 G (Approach to implementation of the IMD) and PERG 5.16.2 G (Text of article 2.3 of the Insurance Mediation Directive)) in relation to a risk or commitment located in an EEA state. The relevant exclusions which are disapplied are:

(1) arrangements in connection with lending on the security of insurance policies (article 30 of the Regulated Activities Order (Arranging transactions in connection with lending on the security of insurance policies));

(2) activities carried on by trustees, nominees and personal representatives (article 66 (Trustees, nominees and personal representatives)); and

(3) activities carried on in the course of a profession or non-investment business (article 67 (Activities carried on in the course of a profession or non-investment business)) (This exclusion is considered in further detail in PERG 5.11.9 G to PERG 5.11.12 G (Activities carried on in the course of a profession or non-investment business)).

01/10/2005

Exclusions applying to more than one regulated activity

PERG 5.11.8

Chapter XVII of the Regulated Activities Order (Exclusions applying to several specified kinds of activity) contains various exclusions applying to several kinds of activity. Threeexclusions of relevance in relation to contracts of insurance are dealt with in this section and a fourth, overseas persons, in PERG 5.12 (Link between activities and the United Kingdom).

01/07/2005

Activities carried on in the course of a profession or non-investment business

PERG 5.11.9

Article 67 excludes from the activities of dealing as agent, arranging (bringing about) deals in investments, making arrangements with a view to transactions in investments, assisting in the administration and performance of a contract of insurance and advising on investments, any activity which:

(1) is carried on in the course of carrying on any profession or business which does not otherwise consist of the carrying on of regulated activities in the United Kingdom; and
(2) may reasonably be regarded as a necessary part of other services provided in the course of that profession or business.

In the FSA's view, the fact that a person may carry on regulated activities in the course of the carrying on of a profession or business does not, of itself, mean that the profession or business consists of regulated activities. This is provided that the main focus of the profession or business does not involve regulated activities and that the regulated activities that are carried on arise in a way that is incidental and complementary to the carrying on of the profession or business.

01/07/2005

PERG 5.11.10

Although the article 67 exclusion is disapplied (by article 4(4A) of the Regulated Activities Order (Specified investments: general)) when a person takes up or pursues insurance mediation or reinsurance mediation as defined by articles 2.3 and 2.5 of the IMD, there may be cases where a person is not carrying on activities that amount to insurance mediation. For example, where a person's activities amount simply to the provision of information on an incidental basis in the context of another professional activity, these may fall outside the scope of article 2.3 of the IMD (see PERG 5.16.2 G (article 2.3 of the Insurance Mediation Directive)) and the exclusion in article 67 may then operate to exclude these activities. Also, it is possible that a professional person's activities may not amount to a regulated activity at all. For example, a doctor who provides a medical report to an insurer may be regarded as making arrangements with a view to providing an expert medical opinion rather than with a view to transactions in contracts of insurance. In such cases, article 67 will not be needed.

01/07/2005

PERG 5.11.11

Article 67 may also apply to activities relating to assignments of insurance policies, as, in the FSA's view, article 2.3 of the IMD applies essentially to the creation of new contracts of insurance and not the assignment of rights under existing policies. As such, where a solicitor or licensed conveyancer arranges an assignment of a contract of insurance, the exclusion in article 67 remains of potential application. For similar reasons, trustees advising on or arranging assignments of contracts of insurance may, in certain circumstances, be able to rely on the exclusions in article 66 of the Regulated Activities Order.

01/07/2005

PERG 5.11.12

For article 67 to apply in these cases, in addition to PERG 5.11.9G (1) and (2), the activity in question must not be remunerated separately from other services (article 67(2) of the Regulated Activities Order).

01/07/2005

Activities carried on by a provider of relevant goods or services

PERG 5.11.13

Article 72B (see also PERG 5.3.7 G (Connected contracts of insurance)) may be of relevance to persons who supply non-motor goods or provide services related to travel in the course of carrying on a profession or business which does not otherwise consist of carrying on regulated activities. In the FSA's view, the fact that a person may carry on regulated activities in the course of the carrying on of a profession or business does not, of itself, mean that the profession or business consists of regulated activities. This is provided that the main focus of the profession or business does not involve regulated activities and that the regulated activities that are carried on arise in a way that is incidental and complementary to the carrying on of the profession or business. For example, a travel agent might carry on insurance mediation activities in relation to some contracts of insurance that satisfy the conditions of the article 72B and some that do not. The former contracts will be excluded from regulation even though the travel agent must seek authorisation or become an appointed representative to be permitted to sell the latter contracts. The exclusion applies to insurance mediation activities when carried on in relation to 'connected contracts of insurance'. In broad terms, a 'connected contract of insurance' is a contract of insurance which:

(1) is not a contract of long-term insurance (as defined by article 3 of the Regulated Activities Order (Interpretation));

(2) has a total duration (including rights to renewal) of five years or less;

(3) has an annual premium (or the equivalent of annual premium) of €500 or less;

(4) covers:

(a) the risk of breakdown, loss of, or damage to, non-motor goods supplied by the provider; or

(b) travel risks;

(5) does not cover any liability risks (except, in the case of a contract which covers travel risks, where the cover is ancillary to the main cover provided by the contract);

(6) is complementary to the non-motor goods being supplied or service being provided by the provider; and

(7) is of such a nature that the only information that a person requires in order to carry on one of the insurance mediation activities is the cover provided by the contract.

01/01/2009

PERG 5.11.13A

(1) There are two types of travel risks covered by PERG 5.11.13G (4)(b). The first type covers damage to, or loss of, baggage and other risks linked to the travel booked with the provider where that travel relates to attendance at an event organised or managed by that provider and the party seeking insurance is not an individual (acting in his private capacity) or a small business.

(2) "Small business" means a sole trader, body corporate, partnership or unincorporated association which had a turnover in the last financial year of less than £1,000,000. But if the small business is a member of a group within the meaning of section 262(1) of the Companies Act 1985 (and after the repeal of that section, within the meaning of section 474(1) of the Companies Act 2006), reference to its turnover means the combined turnover of the group. Turnover means the amounts derived from the provision of goods and services falling within the business's ordinary activities, after deduction of trade discounts, value added tax and any other taxes based on the amounts so derived.

(3) The second type of travel risk is damage to, or loss of, baggage and other risks linked to the hire from the insurance provider of an aircraft, vehicle or vessel which does not provide sleeping accommodation.

(4) PERG 5.11.13G (4)(a) does not apply to the hire of an aircraft, vehicle or vessel but does cover hire purchase and similar agreements.

01/01/2009

PERG 5.11.14

In the FSA's view, the liability risks referred to in PERG 5.11.13G (5) cover risks in relation to liabilities that the policyholder might have to others (that is, third party claims). Many policies will provide this sort of cover and so fall outside the scope of the exclusion. For example, a policy that covers the cost of unauthorised calls made when a mobile telephone is stolen includes 'liability risks' and would not be a 'connected contract of insurance'. By contrast, travel policies which provide cover in respect of the policyholder's personal liability while travelling may fall within the exclusion by virtue of PERG 5.11.13G (5), where sold as part of a package by event organisers.

01/01/2009

PERG 5.11.15

In the FSA's view, the condition in PERG 5.11.13G (7) is likely to be satisfied where the insurance mediation activities relate to a standard form contract of insurance, the terms of which (other than the cost of the premium) are not subject to negotiation.

01/07/2005

Large risks

PERG 5.11.16

Article 72D (Large risks contracts where risk situated outside the EEA) provides an exclusion for large risks situated outside the EEA. Broadly speaking, these are risks relating to:

(1) railway rolling stock, aircraft, ships, goods in transit, aircraft liability and shipping liability;

(2) credit and suretyship where relating to the policyholder's commercial or professional liability;

(3) land vehicles, fire and natural forces, property damage, motor vehicle liability where the policyholder is a business of a certain size.

For a fuller definition of contracts of large risks see the definition in the Glossary.

01/07/2005

PERG 5.12

Link between activities and the United Kingdom

01/07/2005

Introduction

PERG 5.12.1

Section 19 of the Act (The general prohibition) provides that the requirement to be authorised under the Act only applies in relation to regulated activities which are carried on 'in the United Kingdom'. In many cases, it will be quite straightforward to identify where an activity is carried on. But, when there is a cross-border element, for example because a customer is outside the United Kingdom or because some other element of the activity happens outside the United Kingdom, the question may need careful consideration. PERG 5.15.8 G (Flow chart: am I carrying on regulated activities in the United Kingdom?) has a flow chart setting out the questions a person needs to consider in determining whether or not his regulated activities are carried on 'in the United Kingdom'.

01/07/2005

PERG 5.12.2

01/07/2005

PERG 5.12.3

The table in PERG 5.12.4 G is a very simplified summary of territorial issues relating to overseas insurance intermediaries carrying on the business of insurance mediation activities in or into the United Kingdom for remuneration.

01/07/2005

PERG 5.12.4

Table Territorial issues relating to overseas insurance intermediaries carrying on insurance mediation activities in or into the United Kingdom

Needs Part IVpermission

Schedule 3 EEA passport rights available

Overseas persons exclusion available

Registered EEA-based intermediary with UK branch (registered office or head office in another EEA State)

Yes

Registered EEA-based intermediary with no UK branch providing cross-border services

Yes

Potentially available [see Note]

Third country intermediary operating from branch in the UK

Yes

Third country intermediary providing services in (or into) the UK

Yes unless overseas persons exclusion applies

Potentially available

This does not, however, affect the firm's authorisation under Schedule 3 to the Act (see PERG 5.12.9 G to PERG 5.12.10 G (Passporting)).

For EEA-based intermediaries this table assumes that the insurance mediation activities are within the scope of the Insurance Mediation Directive.

06/01/2008

Where are insurance mediation activities carried on?

PERG 5.12.5

Persons carrying on insurance mediation activities from a registered office or head office in the United Kingdom will clearly be carrying on regulated activities in the United Kingdom. However, a person may be considered to be carrying on regulated activities in the United Kingdom even where not carrying on the activity from a registered office or head office in the United Kingdom. This is explained further in PERG 5.12.6 G to PERG 5.12.8 G.

01/07/2005

PERG 5.12.6

In determining the location of an activity, and hence whether it is carried on in the United Kingdom, various factors need to be taken into account in turn, notably:

(1) section 418 of the Act (Carrying on regulated activities in the United Kingdom);

(2) the nature of the activity; and

(3) the overseas persons exclusion (see PERG 5.12.9 G to PERG 5.12.10 G (Overseas persons)).

01/07/2005

PERG 5.12.7

Section 418 of the Act extends the meaning that 'carry on regulated activity in the United Kingdom' would normally have by setting out additional cases in which a person who would not otherwise be regarded as carrying on the activity in the United Kingdom is to be regarded as doing so. Each of the following cases thus amounts to carrying on a regulated activity in the United Kingdom:

(1) where a UK-based person carries on a regulated activity in another EEA State in the exercise of rights under a Single Market Directive;

(2) where a UK-based person carries on a regulated activity and the day-to-day management of the activity is the responsibility of an establishment in the United Kingdom;

(3) where a regulated activity is carried on by a person who is not based in the United Kingdom but is carried on from an establishment maintained by him in the United Kingdom; and

(4) where an electronic commerce activity is carried on with or for a person in an EEA State from an establishment in the United Kingdom.

In each of these cases it is irrelevant where the person with whom the activity is carried on is situated.

01/07/2005

PERG 5.12.8

Otherwise, where the cases in PERG 5.12.7G (1) do not apply, it is necessary to consider further the nature of the activity in order to determine where insurance mediation is carried on. Persons that arrange contracts of insurance will usually be considered as carrying on the activity of arranging in the location where these activities take place. As for dealing activities, the location of the activities will depend on factors such as where the acceptance takes place, which in turn will depend on the method of communication used. In the case of advising, this is generally considered to take place where the advice is received.

01/07/2005

Overseas persons

PERG 5.12.9

Article 72 of the Regulated Activities Order (Overseas persons) provides a potential exclusion for persons with no permanent place of business in the United Kingdom from which regulated activities are conducted or offers to conduct regulated activities are made. Where these persons carry on insurance mediation activities in the United Kingdom, they may be able to take advantage of the exclusions in article 72 of the Regulated Activities Order. In general terms, these apply where the overseas person either:

(1) deals or arranges deals with or through authorised or exempt persons only; or

(2) enters into deals with (or on behalf of) a person in the United Kingdom or gives advice on investments in the United Kingdom, in each case as a result of a 'legitimate approach'.

A 'legitimate approach', for the purposes of (2), is one that results from an unsolicited approach by a person (for example, a customer) or otherwise is a result of an approach by, or on behalf of, an overseas person which complies with the restriction on financial promotion under section 21 of the Act (see PERG 8.3.1 G (Financial promotion)).

01/07/2005

PERG 5.12.10

The overseas person exclusion is available to persons who do not have a permanent place of business in the United Kingdom and so is of relevance to third country intermediaries (that is, non EEA-based intermediaries) who carry on insurance mediation activities in, or into, the United Kingdom (for example with or through authorised insurance brokers and insurance undertakings operating in the Lloyd's market).

01/07/2005

How should persons be authorised?

PERG 5.12.11

UK-based persons must obtain Part IV permission in relation to their insurance mediation activities in the United Kingdom as one of the following:

(1) a body corporate whose registered office is situated in the United Kingdom; or

(2) a partnership or unincorporated association whose head office is situated in the United Kingdom; or

(3) an individual (that is, a sole trader) whose residence is situated in the United Kingdom.

The United Kingdom will, in each case, be the Home State for the purposes of the IMD for insurance or reinsurance intermediaries (see further in connection with the E-Commerce Directive in PERG 5.12.15 G to PERG 5.12.17 G (E-Commerce Directive)).

01/07/2005

PERG 5.12.12

Non-UK-based persons wishing to carry on insurance mediation activities in the United Kingdom must:

(1) qualify for authorisation by exercising passport rights (see section 31 (Authorised persons) and schedule 3 (EEA passport rights) to the Act and PERG 5.12.13 G to PERG 5.12.14 G (Passporting)); or

(2) make use of the overseas persons exclusion (which then has the effect that activities are deemed not to be regulated activities carried on in the United Kingdom); or

(3) seek Part IV permission .

01/07/2005

Passporting

PERG 5.12.13

The effect of the IMD is that any EEA-based insurance intermediaries doing business within the Directive's scope must first be registered in their home EEA State before carrying on insurance mediation in that EEA State or other EEA States. For these purposes, an EEA-based insurance intermediary is either:

(1) a legal person with its registered office or head office in an EEA State other than the United Kingdom; or

(2) a natural person resident in an EEA State other than the United Kingdom.

Registered EEA-based insurance intermediaries wishing to establish branches in the United Kingdom or provide services on a cross-border basis into the United Kingdom can do so by notifying their Home State regulator which in turn notifies the FSA . This enables the intermediary to acquire passporting rights for business within the Directive's scope (so excluding insurance mediation activities relating to connected contracts or connected travel insurance contracts) under Schedule 3 to the Act (EEA passporting rights) (see Schedule 3(13) and (14) of the Act as amended by the Insurance Mediation Directive (Miscellaneous Amendments) Regulations 2003). SUP 13A (Qualifying for authorisation under the Act) has general guidance on the exercise of passporting rights by EEA firms.

01/01/2009

PERG 5.12.14

On the other hand, non-EEA-based insurance intermediaries wishing to establish a branch in the UK for the purpose of carrying on insurance mediation activities may only do so with Part IV permission .

01/07/2005

E-Commerce Directive

PERG 5.12.15

The E-Commerce Directive removes restrictions on the cross-border provision of services by electronic means, introducing a country of origin approach to regulation. This requires EEA States to impose certain requirements on the outward provision of such services and to lift them from inward providers. The E-Commerce Directive defines an e-commerce service (termed an information society service) as any service, normally provided for remuneration, at a distance, by electronic means, and at the individual request of the recipient of the service. So, for example, it includes services provided over the internet, by solicited e-mail, and interactive digital television.

01/11/2007

PERG 5.12.16

The E-Commerce Directive does not remove the IMD requirement for persons taking up or pursuing insurance mediation for remuneration to be registered in their Home State. Nor does it remove the requirement for EEA-based intermediaries to acquire passporting rights in order to establish branches in the United Kingdom (see PERG 5.12.7 G (Where is insurance mediation carried on?) in relation to electronic commerce activity carried on from an establishment in the United Kingdom) or provide services on a cross-border basis into the United Kingdom where the relevant activity is carried on in the United Kingdom. An example of electronic commerce activity provided on a cross-border basis into the United Kingdom could be a recommendation in a (solicited) e-mail from an EEA-based intermediary to a UK-based customer to buy a particular contract of insurance.

01/07/2005

PERG 5.12.17

Put shortly, the E-Commerce Directive relates to services provided into the United Kingdom from other EEA States and from the United Kingdom into other Member States. In broad terms, such cross-border insurance mediation services provided by an EEA firm into the United Kingdom (via electronic commerce activity or distance means) will generally be subject to IMD registration in, and conduct of business regulation of, the intermediary's EEA State of origin. By contrast, insurance mediation services provided in the United Kingdom will be subject to UK conduct of business regulation, although the requirement for registration will again depend upon the intermediary's EEA State of origin.

01/07/2005

PERG 5.13

Appointed representatives

01/07/2005

What is an appointed representative?

PERG 5.13.1

Section 39 of the Act (Exemption of appointed representatives) exempts appointed representatives from the need to obtain authorisation. An appointed representative is a person who is party to a contract with an authorised person which permits or requires him to carry on certain regulated activities (see Glossary for full definition). SUP 12 (Appointed representatives) contains rules and guidance relating to appointed representatives.

01/07/2005

PERG 5.13.2

A person who is an authorised person cannot be an appointed representative (see section 39(1) of the Act (Exemption of appointed representatives)).

01/07/2005

Business for which an appointed representative is exempt

PERG 5.13.3

An appointed representative can carry on only those regulated activities which are specified in the Appointed Representatives Regulations. The regulated activities set out in the table in PERG 5.13.4 G are included in those regulations. As set out in the table, the insurance mediation activities that can be carried on by an appointed representative differ depending on the type of contracts of insurance in relation to which the activities are carried on.

01/07/2005

PERG 5.13.4

Insurance mediation activities able to be carried on by an appointed representative. This table belongs to PERG 5.13.3 G.

Type of contract of insurance

Regulated activities an appointed representative can carry on

General insurance contract

• dealing in investments as agent;• arranging;• assisting in the administration and performance of a contract of insurance;• advising on investments; and•agreeing to carry on these regulated activities.

Pure protection contract

• dealing in investments as agent (but only where the contract is not a long-term care insurance contract);• arranging;• assisting in the administration and performance of a contract of insurance;• advising on investments; and•agreeing to carry on these regulated activities.

Life policy

• arranging;• assisting in the administration and performance of a contract of insurance;• advising on investments; and•agreeing to carry on these regulated activities

01/07/2005

Persons who are not already appointed representatives

PERG 5.13.5

A person who is not already an appointed representative may wish to become one in relation to the regulated activities specified in the Appointed Representatives Regulations (see table in PERG 5.13.4 G). If so, he must be appointed under a written contract by an authorised person, who has permission to carry on those regulated activities and who accepts responsibility for the appointed representative's actions when acting for him. SUP 12.4 (What must a firm do when it appoints an appointed representative?) and SUP 12.5 (Contracts: required terms) set out the detailed requirements that must be met for an appointment to be made. In particular, an appointed representative will not be able to commence an insurance mediation activity until he is included on the FSA Register for such activities.

01/07/2005

Persons who are already appointed representatives

PERG 5.13.6

Where a person is already an appointed representative and he proposes to carry on any insurance mediation activities, he will need to consider the following matters.

(1) He must become authorised if his proposed insurance mediation activities include activities that do not fall within the table in PERG 5.13.4 G (for example, dealing as agent in pure protection contracts) and he wishes to carry on these activities. The Act does not permit any person to be exempt for some activities and authorised for others. He will, therefore, need to apply for permission to cover all the regulated activities that he proposes to carry on.

(2) If he proposes to carry on other regulated activities specified in the Appointed Representatives Regulations in relation to contracts of insurance (see the table in PERG 5.13.4 G), he may be able to do so as an appointed representative bearing in mind the following.

(a) He will need to be appointed by an authorised person prepared to accept responsibility for his insurance mediation activities when acting for him. The authorised person must have permission to carry on these regulated activities.

(b) If these insurance mediation activities are to be carried on for the same authorised person who has already appointed him for his other regulated activities, the contract between them will need to be amended to reflect the additional activities. Other amendments to the contract will be required (see SUP 12.5.6A R).

(c) The effect of amendments to the Appointed Representatives Regulations is that an appointed representative cannot commence an insurance mediation activity until he is included on the FSA Register as carrying on such activities.

(d) An appointed representative would be entitled to have more than one principal subject to certain restrictions. In relation to non-investment insurance contracts (general insurance contracts and pure protection contracts), an appointed representative may have an unlimited number of principals. In relation to regulated mortgage contracts and designated investment business, an appointed representative is limited in the number of principals he may have. In any case where an appointed representative has multiple principals, those principals are required to enter into a multiple- principal agreement (see SUP 12.4.5D G to SUP 12.4.5G G (Appointment of an appointed representative (other than an introducer appointed representative)).

(e) If the activities of the appointed representative are limited to introducing, he should consider the specific Handbook provisions relating to introducer appointed representatives (see SUP 12 (What must a firm do when it appoints an appointed representative?)).

01/07/2005

PERG 5.14

Exemptions

01/07/2005

Professionals

PERG 5.14.1

Professional firms (broadly firms of solicitors, accountants and actuaries) may carry on insurance mediation activities in the course of their professional activities. Exempt professional firms carrying on insurance mediation activities may continue to be able to use the Part XX exemption to avoid any need for authorisation. PROF 2 (Status of exempt professional firm) contains guidance on the Part XX exemption. They will, however, need to be shown on the FSA Register as carrying on insurance mediation activities, in order to benefit from this exemption. The task of registration is the responsibility of the designated professional bodies who will need to inform the FSA both of member firms carrying on insurance mediation activities and individuals within firms' management responsible for these activities.

01/07/2005

PERG 5.14.2

Professional firms with practices that involve acting for claimants in litigation against insurance undertakings are likely to be carrying on the regulated activity of assisting in the administration and performance of a contract of insurance. Exempt professional firms whose practices contain a material element of such activity should consider whether they can continue to take advantage of the Part XX exemption to avoid any need for authorisation, having regard to the relevant provisions of the Act, in particular section 327 (Exemption from the general prohibition) and the guidance in PROF 2.1.14 G (Exempt regulated activities).

01/07/2005

PERG 5.14.3

Professional firms should be aware of the disapplication of the exclusions for trustees (article 66) and activities carried on in the course of a profession or non-investment business (article 67) outlined in PERG 5.11.7 G (Exclusions disapplied in connection with insurance mediation) where their activities would amount to insurance mediation. Where they do not, they will still be able to rely upon article 67. Otherwise, the Nonexempt Activities Order imposes limitations on the extent to which professional firms can give advice to individuals. In particular, a professional firm cannot recommend to a private client that he buy a life policy, unless he is endorsing a corresponding recommendation given to the client. The recommendation he endorses must be one given by an authorised person permitted to advise on life policies, or an exempt person for these purposes. No such restrictions apply, however, in relation to contracts of insurance other than life policies.

01/07/2005

PERG 5.14.4

As indicated in PERG 5.6.8 G, the article 72C exclusion (Provision of information on an incidental basis) is potentially available to unauthorisedprofessional firms including exempt professional firms. This may be relevant to professional firms arranging contracts of insurance for clients on an individual basis.

01/07/2005

Other exemptions

PERG 5.14.5

In addition to certain named persons exempted by the Exemption Order from the need to obtain authorisation, the following bodies are exempt in relation to insurance mediation activities that do not relate to life policies:

(1) local authorities but not their subsidiaries;

(2) registered social landlords in England and Wales within the meaning of Part I of the Housing Act 1996 but not their subsidiaries;

(3) registered social landlords in Scotland within the meaning of the Housing (Scotland) Act 2001 but not their subsidiaries;

(4) the Housing Corporation;

(5) Scottish Homes; and

(6) The Northern Ireland Housing Executive.

01/07/2005

PERG 5.15

Illustrative tables

01/07/2005

PERG 5.15.1

This flow chart sets out the matters a person will need to consider to see if he will need authorisation for carrying on insurance mediation activities. It is referred to in PERG 5.2.3 G (Questions to be considered to decide if authorisation is required).

01/07/2005

PERG 5.15.2

Flow chart: regulated activities related to insurance mediation activities - do you need authorisation?

01/07/2005

PERG 5.15.3

The table in PERG 5.15.4 G is designed as a short, user-friendly guide but should be read in conjunction with the relevant sections of the text of this guidance. It is not a substitute for consulting the text of this guidance or seeking professional advice as appropriate (see PERG 5.1.6 G on the effect of this guidance). References in this table to articles are to articles of the Regulated Activities Order. In this table, it is assumed that each of the activities described is carried on by way of business (see PERG 5.4). Save where otherwise indicated, it is assumed that the intermediary is carrying on activities in respect of policies where he is not the policyholder. Also, that this table does not provide an exhaustive list of all of the exclusions or exemptions that are of relevance to each type of activity. For a full explanation of the exclusions and exemptions under the Regulated Activities Order and their applicability see generally PERG 5.3.7 G to PERG 5.3.8 G, PERG 5.6.5 G to PERG 5.6.23 G, PERG 5.7.7 G, PERG 5.8.24 G to PERG 5.8.26 G, PERG 5.11, PERG 5.12.9 G to PERG 5.12.10 G, PERG 5.13 and PERG 5.14. This Table is referred to in PERG 5.7.5 G (The regulated activities: assisting in the administration and performance of a contract of insurance).

01/07/2005

PERG 5.15.4

Types of activity - are they regulated activities and, if so, why?

Type of activity

Is it a regulated activity?

Rationale

MARKETING AND EFFECTING INTRODUCTIONS

Passive display of information -for example, medical insurance brochures in doctor's surgery (whether or not remuneration is received for this activity)

No.

Merely displaying information does not constitute making arrangements under article 25(2) (see PERG 5.6.4 G).

Recommending a broker/insurance undertaking and providing customer with contact details (whether by phone, fax, e-mail, face-to-face or any other means of communication)

Yes, but article 72C may be available.

This will constitute making arrangements under article 25(2). But, the exclusion in article 72C will apply if all the intermediary does is supply information to the customer and the conditions of article 72C are otherwise met (see PERG 5.6.5 G to PERG 5.6.9 G). Generally, this will not amount to advice under article 53 unless there is an implied recommendation of a particular policy (see PERG 5.8.4 G), in which case article 72C would not be available.

Providing an insurance undertaking/broker with contact details of customer

Yes.

This will constitute making arrangements under article 25(2) when undertaken in the context of regular or ongoing arrangements for introducing customers. Article 72C will not apply because the information is supplied to someone other than the policyholder or potential policyholder.

Marketing on behalf of insurance undertaking to intermediaries only (for example, broker consultants)

Yes.

This amounts to work preparatory to the conclusion of contracts of insurance and so constitutes making arrangements under article 25(2). Article 72C is not available because this activity does not involve provision of information to the policyholder or potential policyholder only.

Telemarketing services (that is, companies specialising in marketing an insurance undertaking's products/services to prospective customers)

Yes.

This amounts to introducing and/or other work preparatory to the conclusion of contracts of insurance and so constitutes making arrangements under article 25(2). This could also involve article 25(1) arranging where the telemarketing company actually sells a particular policy and could involve advising on investments. Article 72C will not be available where the provision of information is more than incidental to the telemarketing company's main business or where the telemarketing company is advising on investments.

PRE-PURCHASE DISCUSSIONS WITH CUSTOMERS AND ADVICE

Discussion with client about need for insurance generally/need to take out a particular type of insurance

Generally, no. Article 72C available if needed.

Not enough, of itself, to constitute making arrangements under article 25(2), but you should consider whether, viewed as a whole, your activities might amount to arranging. If so, article 72C might be of application (see PERG 5.6.5 G to PERG 5.6.9 G).

Advising on the level of cover needed

Generally, no. Article 72C available if needed.

Not enough, of itself, to constitute making arrangements under article 25(2), but you should consider whether, viewed as a whole, your activities might amount to making arrangements under article 25(2) (see PERG 5.8.3 G). If so, article 72C might be of application (see PERG 5.6.5 G to PERG 5.6.9 G).

Pre-purchase questioning in the context of filtered sales (intermediary asks a series of questions and then suggests several policies which suit the answers given)

Yes. Subject to article 72 C exclusion where available.

This will constitute arranging although article 72C may be of application (see PERG 5.6.5 G to PERG 5.6.9 G). If there is no express or implied recommendation of a particular policy, this activity will not amount to advice under article 53 (see PERG 5.8.15 G to PERG 5.8.19 G).

Explanation of the terms of a particular policy or comparison of the terms of different policies

Possibly. Article 72C available.

This is likely to amount to making arrangements under article 25(2). In certain circumstances, it could involve advising on investments (see PERG 5.8.8 G (Advice or information)). Where the explanation is provided to the potential policyholder, and does not involve advising on investments, article 72C may be of application (see PERG 5.6.5 G to PERG 5.6.9 G), and where information is provided by a professional in the course of a profession, article 67 may apply (see PERG 5.11.9 G to PERG 5.11.12 G).

Advising that a customer take out a particular policy

Yes.

This amounts to advice on the merits of a particular policy under article 53 (see PERG 5.8.4 G to PERG 5.8.5 G).

Advising that a customer does not take out a particular policy

Yes.

This amounts to advice on the merits of a particular policy under article 53 (see PERG 5.8.4 G to PERG 5.8.5 G).

Advice by journalists in newspapers, broadcasts etc.

Generally, no because of the article 54 exclusion.

Article 54 provides an exclusion for advice given in newspapers etc (see PERG 5.8.24 G to PERG 5.8.25 G).

Giving advice to a customer in relation to his buying a consumer product, where insurance is a compulsory secondary purchase and/or a benefit that comes with buying the product

Not necessarily but depends on the circumstances.

Where the advice relates specifically to the merits of the consumer product, it is possible that references to the accompanying insurance may be seen to be information and not advice. If, however, the advice relates, in part, to the merits of the insurance element, then it will be regulated activity.

ASSISTING CUSTOMERS WITH COMPLETING/SENDING APPLICATION FORMS

Providing information to customer who fills in application form

Possibly. Subject to article 67 or 72C exclusions where available.

This activity may amount to arranging although the exclusions in article 67 (see PERG 5.11.9 G to PERG 5.11.12 G) and article 72C (see PERG 5.6.5 G to PERG 5.6.9 G) may be of application.

Helping a potential policyholder fill in an application form

Yes.

This activity amounts to arranging. Article 72C will not apply because this activity goes beyond the mere provision of information to a policyholder or potential policyholder (see PERG 5.6.5 G to PERG 5.6.9 G).

Receiving completed proposal forms for checking and forwarding to an insurance undertaking (for example, an administration outsourcing service provider that receives and processes proposal forms)

Yes.

This amounts to arranging. Article 72C does not apply because this activity goes beyond the mere provision of information to a policyholder or potential policyholder (see PERG 5.6.5 G to PERG 5.6.9 G).

Assisting in completion of proposal form and sending to insurance undertaking

Yes.

This activity amounts to arranging. Article 72C does not apply because this activity goes beyond the mere provision of information (see PERG 5.6.5 G to PERG 5.6.9 G).

NEGOTIATING AND CONCLUDING CONTRACTS OF INSURANCE

Negotiating terms of policy on behalf of a customer with the insurance undertaking

Yes.

This activity amounts to arranging (see PERG 5.6.2 G).

Negotiating terms of policy on behalf of insurance undertaking with the customer and signing proposal form on his behalf

Yes.

These activities amount to both arranging and dealing in investments as agent.

Concluding a contract of insurance on insurance company's behalf, for example, motor dealer who has authority to conclude insurance contract on behalf of insurance undertaking when selling a car

Yes.

A person carrying on this activity will be dealing in investments as agent. He will also be arranging (as the article 28 exclusion only applies in the limited circumstances envisaged under article 28(3)) (see PERG 5.6.12 G).

Agreeing, on behalf of a prospective policyholder, to buy a policy.

Yes.

A person who, with authority, enters into a contract of insurance on behalf of another is dealing in investments as agent under article 21, and will also be arranging.

Providing compulsory insurance as a secondary purchase

Yes. It will amount to dealing in investments as agent or arranging.

The fact that the insurance is secondary to the primary product does not alter the fact that arranging the package involves arranging the insurance.

COLLECTION OF PREMIUMS

Collection of cheque for premium from the customer at the pre-contract stage.

Yes (as part of arranging).

This activity is likely to form part of arranging. But the mere collection/receipt of premiums from the customer is unlikely, without more, to amount to arranging.

Collection of premiums at post-contract stage

No.

The mere collection of premiums from policyholders is unlikely, without more, to amount to assisting in the administration and performance of a contract of insurance.

MID-TERM ADJUSTMENTS AND ASSIGNMENTS

Solicitors or licensed conveyancers discharging client instructions to assign contracts of insurance.

Not where article 67 applies.

As the assignment of rights under a contract of insurance (as opposed to the creation of new contracts of insurance) does not fall within the IMD, article 67 is of potential application (see PERG 5.11.9 G to PERG 5.11.12 G).

Making mid-term adjustments to a policy, for example, property manager notifies changes to the names of the leaseholders registered as "interested parties" in the policy in respect of the property.

Yes.

Assuming the freeholder (as policyholder) is obliged under the terms of the policy to notify the insurance undertaking of changes to the identity of the leaseholders, the property manager is likely to be assisting in the administration and the performance of the contract of insurance.

TRADED ENDOWMENT POLICIES ("TEPs")

Making introductions for the purposes of selling TEPs

Yes, unless article 72C applies.

Making introductions for these purposes is arranging unless article 72C applies (see PERG 5.6.5 G to PERG 5.6.9 G). The exclusions in article 29 (Arranging deals with or through authorised persons) and 33 (Introducing) no longer apply to arranging contracts of insurance.

Market makers in TEPs

Yes, although the exclusion in article 28 may apply.

Unauthorised market makers can continue to make use of the exclusions in articles 15 (Absence of holding out etc.) and 16 (Dealing in contractually based investments), where appropriate. In order to avoid the need for authorisation in respect of arranging they may be able to rely upon article 28 (see PERG 5.6.12 G).

ASSISTING POLICYHOLDER WITH MAKING A CLAIM

Merely providing information to the insured to help him complete a claim form

No.

Of itself, this is likely to amount to assisting in the administration but not the performance of a contract of insurance. In the FSA's view, the provision of information in these circumstances is more akin to facilitating performance of a contract of insurance rather than assisting in the performance (see PERG 5.7.3 G to PERG 5.7.5 G)

Completion of claim form on behalf of insured

Potentially.

This activity amounts to assisting in the administration of a contract of insurance. Whether this activity amounts to assisting in the administration and performance of a contract of insurance will depend upon whether a person's assistance in filling in a claims form is material to whether performance of the contractual obligation to notify a claim takes place (see PERG 5.7.2 G to PERG 5.7.3 G).

Notification of claim to insurance undertaking and helping negotiate its settlement on the policyholder's behalf

Yes.

This activity amounts to assisting in the administration and performance of a contract of insurance (see PERG 5.7.4 G).

ASSISTING INSURANCE UNDERTAKING WITH CLAIMS BY POLICYHOLDERS

Negotiation of settlement of claims on behalf of an insurance undertaking

No.

Claims management on behalf of an insurance undertaking does not amount to assisting in the administration and performance of a contract of insurance by virtue of the exclusion in article 39B (see PERG 5.7.7 G).

Providing information to an insurance undertaking in connection with its investigation or assessment of a claim

No.

This activity does not amount to assisting in the administration and performance of a contract of insurance.

Loss adjusters and claims management services (for example, by administration outsourcing providers)

Potentially.

These activities may amount to assisting in the administration and performance of a contract of insurance. Article 39B excludes these activities, however, when undertaken on behalf of an insurance undertaking only (see PERG 5.7.7 G).

Providing an expert appraisal of a claim

No.

This activity does not amount to assisting in the administration and performance of a contract of insurance whether carried out on behalf of an insurance undertaking or otherwise.

Jeweller repairs customer's jewellery pursuant to a policy which permits the jeweller to carry out repairs

No.

This activity does not amount to assisting in the administration and performance of a contract of insurance. It amounts to managing claims on behalf of an insurance undertaking and so falls within the exclusion in article 39B (see PERG 5.7.7 G).

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PERG 5.15.5

The flow chart in PERG 5.15.6 G sets out the matters a person whose introducing activities potentially amount to making arrangements with a view to transactions in investments will need to consider if he can use the exclusion in article 72C (Provision of information on an incidental basis). It is referred to in PERG 5.1.6 G (Purpose of guidance) and PERG 5.6.9 G (Exclusion: article 72C (Provision of information on an incidental basis)).

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PERG 5.15.6

Flow Chart: Introducers.

01/07/2005

PERG 5.15.7

The flow chart in PERG 5.15.8 G sets out the questions a person needs to consider in determining whether or not his regulated activities are carried on 'in the United Kingdom'.

01/07/2005

PERG 5.15.8

Flow chart: am I carrying on regulated activities in the United Kingdom?

01/07/2005

PERG 5.16

Meaning of 'insurance mediation'

01/07/2005

PERG 5.16.1

PERG 5.16.2 G sets out the text of article 2.3 of the Insurance Mediation Directive. It is referred to in PERG 5.2.5 G and PERG 5.2.5 G (Approach to implementation of the IMD), PERG 5.11.7 G (Exclusions disapplied in connection with insurance mediation) and PERG 5.11.10 G (Activities carried on in the course of a profession or non-investment business).

01/07/2005

PERG 5.16.2

Text of article 2.3 of the Insurance Mediation Directive
"'Insurance mediation' means the activities of introducing, proposing or carrying out other work preparatory to the conclusion of contracts of insurance, or of concluding such contracts, or of assisting in the administration and performance of such contracts, in particular in the event of a claim.
These activities when undertaken by an insurance undertaking or an employee of an insurance undertaking who is acting under the responsibility of the insurance undertaking shall not be considered as insurance mediation.
The provision of information on an incidental basis in the context of another professional activity provided that the purpose of that activity is not to assist the customer in concluding or performing an insurance contract, the management of claims of an insurance undertaking on a professional basis, and loss adjusting and expert appraisal of claims shall also not be considered as insurance mediation."

01/07/2005

PERG 6

Guidance on the Identification of Contracts of Insurance

PERG 6.1

Application

01/07/2005

PERG 6.1.1

This chapter is relevant to any person who needs to know what activities fall within the scope of the Act.

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PERG 6.2

Purpose of guidance

01/07/2005

PERG 6.2.1

The purpose of this guidance is to set out:

(1) at PERG 6.5 the general principles; and

(2) at PERG 6.6 the range of specific factors;

that the FSA regards as relevant in deciding whether any arrangement is a contract of insurance.

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PERG 6.2.2

This guidance includes (at PERG 6.7) a number of examples, showing how the factors have been applied to reach conclusions with respect to specific categories of business. Further examples may be published from time-to-time.

01/07/2005

PERG 6.3

Background

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PERG 6.3.1

The business of effecting or carrying out contracts of insurance is subject to prior authorisationand regulation by the FSA . (There are some limited exceptions to this requirement, for example, for breakdown insurance.)

01/07/2005

PERG 6.3.2

The Regulated Activities Order, which sets out the activities for which authorisation is required, does not attempt an exhaustive definition of a 'contract of insurance'. Instead, it makes some specific extensions and limitations to the general common law meaning of the concept. For example, it expressly extends the concept to fidelity bonds and similar contracts of guarantee, which are not contracts of insurance at common law, and it excludes certain funeral plan contracts, which would generally be contracts of insurance at common law. Similarly, the Exemption Order excludes certain trade union provident business, which would also be insurance at common law. One consequence of this is that common law judicial decisions about whether particular contracts amount to 'insurance' or 'insurance business' are relevant in defining the scope of the FSA's authorisation and regulatory activities, as they were under predecessor legislation.

01/07/2005

PERG 6.3.3

The courts have not fully defined the common law meaning of 'insurance' and 'insurance business', since they have, on the whole, confined their decisions to the facts before them. They have, however, given useful guidance in the form of descriptions of contracts of insurance.

01/07/2005

PERG 6.3.4

The best established of these descriptions appears in the case of Prudential v. Commissioners of Inland Revenue [1904] 2 KB 658. This case, read with a number of later cases, treats as insurance any enforceable contract under which a 'provider' undertakes:

(1) in consideration of one or more payments;

(2) to pay money or provide a corresponding benefit (including in some cases services to be paid for by the provider) to a 'recipient';

(3) in response to a defined event the occurrence of which is uncertain (either as to when it will occur or as to whether it will occur at all) and adverse to the interests of the recipient.

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PERG 6.4

Limitations of this guidance

01/07/2005

PERG 6.4.1

Although what appears below is the FSA's approach, it cannot state what the law is, as that is a matter for the courts. Accordingly, this guidance is not a substitute for adequate legal advice on any transaction.

01/07/2005

PERG 6.4.2

The list of principles and factors is not closed and this guidance by no means covers all types of insurance-like business.

01/07/2005

PERG 6.4.3

The FSA will consider each case on its facts and on its merits.

01/07/2005

PERG 6.4.4

In some cases transactions with the same commercial purpose or economic effect may be classified differently, ie some as insurance and some as non-insurance.

01/07/2005

PERG 6.5

General principles

01/07/2005

PERG 6.5.1

The starting point for the identification of a contract of insurance is the case of Prudential v. Commissioners of Inland Revenue [1904] 2 KB 658, from which the description set out in PERG 6.3.4 G is drawn. Any contracts that fall outside that description are unlikely to be contracts of insurance.

01/07/2005

PERG 6.5.2

The FSA will interpret and apply the description in PERG 6.3.4 G in the light of applicable legislation and common law, including case law.

01/07/2005

PERG 6.5.3

In particular, if the common law is unclear as to whether or not a particular contract is a contract of insurance, the FSA will interpret and apply the common law in the context of and in a way that is consistent with the purpose of the Act as expressed in the FSA's statutory objectives.

01/07/2005

PERG 6.5.4

The FSA will apply the following principles of construction to determine whether a contract is a contract of insurance.

(1) In applying the description in PERG 6.3.4 G, more weight attaches to the substance of the contract, than to the form of the contract. The form of the contract is relevant (see PERG 6.6.8 G (3) and (4)) but not decisive of whether a contract is a contract of insurance: Fuji Finance Inc. v. Aetna Life Insurance Co. Ltd [1997] Ch. 173 (C.A.).

(2) In particular, the substance of the provider's obligation determines the substance of the contract: In re Sentinel Securities [1996] 1 WLR 316. Accordingly, the FSA is unlikely to treat the provider's or the customer's intention or purpose in entering into a contract as relevant to its classification.

(3) The contract must be characterised as a whole and not according to its 'dominant purpose' or the relative weight of its 'insurance content': Fuji Finance Inc. v. Aetna Life Insurance Co. Ltd [1997] Ch. 173 (C.A.).

(4) Since only contracts of marine insurance and certain contracts of insurance effected without consideration are required to be in writing, a contract of insurance may be oral or may be expressed in a number of documents.

01/07/2005

PERG 6.6

The factors

01/07/2005

PERG 6.6.1

Contracts under which the provider has an absolute discretion as to whether any benefit is provided on the occurrence of the uncertain event, are not contracts of insurance. This may be the case even if, in practice, the provider has never exercised its discretion so as to deny a benefit: Medical Defence Union v. Department of Trade and Industry [1979] 2 W.L.R. 686. The degree of discretion required and the matters to which it must relate are illustrated in PERG 6.7.1 G (Example 1: discretionary medical schemes).

01/07/2005

PERG 6.6.2

The 'assumption of risk' by the provider is an important descriptive feature of all contracts of insurance. The 'assumption of risk' has the meaning in (1) and (3), derived from the case law in (2) and (4) below. The application of the 'assumption of risk' concept is illustrated in PERG 6.7.2 G (Example 2: disaster recovery business).

(1) Case law establishes that the provider's obligation under a contract of insurance is an enforceable obligation to respond (usually, by providing some benefit in the form of money or services) to the occurrence of the uncertain event. This guidance describes the assumption of that obligation as the 'assumption' by the provider of (all or part of) the insured risk. 'Transfer of risk' has the same meaning in this guidance.

(2) The case law referred to in (1) is Prudential v. Commissioners of Inland Revenue [1904] 2 KB 658, read with Hampton v. Toxteth Co-operative Provident Society Ltd [1915] 1 Ch. 721 (C.A.), Department of Trade and Industry v. St Christopher Motorists Assoc. Ltd [1974] 1 All E.R. 395, Medical Defence Union v. Department of Trade and Industry [1979] 2 W.L.R. 686 and Wooding v. Monmouthshire and South Wales Mutual Indemnity Soc. Ltd [1939] 4 All E.R. 570 (H.L.).

(3) The FSA recognises that there is a line of case law in relation to long-term insurance business that establishes that a contract may be a contract of insurance even if, having effected that contract, the provider 'trades without any risk'. The FSA accepts that the insurer's risk of profit or loss from insurance business is not a relevant descriptive feature of a contract of insurance. But in the FSA's view that is distinct from and does not undermine the different proposition in (1).

(4) The case law referred to in (3) is Flood v. Irish Provident Assurance Co. Ltd [1912] 2 Ch. 597 (C.A.), Fuji Finance Inc. v. Aetna Life Insurance Co. Ltd [1995] Ch. 122, Re Barrett; Ex parte Young v. NM Superannuation Pty Ltd, (1992) 106 A.L.R. 549, Fuji Finance Inc. v. Aetna Life Insurance Co. Ltd [1997] Ch. 173 (C.A.).

01/07/2005

PERG 6.6.3

Contracts, under which the amount and timing of the payments made by the recipient make it reasonable to conclude that there is a genuine pre-payment for services to be rendered in response to a future contingency, are unlikely to be regarded as insurance. In general, the FSA expects that this requirement will be satisfied where there is a commercially reasonable and objectively justifiable relationship between the amount of the payment and the cost of providing the contract benefit.

01/07/2005

PERG 6.6.4

Contracts under which the provider undertakes to provide periodic maintenance of goods or facilities, whether or not any uncertain or adverse event (in the form of, for example, a breakdown or failure) has occurred, are unlikely to be contracts of insurance.

01/07/2005

PERG 6.6.5

Contracts under which, in consideration for an initial payment, the provider stands ready to provide services on the occurrence of a future contingency, on condition that the services actually provided are paid for by the recipient at a commercial rate, are unlikely to be regarded as insurance. Contrast PERG 6.7.21 G (Example 7: solicitors' retainers) with PERG 6.7.22 G (Example 8: time and distance cover).

01/07/2005

PERG 6.6.6

The recipient's payment for a contract of insurance need not take the form of a discrete or distinct premium. Consideration may be part of some other payment, for example the purchase price of goods (Nelson v. Board of Trade (1901) 17 T.L.R. 456). Consideration may also be provided in a non-monetary form, for example as part of the service that an employee is contractually required to provide under a contract of employment (Australian Health Insurance Assoc. Ltd v. Esso Australia Pty Ltd (1993) 116 A.L.R. 253).

01/07/2005

PERG 6.6.7

Under most commercial contracts with a customer, a provider will assume more than one obligation. Some of these may be insurance obligations, others may not. The FSA will apply the principles in PERG 6.5.4 G, in the way described in (1) to (3) to determine whether the contract is a contract of insurance.

(1) If a provider undertakes an identifiable and distinct obligation that is, in substance an insurance obligation as described in PERG 6.5.4 G, then, other things being equal, the FSA is likely to find that by undertaking that obligation the provider has effected a contract of insurance.

(2) The presence of an insurance obligation will mean that the contract is a contract of insurance, whether or not that obligation is 'substantial' in comparison with the other obligations in the contract.

(3) The presence of an insurance obligation will mean that the contract is a contract of insurance, whether or not entering into that obligation forms a significant part of the provider's business. The FSA generally regards a provider as undertaking an obligation 'by way of business' if he takes on an obligation in connection with or for the purposes of his core business, to realise a commercial advantage or benefit.

01/07/2005

PERG 6.6.8

The following factors are also relevant.

(1) A contract is more likely to be regarded as a contract of insurance if the amount payable by the recipient under the contract is calculated by reference to either or both of the probability of occurrence or likely severity of the uncertain event.

(2) A contract is less likely to be regarded as a contract of insurance if it requires the provider to assume a speculative risk (ie a risk carrying the possibility of either profit or loss) rather than a pure risk (ie a risk of loss only).

(3) A contract is more likely to be regarded as a contract of insurance if the contract is described as insurance and contains terms that are consistent with its classification as a contract of insurance, for example, obligations of the utmost good faith.

(4) A contract that contains terms that are inconsistent with obligations of good faith may, therefore, be less likely to be classified as a contract of insurance; however, since it is the substance of the provider's rights and obligations under the contract that is more significant, a contract does not cease to be a contract of insurance simply because the terms included are not usual insurance terms.

01/07/2005

PERG 6.7

Examples

01/07/2005

Example 1: discretionary medical schemes

PERG 6.7.1

Medical schemes under which an employer operates or contributes to a fund, from which the employee has a right to a benefit (for example, a payment) on the occurrence of a specified illness or injury, are likely to be insurance schemes. This will be the case whether the employee makes any contribution to the fund, or the scheme is funded by the employer as an emolument. The scheme would not be insurance, however, if the employer has an absolute discretion whether or not to provide any benefit to the employee. Absolute discretion requires, for example, that the employer has an unfettered discretion both as to whether the employee will receive a benefit and as to the amount of that benefit. The absolutely discretionary nature of the benefits should also be clear from the terms of the scheme and any literature published about or in relation to it. If these requirements are met, it may not be relevant that, in practice, the employer has never refused to meet a valid claim under the scheme.

01/07/2005

Example 2: disaster recovery business

PERG 6.7.2

The disaster recovery provider sets up and maintains a range of IT and related facilities (PABX etc). The disaster recovery contracts so far considered by the FSA give the recipient, subject to certain conditions including an up front payment, priority access to all or a specified part of these facilities if a 'disaster' causes the failure of a similar business system on which the recipient relies. The provider sells access to the same facilities to a number of different recipients, both for use in response to 'disasters' and, more usually, for use in testing and refining the recipient's ability to switch to alternative systems in the event of a disaster.

01/07/2005

PERG 6.7.3

In principle, a significant part of disaster recovery business could potentially fall within the description of a contract of insurance set out in PERG 6.3.4 G. The provider undertakes, in consideration of a payment, to provide the recipient with services (alternative facilities) in response to a defined event (a disaster), which is adverse to the interests of the recipient and the occurrence of which is uncertain. The risk dealt with under the disaster recovery contract is a pure risk (see PERG 6.6.8 G (2)) and, at least at the commencement of the contract, the provider assumes that risk, within the terms of PERG 6.6.2 G.

01/07/2005

PERG 6.7.4

However, the disaster recovery contracts considered by the FSA had two key features.

(1) Priority access to facilities in the event of a disaster was expressed to be on a 'first come, first served' basis. The contracts provided expressly that if the facilities needed by recipient A were already in use, following an earlier invocation by recipient B, the provider's obligation to recipient A was reduced to no more than an obligation of 'best endeavours' to meet A's requirements. The entry into additional contracts of this kind did not increase the probability that the provider's existing resources would be inadequate to meet all possible claims. The terms of the contract were such that there was no pattern of claims that would cause the provider to have to pay claims from its own resources.

(2) In general, the contracts were priced so that the total consideration collected from the recipient over the life of the contract bore a reasonable and justifiable relationship to the commercial cost of the services actually provided to the recipient (see PERG 6.6.5 G). This was achieved, for example, by post-invocation charges levied according to the actual usage of services.

01/07/2005

PERG 6.7.5

Based on these features, the FSA reached the conclusion, with which the other terms of the contracts were consistent (PERG 6.6.8 G (3)), that these disaster recovery contracts were not contracts of insurance.

01/07/2005

PERG 6.7.6

An important part of the conclusion in PERG 6.7.5 G was that, although the provider assumed a risk at the outset of the contract, looking at the contract as a whole and interpreting the common law in the context of the FSA's objectives (see PERG 6.5.2 G and PERG 6.5.3 G) there was no relevant assumption of risk.

(1) The presence or absence of an assumption of risk is an important part of the statutory rationale for the prudential regulation of insurance.

(2) In Medical Defence Union v. Department of Trade and Industry [1979] 2 W.L.R. 686, the court accepted that since there was no common law definition of a contract of insurance, the meaning of the term 'fell to be construed in its context according to the general law'. The court recognised that in deciding whether a contract was a contract of insurance for the purposes of the Insurance Companies Act 1974, the 'context' included the purpose of the regulatory statute.

(3) Accordingly, when the common law is unclear, the FSA will assess the desirability of regulating a particular contract as insurance in the light of the statutory objectives in the Act. The FSA will use that assessment as an indicator of whether or not a sufficient assumption of risk is present for the contract to be classified as a contract of insurance at common law.

(4) In the case of disaster recovery contracts, the fact that there was no pattern of claims that would cause the provider to have to pay claims form its own resources led the FSA to conclude that there was no relevant assumption of risk by the disaster recovery provider.

01/07/2005

Example 3: manufacturers' and retailers' warranties

PERG 6.7.7

Under a simple manufacturer's or retailer's warranty the purchase price of the goods includes an amount, in consideration of which the manufacturer undertakes an obligation (the warranty) to respond (without further expense to the purchaser) to specified defects in the product that emerge within a defined time after purchase. When the warranty operates, the manufacturer or retailer provides repairs or replacement products in response to a defined event (the emergence of a latent defect in the product), which is adverse to the interests of the purchaser and the occurrence of which is uncertain. In summary, therefore, a simple manufacturer's or retailer's warranty is an identifiable and distinct obligation that is similar to and capable of being described as an insurance obligation in substance under PERG 6.3.4 G.

01/07/2005

PERG 6.7.8

Notwithstanding PERG 6.7.7 G, the FSA's view is that an obligation that is of the same nature as a seller's or supplier's usual obligations as regards the quality of the goods or services is unlikely to be an insurance obligation in substance.

01/07/2005

PERG 6.7.9

The FSA is unlikely to classify a contract containing a simple manufacturer's or retailer's warranty as a contract of insurance, if the FSA is satisfied that the warranty does no more that crystallise or recognise obligations that are of the same nature as a seller's or supplier's usual obligations as regards the quality of the goods or services.

01/07/2005

PERG 6.7.10

For the purpose of PERG 6.7.9 G, an obligation is likely to be of the same nature as the seller's or supplier's usual obligations as regards the quality of goods or services if it is an obligation of the seller to the buyer, assumed by the seller in consideration of the purchase price, which:

(1) implements, or bears a reasonable relationship to, the seller's statutory or common law obligations as regards the quality of goods or services of that kind; or

(2) is a usual obligation relevant to quality or fitness in commercial contracts for the sale of goods or supply of services of that kind.

01/07/2005

Example 4: separate warranty transactions and extended warranties

PERG 6.7.11

It follows from PERG 6.7.10 G that the FSA is unlikely to be satisfied that an obligation in a contract of sale or supply is of the same nature as the seller's or supplier's usual obligations as regards the quality of goods or services, if that obligation has one or more of the following features:

(1) it is assumed by a person other than the seller or supplier (a 'third party'); or

(2) it is significantly more extensive in content, scope or duration than a seller's usual obligations as to the quality of goods or services of that kind.

01/07/2005

PERG 6.7.12

Other things being equal, the FSA is likely to classify a contract of sale containing a warranty that has one or more of the features in PERG 6.7.11 G as a contract of insurance. The features in PERG 6.7.11 G (1) and (2) typically distinguish a 'third party' warranty and an 'extended warranty' from a 'simple' manufacturer's or retailer's warranty.

01/07/2005

PERG 6.7.13

If a warranty is provided by a third party, the FSA will usually treat this as conclusive of the fact that there are different transactions and an assumption or transfer of risk. This conclusion would not usually depend on whether the provider is (or is not) a part of the same group of companies as the manufacturer or retailer. But it will be the third party (who assumes the risk) that is potentially effecting a contract of insurance.

01/07/2005

PERG 6.7.14

A manufacturer or retailer may undertake a warranty obligation to his customer in a separate contract with the customer, distinct from the contract of sale or supply of goods or services. The FSA will examine the separate contract to see if it is a contract of insurance. But the mere existence of a separate warranty contract is unlikely to be conclusive by itself.

01/07/2005

PERG 6.7.15

A manufacturer or retailer may undertake an obligation to ensure that the customer becomes a party to a separate contract of insurance in respect of the goods sold. This would include, for example, a contract for the sale of a freezer, with a simple warranty in relation to the quality of the freezer, but also providing insurance (underwritten by an insurer and in respect of which the customer is the policyholder) covering loss of frozen food if the freezer fails. The FSA is unlikely to treat a contract containing an obligation of this kind as a contract of insurance. However, the manufacturer or retailer may be in the position of an intermediary and may be liable to regulation in that capacity.

01/07/2005

PERG 6.7.16

The FSA distinguishes the contract in PERG 6.7.15 G from a contract under which the manufacturer or retailer assumes the obligation to provide the customer with an indemnity against loss or damage if the freezer fails, but takes out insurance to cover the cost of having to provide the indemnity to the customer. The obligation to indemnify is of a different nature from the seller's or supplier's usual obligations as regards the quality of goods or services and is an insurance obligation. By assuming it, other things being equal, the manufacturer or retailer effects a contract of insurance. The fact that the manufacturer or retailer may take out insurance to cover the cost of having to provide the indemnity is irrelevant.

01/07/2005

Example 5: typical warranty schemes administered by motor dealers

PERG 6.7.17

The following are examples of typical warranty schemes operated by motor dealers. Provided that, in each case, the FSA is satisfied that the obligations assumed by the dealer are not significantly more extensive in content, scope or duration that a dealer's usual obligations as to the quality of motor vehicles of that kind, the FSA would not usually classify the contracts embodying these transactions as contracts of insurance.

(1) The dealer gives a verbal undertaking to the purchaser that during a specified period (usually 3 months) he will rectify any fault occurring with the vehicle. No money changes hands, and the dealer is responsible for meeting the warranty obligation.

(2) The dealer undertakes warranty obligations to his customer. The warranty obligations are either included in the contract for the sale of the vehicle or are set out in a separate contract between dealer and customer at the time of sale. The dealer administers his own warranty scheme and does not employ a separate company (for example a subsidiary) to run the scheme. In the event of a fault, the purchaser must contact the dealer, who is responsible for meeting the warranty obligation. The dealer decides whether or not to put money aside to meet potential claims.

(3) The dealer purchases proprietary warranty booklets issued by an administration company. These booklets contain 'terms and conditions' under which the dealer undertakes warranty obligations to the customer. The dealer sells these 'products' to his customer under a separate contract or inflates the price of the vehicle to include them as part of the sale of the vehicle. The administration company administers any claims that arise. The financial arrangements are that the dealer charges his customer for the warranty, passing a fee to the administration company for the purchase of the booklet and any administration relating to the processing of claims. The dealer retains all monies (less administration fee) received from the sale of the warranties and keeps any surplus after claims have been paid. The dealer is responsible for meeting the warranty obligation.

(4) The dealer undertakes warranty obligations to his customer. The warranty obligations are either included in the contract for the sale of the vehicle or are set out in a separate contract between dealer and customer at the time of sale. The dealer employs an administration company to handle all the claims and associated administrative work. The administration company usually has access to a bank account, funded by the dealer and specifically set aside to meet warranty claims. The administration company authorises and pays warranty claims from the bank account in accordance with the dealer's instructions. The dealer ultimately decides on the amount of claims payable from this account and retains all surplus monies. The dealer is responsible for meeting the warranty obligation.

01/07/2005

Example 6: tax investigation schemes

PERG 6.7.18

When self-assessment for income tax was first introduced, a number of providers set up schemes connected with their tax accounting and tax advisory services. In consideration of an annual fee, the provider undertakes to deal with any enquiries or investigations that HM Revenue and Customs might launch into the self-assessment that the provider completes for the recipient. The event covered by these schemes (an investigation) is both uncertain and adverse to the interests of the recipient, who would, if the scheme were not in place, have to devote resources to dealing with the investigation. Accordingly, these schemes fall within the description of a contract of insurance (see PERG 6.3.4 G).

01/07/2005

PERG 6.7.19

Some providers argued that these schemes amount to nothing more than a 'manufacturer's warranty' of their own work, within the scope of PERG 6.7.7 G (Example 3: manufacturers' and retailers' warranties). However, HM Revenue and Customs is expected to make a significant number of random checks of self-assessment forms, irrespective of the quality of the work done by the provider. These random checks are also covered by the schemes. The FSA concluded, therefore, that these schemes were not analogous to manufacturers' warranties and that the better view was that they were contracts of insurance.

01/07/2005

Example 7: solicitors' retainers

PERG 6.7.20

A contract under which a provider undertakes, in consideration of an initial payment, to stand ready to provide, or to procure the provision of, legal services on the occurrence of an uncertain event (for example, if the recipient is sued), is capable of being construed as a contract of insurance (see PERG 6.3.4 G). Indeed, legal expenses insurance is commonplace.

01/07/2005

PERG 6.7.21

If, however, a contract of this kind were structured so that the recipient was charged at a commercial rate for any legal services in fact provided, the FSA's approach will be to treat the arrangement as non-insurance. This is principally because, by taking on obligations of this kind, the provider does not assume a relevant risk (see PERG 6.7.6 G). The position might be different if the solicitor carries the additional obligation to pay for alternative legal services to be provided if the solicitor is unable to act. In that case, the FSA's approach will be to examine all the elements of the contract to determine whether the substance of the solicitor's obligation (see PERG 6.5.4 G (2)) is to insure, or to give legal advice for a fee.

01/07/2005

Example 8: contracts providing for ultimate repayment of any indemnity ('time and distance cover')

PERG 6.7.22

A contract under which a provider agrees to meet a specified obligation on behalf of the recipient (for example an obligation to pay for the re-purchase of shares or to meet a debt) immediately that obligation falls due, subject to later reimbursement by the recipient, would be a contract of insurance if in all other respects it fell within the description of such contract (see PERG 6.3.4 G). This is principally because the provider assumes the risk that an immediate payment will be required and, depending on the terms of the contract, may also assume the risk that the recipient will be unable to make future repayments (see PERG 6.6.2 G).

01/07/2005

PERG 7

Periodical publications, news services and broadcasts: applications for certification

PERG 7.1

Application and purpose

01/07/2005

Application

PERG 7.1.1

This chapter applies to anyone involved in publishing periodicals, or in providing news services or broadcasts, who gives (or proposes to give) advice about securities, relevant investments or home finance transactions and who wishes to determine whether he will be carrying on the regulated activities of advising on investments or advising on a home finance transaction .

06/04/2007

Purpose

PERG 7.1.2

The purpose of this chapter is to provide guidance as to:

(1) when a person involved in publishing periodicals, or in providing news services or broadcasts, requires authorisation to carry on the regulated activities of advising on investments or advising on a home finance transaction (see PERG 7.3 (Does the activity require authorisation));

(2) if he does, whether he qualifies for the exclusion from those activities that applies to a periodical publication, a regularly updated news or information service or a television or radio service (see PERG 7.4 (Does the article 54 exclusion apply));

(3) if he does, whether his circumstances are an appropriate case for a certificate given by the FSA as conclusive evidence that he does qualify (see PERG 7.5 (When is it appropriate to apply for a certificate));

(4) how to apply for a certificate (see PERG 7.6.1 G to PERG 7.6.5 G); and

(5) how the FSA will use its power to give certificates (see PERG 7.6.6 G to PERG 7.6.10 G).

06/04/2007

PERG 7.1.3

This guidance is issued under section 157of the Act. The guidance represents the FSA's views and does not bind the courts, for example in relation to an action for damages brought by a private person for breach of a rule (see section 150of the Act (Actions for damages)), or in relation to the enforceability of a contract where there has been a breach of section 19 (The general prohibition) of the Act (see section 26 of the Act (Enforceability of agreements)). Although the guidance does not bind the courts, it may be of persuasive effect for a court considering whether it would be just and equitable to allow a contract to be enforced (see section 28(3) of the Act). Anyone reading this guidance should refer to the Act and to the Financial Services and Markets Act 2000 (Regulated activities) Order 2001 (SI 2001/544) (the Regulated activities Order) to find out the precise scope and effect of any particular provision referred to in the guidance and should consider seeking legal advice if doubt remains. If a person acts in accordance with the guidance in the circumstances contemplated by it, then the FSA will proceed on the footing that the person has complied with the aspects of the requirement to which the guidance relates.

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PERG 7.2

Introduction

01/07/2005

Exclusion for advice given in certain publications and services

PERG 7.2.1

Advice is excluded by article 54 of the Regulated Activities Order from the regulated activities of advising on investments and advising on a home finance transaction if:

(1) the advice is given in a publication or service that is in one of three formats (see PERG 7.4.3 G and PERG 7.4.4 G); and

(2) the principal purpose of the particular format is neither to give certain advice nor to lead to (or enable) certain transactions to be carried out (see PERG 7.4.5 G and PERG 7.4.10 G).

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Certificate that the exclusion applies

PERG 7.2.2

If a person would, but for the exclusion, be carrying on the regulated activities of advising on investments or advising on a home finance transaction , or any or each of them, and will be doing so as a business in the United Kingdom (see PERG 7.3), he may wish to apply to the FSA for a certificate that the exclusion applies (see PERG 7.6). However, a person does not need a certificate to get the benefit of the exclusion. In many cases it will be clear that the exclusion in article 54 applies and a certificate is not called for. A certificate may be appropriate, however, where the exclusion appears to apply but there may be an element of doubt. The granting of a certificate would remove any such doubt.

06/04/2007

Certificates under the Financial Services Act 1986

PERG 7.2.3

Certificates given under paragraph 25 of Schedule 1 to the Financial Services Act 1986 (Exclusion for periodical publications giving investment advice) ceased to have effect on 1 December 2001. Holders of such certificates must consider their position under the terms of the new exclusion. If a person considers that a certificate might be appropriate, a new application must be made.

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PERG 7.3

Does the activity require authorisation?

01/07/2005

Advising on investments and advising on home finance transactions

PERG 7.3.1

Under article 53 of the Regulated Activities Order (Advising on investments), advising a person is a specified kind of activity if:

(1) the advice is given to the person in his capacity as an investor or potential investor, or in his capacity as agent for an investor or a potential investor; and

(2) it is advice on the merits of his doing any of the following (whether as principal or agent):

(a) buying, selling, subscribing for or underwriting a particular investment which is a security or a relevant investment; or

(b) exercising any right conferred by such an investment to buy, sell, subscribe for or underwrite such an investment.

01/07/2005

PERG 7.3.1A

Under article 53A of the Regulated Activities Order (Advising on regulated mortgage contracts), advising a person is a specified kind of activity if:

(1) the advice is given to the person in his capacity as a borrower or potential borrower; and

(2) it is advice on the merits of his doing any of the following:

(a) entering into a particular regulated mortgage contract; or

(b) varying the terms of a regulated mortgage contract entered into by him after mortgage day in such a way as to vary his obligations under that contract.

01/07/2005

PERG 7.3.1B

Under article 53B of the Regulated Activities Order (Advising on regulated home reversion plans), advising a person is a specified kind of activity if:

(1) the advice is given to the person in his capacity as a reversion occupier or reversion provider or as a potential reversion occupier or reversion provider; and

(2) it is advice on the merits of his doing any of the following:

(a) entering into a particular home reversion plan; or

(b) varying the terms of a home reversion plan entered into by him as reversion occupier or as reversion provider (but only where the plan was originally entered into on or after 6 April 2007) in such a way as to vary his obligations under that plan.

06/04/2007

PERG 7.3.1C

Under article 53C of the Regulated Activities Order (Advising on regulated home purchase plans), advising a person is a specified kind of activity if:

(1) the advice is given to the person in his capacity as a home purchaser or potential home purchaser; and

(2) it is advice on the merits of his doing any of the following:

(a) entering into a particular home purchase plan; or

(b) varying the terms of a home purchase plan entered into by him on or after 6 April 2007 in such a way as to vary his obligations under that plan.

06/04/2007

PERG 7.3.2

Articles 53, 53A, 53B and 53Cof the Regulated Activities Order contain a number of elements, all of which must be present before a person will require authorisation. For guidance on whether a person is carrying on these regulated activities, see PERG 8 (Financial promotion and related activities), PERG 4 (Guidance on regulated activities connected with mortgages) and PERG 14.3 and PERG 14.4 (Guidance on home reversion and home purchase activities).

06/04/2007

Advice in publications and broadcasts and MiFID

PERG 7.3.2A

Advice about financial instruments in a newspaper, journal, magazine, publication, internet communication or radio or television broadcast should not normally be a personal recommendation under MiFID (see PERG 13, Q18 to Q21).

01/11/2007

Carrying on the regulated activity by way of business

PERG 7.3.3

Under section 22 of the Act (Regulated activities), for an activity to be a regulated activity it must be carried on 'by way of business'. There is power in the Act for the Treasury to change the meaning of the business test by including or excluding certain things. It has exercised this power (through the Financial Services and Markets Act 2000 (Carrying on Regulated Activities by Way of Business) Order 2001 (SI 2001/1177) (the Business Order). This has been amended by article 18 of the Financial Services and Markets Act 2000 (Regulated Activities) (Amendment) (No 2) Order 2003 (SI 2003/1476) and by article 28 of the Financial Services and Markets Act 2000 (Regulated activities) (Amendment) (No 2) Order 2006 (SI 2006/2383) as explained in PERG 7.3.3A G.

06/04/2007

PERG 7.3.3A

The result of the amendments made to the meaning of the business test in section 22 of the Act is that the test differs depending on the activity in question. Where the regulated activities of advising on investments and advising on a home finance transaction are concerned, the business test is not to be regarded as satisfied unless a person carries on the business of engaging in those activities. This is a narrower test than that of carrying on regulated activities by way of business (as required by section 22 of the Act), as it requires the regulated activities to represent the carrying on of a business in their own right. Where the advice relates to a contract of insurance, the business test is not to be regarded as satisfied unless the person carrying on the activity of giving the advice is taking up or pursuing the activity for remuneration. PERG 2.3 (The Business element) and PERG 2.4 (Link between activities and the United Kingdom) together with PERG 5.4 (The business test) provide further detail on this.

06/04/2007

PERG 7.3.4

In the FSA's view, for a person to be carrying on the business of advising on investments or advising on a home finance transaction he will usually need to be doing so with a degree of regularity and for commercial purposes - that is to say, he will normally be expecting to gain some kind of a direct or indirect financial benefit. But, in the FSA's view it is not necessarily the case that advice provided free of charge will not amount to a business. Advice is often given 'free' by a journalist or presenter, or in a publication or website, in the sense that no charge is made or commission received. For example, a newspaper may reply to readers' letters to generate goodwill or to generate a supply of further material that it can publish or a website that is 'free' to the user will be sponsored or paid for by advertising. In such cases, if advice on securities, relevant investments or home finance transactions is given, then, in the FSA's view, the business of advising on investments or advising on a home finance transaction is being carried on. In addition, non-commercial motives may be relevant in determining whether a person can be said to be carrying on the business of giving advice. For example, an investigative journal or journalist may occasionally feel that it is necessary to warn investors against the purchase of a particular investment because there are suspicions of fraud in connection with that investment. The FSA takes the view that, in such circumstances, the journal or journalist would not be regarded as carrying on the business of advising on investments or advising on a home finance transaction as he would be acting to prevent crime rather than in the carrying on of a business.

06/04/2007

Carrying on the regulated activity in the United Kingdom

PERG 7.3.5

Advice given in periodicals published from an establishment in the United Kingdom is regarded by the FSA as given in the United Kingdom. A similar approach is taken to advice given in, or by way of, a service provided from such an establishment.

01/07/2005

PERG 7.3.6

In other circumstances, advice issued remotely may still be given in the United Kingdom. For example, the FSA considers that advice is given in the United Kingdom if:

(1) it is contained in a non-UK periodical that is posted in hard copy to persons in the United Kingdom;

(2) it is contained in a non-UK periodical (or given in or by way of a service) which is made available electronically to such persons.

01/07/2005

PERG 7.3.7

But even if advice is given in the United Kingdom, the general prohibition will not be contravened if the giving of advice does not amount to the carrying on, in the United Kingdom, of the business of advising on investments or advising on a home finance transaction . Also, the general prohibition will not be contravened if the exclusion for overseas persons in article 72 of the Regulated Activities Order (Overseas persons) applies. That exclusion applies in relation to the giving of advice on securities or relevant investments by an overseas person as a result of a 'legitimate approach' (defined in article 72(7)). In many cases where publications or services are provided from outside the United Kingdom it is likely that they will fall within the terms of this exclusion. For example, this will exclude any advice in a publication or service from being a regulated activity if it is given in response to an approach that has not been solicited in any way. It should be noted, however, that the exclusions in article 72 do not apply to the regulated activitiesthat involve advising on a home finance transaction. The effect of this is that, where the principal purpose of an overseas periodical publication is to offer advice on securities or relevant investments and home finance transactions , the exclusion for an overseas person who provides advice to persons in the United Kingdom as a result of a legitimate approach will not apply to the advice concerning home finance transactions .

06/04/2007

Exclusions and exempt persons

PERG 7.3.8

If a person is carrying on the business of advising on investments or advising on a home finance transactionin the United Kingdom, he will not require authorisation if:

(1) he is able to rely on an exclusion; in addition to the exclusions already mentioned (in articles 54 and 72 of the Regulated Activities Order), other exclusions that may be relevant are in Chapter XVII of Part II of the Regulated Activities Order; or

(2) he is an exempt person (see PERG 2.11 (What to do now?)); since persons are exempt only in relation to specified regulated activities, his exemption must apply to the regulated activity of advising on investments or advising on a home finance transaction as the case may be.

06/04/2007

Which person is required to be authorised?

PERG 7.3.9

Many people may be involved in the production of a periodical publication, news service or broadcast. But if the regulated activity of advising on investments or advising on a home finance transaction is being carried on so that authorisation is required, the FSA's view is that the person carrying on the activity (and who will require authorisation) is the person whose business it is to have the editorial control over the content. In the case of a periodical publication, this will often be the proprietor. But particular circumstances may vary so that the responsibility for content and editorial control rests with a freelance journalist rather than with the proprietor. In such cases it may well be that the journalist may properly be viewed as carrying on his own business, using the periodical publication as the vehicle for doing so - in which case it is likely to be the journalist alone who needs the authorisation.

06/04/2007

PERG 7.3.10

Similar principles apply to news services and broadcasts.

01/07/2005

PERG 7.4

Does the article 54 exclusion apply?

01/07/2005

The formats

PERG 7.4.1

The exclusion applies to advice given in one of the following formats:

(1) advice in writing or other legible form which is contained in a newspaper, journal, magazine, or other periodical publication;

(2) advice in writing or other legible form which is given by way of a service comprising regularly updated news or information;

(3) advice given in any service consisting of the broadcast or transmission of a television or radio programme.

01/07/2005

PERG 7.4.2

But the exclusion applies only if the principal purpose of the publication or service is not:

(1) to advise on securities or relevant investments or home finance transactions : or

(2) to lead or enable persons:

(a) to buy, sell, subscribe for or underwrite securities or relevant investments; or

(b) to enter as borrower into regulated mortgage contracts, or vary the terms of regulated mortgage contracts entered into by them as borrower on or after 31 October 2004; or

(c) to enter as reversion occupier or reversion provider into home reversion plans or to vary the terms of home reversion plans entered into by them as reversion occupier or as reversion provider where the plan was originally established on or after 6 April 2007; or

(d) to enter as home purchaser into home purchase plans or to vary the terms of home purchase plans entered into by them as home purchaser on or after 6 April 2007.

06/04/2007

Formats in writing or other legible form

PERG 7.4.3

(1) There are two specified formats for advice appearing in writing or other legible form.

(2) The first is that of a newspaper, journal, magazine or other periodical publication. For these purposes it does not matter what form the periodical publication takes as long as it can be read. This will include, for example, a newspaper appearing as a hard copy or electronically on a website. It will also include any periodical published on an intranet site.

(3) The second is that of a regularly updated news or information service. As with periodical publications, it does not matter how the service is accessed by, or delivered to, the user as long as it can be read. This will include, for example, a service provided through teletext, a fax retrieval system or a website (including websites that are used through handheld devices). The fact that it must be a 'regularly updated' service means that the provision of up-to-date news or information must be a primary feature of the service (for example, where it is likely to be of commercial value to the recipient). But, in the FSA's view, a news or information 'service' is not restricted to the giving of onlynews or information since this would not generally constitute the regulated activity of advising on investments (see PERG 8.28 (Advice or information)), advising on regulated mortgage contracts (see PERG 4.6.13 G to PERG 4.6.16 G (Advice or information)), advising on a home reversion plan or advising on a home purchase plan . So the exclusion applies to services providing material in addition to news or information, such as comment or advice.

06/04/2007

Television and Radio

PERG 7.4.4

The third specified format is for advice in any service consisting of the broadcast or transmission of television or radio programmes. This will encompass the transmission through cable of interactive television programmes. In the FSA's view, 'service' in this context goes beyond any particular series of programmes broadcast or transmitted through a given medium. It refers instead to the administrative system (usually aimed at a particular audience) through which a range of different programmes is provided, for example any particular TV or radio channel. In the FSA's view, it is unlikely that a TV or radio service will have one of the principal purposes that would prevent its being able to rely on the exclusion unless the complete service is designed to focus on financial or investment matters.

01/07/2005

The principal purpose test

PERG 7.4.5

The exclusion applies only if the principal purpose of the publication or service is not:

(1) to give advice on securities, relevant investments or home finance transactions (see PERG 7.3.1 G); or

(2) to lead or enable persons to:

(a) buy, sell, subscribe for or underwrite securities or relevant investments; or

(b) to enter as borrower into regulated mortgage contracts, or vary the terms of regulated mortgage contracts entered into bythem as borrower on or after 31 October 2004; or

(d) to enter as home purchaser into home purchase plans or to vary the terms of home purchase plans entered into by them as home purchaser on or after 6 April 2007.

References to leading or enabling persons to do the things mentioned in (2)(a) or (b) are abbreviated in PERG 7.4.9 G and PERG 7.4.11 G as leading or enabling persons 'to engage in a relevant transaction'.

06/04/2007

PERG 7.4.6

Any assessment of the principal purpose of a periodical publication, news service or broadcast needs to be carried out against the background that:

(1) they all share the characteristic of being available over a sustained period and, within that period, appearing from time to time with a different content;

(2) the same periodical publication will have many different editions;

(3) the regular updating of the news or information service will produce differences in the material provided, comparing the content of the service as it appears at any one time with its content as it appears at any other; and

(4) the programmes in a TV or radio service are bound to have a different content from each other.

01/07/2005

PERG 7.4.7

To address this feature of variation in content, article 54 requires that the principal purpose of a publication or service is to be assessed by looking at the publication or service taken as a whole and including any advertisements or other promotional material contained in it. This requirement of an overall assessment of purpose or purposes goes beyond the content of any particular example of the publication or service (such as a particular edition or programme). It fixes instead on the characteristic content of the publication or service looked at over time. This judgment depends on the overall impression of content. One way of approaching this is to consider what an average consumer of a publication or service might expect to find when making a decision whether to buy a particular edition or to use the service.

01/07/2005

PERG 7.4.8

Looking at the first disqualifying purpose set out in the exclusion, all the matters relevant to whether the regulated activities of advising on investments or advising on a home finance transaction are being carried on must be taken into account (see PERG 8.24 (Advising on investments)). If the principal purpose of a publication or service is to give to persons, in their capacity as investors (or potential investors), as borrowers, as reversion occupiers or reversion providers or as home purchasers (as the case may be), advice as referred to in PERG 7.4.5G (1), then the publication or service will not be able to benefit from this exclusion.

06/04/2007

PERG 7.4.9

For the second disqualifying purpose, the focus switches to assessing whether the principal purpose of a publication or service is to lead a person to engage in a relevant transaction or enable him to do so. This disqualifying purpose is an alternative to the first. So it extends to material not covered by the first. In this respect:

(1) material in a publication or service that invites or seeks to procure persons to engage in a relevant transaction can be said to "lead" to those transactions even if it would not constitute the regulated activities of advising on investments or advising on a home finance transaction ; this includes, for example, material that consists of generic buy or sell recommendations, corporate brochures or invitations to invest in particular products or with a particular broker or fund manager; and

(2) material enables persons to engage in a relevant transaction if it facilitates the transactions, for example by giving a user the forms that enable him to carry out relevant transactions; so this limb of the second disqualifying purpose would apply to the material providing an online dealing facility on an interactive website or to facilities for on-screen dealing through digital television.

In the FSA's view, material will not lead or enable a person to engage in a relevant transaction where the material is intended merely to raise people's awareness of matters relating to securities, relevant investments or home finance transaction .

06/04/2007

PERG 7.4.10

The test for determining the principal purpose of any publication that appears on a website, or of any news or information service on a website, is no different from any other medium. An overall view will need to be taken of all the contents of the publication or service, including any features such as chatrooms, advertisements or other promotional material.

01/07/2005

PERG 7.4.11

In the context of the second disqualifying purpose, whether or not the presence of a hypertext link to another website indicates that the purposes of a publication or service include leading to relevant transactions (or enabling them to be entered into) will depend on all the circumstances. It will, in particular, be necessary to consider the form of the link and the content of the destination website. In the FSA's view, the presence on a host publication or service of a hypertext link which is only the name or logo of another website is unlikely itself to indicate that a purpose of the host website is to lead to relevant transactions (or enable them to be entered into). But if more sophisticated links, such as banners or changeable text, contain promotional material inviting or seeking to procure persons to enter into relevant transactions, those links will have to be weighed in the balance in determining the principal purpose of the publication or service hosting the link. The same applies if the host publication or service hosting the link itself contains material inviting persons to activate the link with a view to entering into relevant transactions.

01/07/2005

PERG 7.4.12

In reaching a view of the principal purpose of the publication or service as a whole, all the material that falls within either the first or second disqualifying purpose must be considered together.

01/07/2005

Who can benefit from the exclusion?

PERG 7.4.13

The persons who directly benefit from the exclusion will be the persons who would otherwise require authorisation (see PERG 7.3.9 G), that is, the person whose business it is to have editorial control over the content of the publication or service. The exclusion will apply regardless of the legal form of the person giving the advice so, for example, it will extend to advice given by a company through its employees.

01/07/2005

PERG 7.5

When is it appropriate to apply for a certificate?

01/07/2005

PERG 7.5.1

To decide whether the exclusion in article 54 applies, three assessments need to be made:

(1) first, an assessment whether the vehicle for giving the advice is a newspaper, journal, magazine or other periodical publication, a service comprising regularly updated news or information or a service consisting of the broadcast or transmission of television or radio programmes;

(2) second, an assessment of the purpose or purposes of any particular publication or service; and

(3) third, an assessment of the relative significance of each purpose compared with any others.

01/07/2005

PERG 7.5.2

Because opinions may differ in circumstances close to the borderline, giving rise to doubt as to whether or not the exclusion applies, the Regulated Activities Order makes provision for a certification process. The purpose of this process is not to provide certification for every publication or service to which the exclusion in article 54 applies.

01/07/2005

PERG 7.5.3

In many cases it will be clear whether or not a publication or service benefits from the exclusion. A publication or service may provide reports on such a wide range of matters that it is not possible to say that it has any purpose other than to provide coverage of a wide range of matters. Alternatively, it may be clear that the principal purpose of a publication or service is something other than those specified in the article 54 exclusion. Examples of cases where, in the FSA's view, the exclusion is capable of applying include:

(1) national or local newspapers providing the normal range of non-financial news and coverage of other matters (such as sports, arts and leisure) and which simply contain financial journalism (such as reports on particular investments or markets) as one element of their all-round coverage;

(2) weekly or monthly journals aimed at a particular subject (such as computing or sport) but which have some coverage of, or promotional material relating to, investments and financial matters;

(3) websites which provide financial news or information;

(4) closed user group communication systems specialising in financial or investment matters; and

(5) television or radio channels dedicated to consumer affairs which devote a small number of programmes to financial planning.

01/07/2005

PERG 7.5.4

It is only where there are grounds to think that there is a significant doubt as to the principal purpose of a publication or service that the question of whether or not to apply to the FSA for a certificate under article 54 of the Regulated Activities Order is expected to arise. For example, this may happen where a publication or service has several significant purposes and one of them is a disqualifying purpose referred to in the exclusion in article 54. It may on occasion be difficult to assess the relative importance of the purposes compared with each other, particularly given that over time there will be a variation in the content of the publication or service. In such cases, an application for a certificate would be appropriate.

01/07/2005

PERG 7.6

Applications for a certificate

01/07/2005

Pre-application contact

PERG 7.6.1

A person considering applying for a certificate should, before sending in any application, contact the Perimeter Enquiries Team of the FSA (email: authorisationenquiries@fsa.gov.uk, Tel 020 7066 0082) to discuss whether a certificate may be appropriate.

01/07/2005

Form of application

PERG 7.6.2

(1) An application should be made by the proprietor of the relevant publication or service using the appropriate form, accessible from our website (see Forms/ Perimeter Guidance manual forms). The form asks for general information about the applicant and gives guidance notes on completion and other details of how the FSA can help.

(2) An applicant will be asked to state his own view of the principal purpose of the publication or service. This should include an explanation why the applicant believes that he qualifies for the exclusion and why he believes that a certificate may be called for.

(3) The applicant will be asked to define the extent of the publication or service for which he is seeking a certificate.

(4) The applicant will be asked to supply material to demonstrate the content of the publication or service or, in the case of a new publication or service, its proposed content. For an existing publication or service, past samples should be supplied in the form most appropriate to the medium for which certification is sought. The samples should be chosen on the basis that they are representative of the publication or service as a whole and as it appears from time to time. The applicant will be asked to justify the selection of the particular samples as being representative. For a new publication or service, samples of proposed content should be supplied. These should be as comprehensive as possible.

(5) The applicant will be asked to supply material to demonstrate that the principal purpose is not liable to change over the foreseeable future. This may, for example, include business plans, a statement of editorial policy and marketing literature.

(6) The application must be accompanied by the application fee (see PERG 7.6.5 G).

01/07/2005

Requests for further information

PERG 7.6.3

After an application is sent in, the FSA may, on occasion, need to obtain additional information from the applicant or elsewhere to enable it to process the application.

01/07/2005

Time for processing applications

PERG 7.6.4

The Act does not specify a time limit for processing the application but the FSA intends to deal with an application as quickly as possible. The more complete and relevant the information provided by an applicant, the more quickly a decision can be expected. But on occasion it may be necessary to allow time in which the FSA can monitor the content of the service. This might happen where, for example, a service is in a form that makes record keeping difficult (such as a large website with a number of hypertext links).

01/07/2005

Application Fee

PERG 7.6.5

The fee for an application for a certificate under article 54 of the Regulated Activities Order is £2,000.

06/10/2007

The FSA's approach to considering applications

PERG 7.6.6

The FSA will consider any application for a certificate on its merits.

01/07/2005

PERG 7.6.7

Before it gives a certificate, the FSA must be satisfied that the principal purpose of the publication or service is neither of the purposes referred to in the exclusion (see PERG 7.4.5 G). If there is insufficient evidence, a certificate cannot be given.

01/07/2005

PERG 7.6.8

The FSA will form an overall view as to the purpose (or purposes) underlying the publication or service. It will then determine whether the principal purpose is neither of those referred to in article 54 of the Regulated Activities Order. Because the possible range of subject matter covered by different publications or services is very wide it is not possible to apply standard tests. The FSA will form a judgment as to the overall impression created by the publication or service. For example, the proportion of advice, compared with other material in the publication or service, will be relevant in determining the principal purpose of the publication or service. But this will not necessarily be conclusive one way or the other. The purpose of a publication or service may still be to give advice even if only a small proportion of the space is devoted to advice as such. This might happen if, for example, a publication were marketed primarily on the basis that it contains advice on investments.

01/07/2005

PERG 7.6.9

In reaching a view, the FSA will take into account both editorial and promotional material in the publication or service. It will also have regard to the stated purpose of the publication or service and to any other material relevant to its purpose.

01/07/2005

PERG 7.6.10

Other factors relevant to an assessment of purpose or content of the publication or service may vary depending on the nature of the publication or service. For example, if a service is provided by a website, consideration of the content of the publication or service will take account of hypertext links and other features such as e-mail addresses, bulletin boards and chat rooms.

01/07/2005

Grant of application

PERG 7.6.11

If the FSA decides to grant the application it will issue a certificate. The certificate will normally be granted for an indefinite period. It will state what it is that the FSA considers constitutes the periodical or service in relation to which the FSA is satisfied that the exclusion in article 54 of the Regulated Activities Order applies. In many cases this will be self-evident. But it may sometimes be necessary to include further details in the certificate indicating what the certificate covers. For example, in the case of a large website, a distinct publication or service may form part of the website. In such a case a certificate may be given for that part only.

01/07/2005

Refusal of application

PERG 7.6.12

An application may be refused on the grounds that the FSA is not satisfied that the principal purpose of the publication or service is neither of those mentioned in article 54(1)(a) or (b) of the Regulated Activities Order (see PERG 7.4.5 G). An application may also be refused on the grounds that the FSA considers that the vehicle through which advice is to be given is not a newspaper, journal, magazine or other periodical publication, a regularly updated news or information service or a service consisting of the broadcast or transmission of television or radio programmes. Where an application is refused, the FSA will issue a notice which will give a statement of the reasons for the refusal in that case. If the application is refused, the applicant, if he is an unauthorised person, will need to consider whether it is appropriate to continue to publish the periodical or provide the service without authorisation or exemption.

01/07/2005

PERG 7.7

Post-certification issues

01/07/2005

Ongoing monitoring

PERG 7.7.1

If a certificate is granted then, until it is revoked, it is conclusive evidence that the exclusion under article 54 of the Regulated Activities Order applies. A person to whom a certificate is given should notify the FSA of any significant changes to the purpose or nature of the content of the relevant publication or service. The FSA will need to keep the content of the publication or service in question under review.

01/07/2005

PERG 7.7.2

An annual fee of £1,000 will be charged to meet the costs of ongoing monitoring (see SUP 20 Annex 3 R).

01/07/2005

Revocation of certificate

PERG 7.7.3

The FSA may revoke a certificate at the request of its holder or on the FSA's own initiative if the FSA considers that it is no longer justified. If the FSA revokes a certificate on its own initiative, it would normally expect to give advance notice to the holder of the certificate together with a statement of the reasons for the proposed revocation, and give the holder of the certificate an opportunity to make representations. Where a certificate is revoked, the holder of the certificate, if he is an unauthorised person, will need to consider whether it is appropriate to continue to publish the periodical or provide the service without authorisation or exemption.

01/07/2005

Publication of details of certificate holders

PERG 7.7.4

The fact of a person holding a certificate granted under article 54(3) is information which may be of relevance to other persons (including investors or potential investors). For this reason, the FSA considers it appropriate that details of certificates granted under article 54(3) should be included in a list on the public record which the FSA is required to maintain under section 347 of the Act (The record of authorised persons, etc).

01/07/2005

Further information

PERG 7.7.5

For further information contact the Perimeter Enquiries Team of the FSA (email: authorisationenquiries@fsa.gov.uk, Tel 020 7066 0082).

01/07/2005

PERG 8

Financial promotion and related activities

PERG 8.1

Application and purpose

01/07/2005

Application

PERG 8.1.1

This chapter applies to persons who need to know whether their communications are subject to or comply with the Act. It also helps them decide whether their activities in making or helping others to make financial promotions are regulated activities.

01/07/2005

Purpose of guidance

PERG 8.1.2

The purpose of this guidance is two fold:

(1) to outline the restriction on financial promotion under section 21 of the Act (Restrictions on financial promotion) and the main exemptions from this restriction; and

(2) to outline the main circumstances in which persons who are primarily involved in making or helping others to make financial promotions may be conducting regulated activities requiring authorisation or exemption themselves; this part of the guidance may also be of more general relevance to persons who may be concerned whether or not they are carrying on the regulated activities of advising on investments or making arrangements with a view to transactions in investments

01/07/2005

PERG 8.1.3

In particular, this guidance covers:

(1) invitations and inducements (see PERG 8.4);

(2) meaning of 'in the course of business' (see PERG 8.5);

(3) meaning of 'communicate' (see PERG 8.6);

(4) meaning of 'engage in investment activity' (see PERG 8.7);

(5) meaning of 'having an effect in the United Kingdom' (see PERG 8.8);

(6) circumstances where the restriction in section 21 does not apply (see PERG 8.9);

(7) types of financial promotion, including:

(a) meaning of 'real time financial promotion' (see PERG 8.10.2 G); and

(b) meaning of 'unsolicited real time financial promotion' (see PERG 8.10.8 G);

(8) types of exemption under the Financial Promotion Order, including:

(a) exemption for certain one-off promotions (see PERG 8.14.3 G);

(b) exemption for financial promotions not directed at the United Kingdom (see PERG 8.12.2 G);

(9) financial promotions concerning deposits and contracts of insurance other than life policies (see PERG 8.13);

(10) financial promotions concerning promotions by members of the professions (see PERG 8.15);

(11) financial promotions concerning funeral plans (see PERG 8.16);

(12) financial promotions concerning the Lloyd's market (see PERG 8.18);

(13) additional restrictions on the promotion of:

(a) life policies (see PERG 8.19);

(b) collective investment schemes (see PERG 8.20);

(14) company statements, announcements and briefings (see PERG 8.21);

(15) financial promotions made on the Internet (see PERG 8.22);

(16) regulated activities:

(a) advising on investments (see PERG 8.24);

(b) making arrangements with a view to transactions in investments (see PERG 8.32); and

(17) the business test for regulated activities (see PERG 8.34)

01/07/2005

PERG 8.1.4

This guidance is issued under section 157 of the Act. It represents the FSA's views and does not bind the courts. For example, it would not bind the courts in an action for damages brought by a private person for breach of a rule (see section 150 of the Act (Actions for damages)), or in relation to the enforceability of a contract where there has been a breach of sections 19 (The general prohibition) or 21 (Restrictions on financial promotion) of the Act (see sections 26 to 30 of the Act (Enforceability of agreements)). Although the guidance does not bind the courts, it may be of persuasive effect for a court considering whether it would be just and equitable to allow a contract to be enforced (see sections 28(3) and 30(4) of the Act). Anyone reading this guidance should refer to the Act and to the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (SI 2005/1529) (the Financial Promotion Order) and the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 (SI 2001/544) (as amended) (the Regulated Activities Order). These should be used to find out the precise scope and effect of any particular provision referred to in the guidance and any reader should consider seeking legal advice if doubt remains. If a person acts in line with the guidance in the circumstances mentioned by it, the FSA will proceed on the footing that the person has complied with the aspects of the requirement to which the guidance relates.

01/07/2005

PERG 8.2

Introduction

01/07/2005

PERG 8.2.1

The effect of section 21 of the Act (Restrictions on financial promotion) is that in the course of business, an unauthorised person must not communicate an invitation or inducement to engage in investment activity unless either the content of the communication is approved for the purposes of section 21 by an authorised person or it is exempt. Under section 25 of the Act (Contravention of section 21), a person commits a criminal offence if he carries on activities in breach of the restriction in section 21 of the Act. A person who commits this criminal offence is subject to a maximum of two years imprisonment and an unlimited fine. However, it is a defence for a person to show that he took all reasonable precautions and used all due diligence to avoid committing the offence.

01/07/2005

PERG 8.2.2

Another consequence of a breach of section 21 of the Act is that certain agreements could be unenforceable (see section 30 of the Act (Enforceability of agreements resulting from unlawful communications)). This applies to agreements entered into by a person as a customer as a consequence of a communication made in breach of section 21.

01/07/2005

PERG 8.2.3

An authorised person will not breach section 21 when communicating a financial promotion. Nevertheless, this guidance may be relevant where an authorised person needs to know whether the financial promotion rules apply to a particular communication. For example, to find out if the communication would be subject to an exemption if it were made by an unauthorised person (for example, see COB 3.2.4 R and COB 3.2.5 R (2)).

06/01/2008

PERG 8.2.4

A person who is concerned to know whether his communications will require approval or, if he is an authorised person, whether the appropriate financial promotion rules will apply to his communications will need to consider the following:

(1) am I making a communication or causing a communication to be made? (see PERG 8.6);

(2) if so, is it an invitation or inducement? (see PERG 8.4);

(3) if so, does the invitation or inducement relate to a controlled investment? (see PERG 8.7);

(4) if so, is the invitation or inducement to engage in investment activity? (see PERG 8.7);

(5) if so, is it made in the course of business? (see PERG 8.5);

(6) if so, and the financial promotion originates outside the United Kingdom, is it capable of having an effect in the United Kingdom? (see PERG 8.8);

(7) if so, or if the answer to (5) is yes and the financial promotion was made in the United Kingdom, is the promotion exempt? (see PERG 8.12 to PERG 8.15 and PERG 8.21);

(8) if not, am I an authorised person?

06/01/2008

PERG 8.2.5

If the answer to PERG 8.2.4G (8) is yes then the appropriate financial promotion rules will apply (subject to additional exemptions in, for example, COB 3.2.5 R). If the answer is no, then the promotion must be approved by an authorised person if it is a non-real time financial promotion. Authorised persons are not allowed to approve real time financial promotions (see COB 3.12.2 R ). PERG 8.36.1Gcontains a flowchart explaining these steps.

06/01/2008

PERG 8.2.6

One of the main effects of the Act is to bring together in one statute the regulation of persons who provide financial services. These would previously have been regulated under the Financial Services Act 1986, the Banking Act 1987, the Insurance Companies Act 1982 or under laws relating to building societies, friendly societies and credit unions. The Act also consolidates the provisions of those statutes which governed advertising and making unsolicited personal communications.

01/07/2005

PERG 8.2.7

The restriction in section 21 applies to all forms of communication such as advertising, broadcasts, websites, e-mails and all other forms of written or oral communication whether sent to one person or many. However, the restrictions only apply to a communication made in the course of business and not, for example, to personal communications between individuals.

01/07/2005

PERG 8.2.8

There are extensive exemptions in the Financial Promotion Order. This is explained in greater detail in PERG 8.11 to PERG 8.15 and PERG 8.21.

01/07/2005

PERG 8.3

Financial promotion

01/07/2005

PERG 8.3.1

The basic restriction on the communication of financial promotions is in section 21(1) of the Act. Sections 21(2) and (5) disapply the restriction in certain circumstances. Their combined effect is that a person must not, in the course of business, communicate an invitation or inducement to engage in investment activity unless:

(1) he is an authorised person; or

(2) the content of the communication is approved for the purposes of section 21 by an authorised person; or

(3) the communication is exempt under an order made by the Treasury under section 21(5) - the Financial Promotion Order (as amended).

01/07/2005

PERG 8.3.2

Section 21 of the Act does not itself (other than in its heading and side-note) refer to a 'financial promotion' but rather to the communication of 'an invitation or inducement to engage in investment activity'. References in this guidance to a financial promotion mean an invitation or inducement to engage in investment activity.

01/07/2005

PERG 8.3.3

Section 21 of the Act contains a number of key expressions or phrases which will determine whether or not it will apply. These are:

(1) 'invitation or inducement' (see PERG 8.4);

(2) 'in the course of business' (see PERG 8.5);

(3) 'communicate' (see PERG 8.6);

(4) 'engage in investment activity' (see PERG 8.7); and

(5) 'having an effect in the United Kingdom' (see PERG 8.8).

01/07/2005

PERG 8.3.4

The FSA's views as to the meaning of these are explained in PERG 8.4 to PERG 8.8.

01/07/2005

PERG 8.3.5

In addition, this guidance deals with other factors such as when the exemptions in the Financial Promotion Order can be applied, including the exemptions relating to territorial scope and one-off financial promotions.

01/07/2005

PERG 8.4

Invitation or inducement

01/07/2005

Promotional element

PERG 8.4.1

The Act does not contain any definition of the expressions 'invitation' or 'inducement', leaving them to their natural meaning. The ordinary dictionary entries for 'invitation' and 'inducement' offer several possible meanings to the expressions. An 'invitation' is capable of meanings ranging from merely asking graciously or making a request to encouraging or soliciting. The expression 'inducement' is given meanings ranging from merely bringing about to prevailing upon or persuading. In the FSA's view it is appropriate, in interpreting the expressions, to take due account of the context in which they are being used and their purpose.

01/07/2005

PERG 8.4.2

The Treasury, responding to consultation on the draft Financial Promotion Order, stated its intention that only communications containing a degree of incitement would amount to 'inducements' and that communications of purely factual information would not. This is provided the facts are presented in such a way that they do not also amount to an invitation or inducement. This was made clear both in the Treasury's consultation document on financial promotion and during the passage of the Act through Parliament. Under questioning, the Minister confirmed that the government's policy was "to capture promotional communications only. The Minister also stated that 'inducement', in its Bill usage, already incorporates an element of design or purpose on the part of the person making the communication and that "design or purpose" is implicit in this context (Hansard HL, 18 May 2000 cols 387 and 388). In the same debate, the Minister stated that the restriction would not apply to such things as "public announcements, exchange of draft share purchase agreements in corporate finance transactions or cases in which the recipient of a communication simply misunderstands its contents and engages in investment activity as a result."

01/07/2005

PERG 8.4.3

The FSA recognises that the matter cannot be without doubt. However, it is the FSA's view that the context in which the expressions 'invitation' or 'inducement' are used clearly suggests that the purpose of section 21 is to regulate communications which have a promotional element. This is because they are used as restrictions on the making of financial promotions which are intended to have a similar effect to restrictions on advertising and unsolicited personal communications in earlier legislation. Such communications may be distinguished from those which seek merely to inform or educate about the mechanics or risks of investment. In this respect, the FSA supports the views expressed by Ministers as referred to in PERG 8.4.2 G. To the extent that doubt may remain as to the true meaning of 'invitation' or 'inducement' when used in section 21, it is the opinion of the FSA that the courts are likely to take account of the ministerial statements under the judgement in Pepper (Inspector of Taxes) v Hart [1993] AC 593.

01/07/2005

PERG 8.4.4

The FSA considers that it is appropriate to apply an objective test to decide whether a communication is an invitation or an inducement. In the FSA's view, the essential elements of an invitation or an inducement under section 21 are that it must both have the purpose or intent of leading a person to engage in investment activity and be promotional in nature. So it must seek, on its face, to persuade or incite the recipient to engage in investment activity. The objective test may be summarised as follows. Would a reasonable observer, taking account of all the circumstances at the time the communication was made:

(1) consider that the communicator intended the communication to persuade or incite the recipient to engage in investment activity or that that was its purpose; and

(2) regard the communication as seeking to persuade or incite the recipient to engage in investment activity.

It follows that a communication which does not have any element of persuasion or incitement will not be an invitation or inducement under section 21.

01/07/2005

Invitations

PERG 8.4.5

An invitation is something which directly invites a person to take a step which will result in his engaging in investment activity. It follows that the invitation must cause the engaging in investment activity. Examples of an invitation include:

(1) direct offer financial promotions;

(2) a prospectus with application forms; and

(3) Internet promotions by brokers where the response by the recipient will initiate the activity (such as 'register with us now and begin dealing online').

A communication may contain a statement that it is not an invitation. Such statements may be regarded as evidence that the communication is not an invitation unless its contents indicate otherwise.

01/07/2005

PERG 8.4.6

Merely asking a person if they wish to enter into an agreement with no element of persuasion or incitement will not, in the FSA's view, be an invitation under section 21. For example, the FSA does not consider an invitation to have been made where:

(1) a trustee or nominee receives an offer document of some kind and asks the beneficial owner whether he wishes it to be accepted or declined;

(2) a person such as a professional adviser enquires whether or not his client would be willing to sign an agreement; or

(3) a person is asked to sign an agreement on terms which he has already accepted or to give effect to something which he has already agreed to do.

01/07/2005

Inducements

PERG 8.4.7

An inducement may often be followed by an invitation or vice versa (in which case both communications will be subject to the restriction in section 21 of the Act). An inducement may be described as a link in a chain where the chain is intended to lead ultimately to an agreement to engage in investment activity. But this does not mean that all the links in the chain will be an inducement or that every inducement will be one to engage in investment activity. Only those that are a significant step in persuading or inciting or seeking to persuade or incite a recipient to engage in investment activity will be inducements under section 21. The FSA takes the view that the mere fact that a communication may be made at a preliminary stage does not, itself, prevent that communication from being a significant step. However, in many cases a preliminary communication may simply be an inducement to contact the communicator to find out what he has to offer. For example, an advertisement which merely holds out a person as having expertise in or providing services about investment management or venture capital will not be an inducement to engage in investment activity. It will merely be an inducement to make contact for further material and will not be a significant step in the chain. However, that further material may well be a significant step and an invitation or inducement to engage in investment activity. In contrast, an advertisement which claims that what the recipient should do in order to make his fortune is to invest in securities and that the communicator can provide him with the services to achieve that aim will be a significant step and an inducement to engage in investment activity.

01/07/2005

PERG 8.4.8

PERG 8.4.9 G to PERG 8.4.34 G apply the principles in PERG 8.4.4 G to PERG 8.4.7 G to communications made in certain circumstances. They do not seek to qualify those principles in any way. A common issue in these circumstances arises when contact details are given (for example, of a provider of investments or investment services). In the FSA's view, the inclusion of contact details should not in itself decide whether the item in which they appear is an inducement or, if so, is an inducement to engage in investment activity. However, they are a factor which should be taken into account. The examples also refer, where appropriate, to specific exemptions which may be relevant if a communication is an invitation or inducement to engage in investment activity.

01/07/2005

Directory listings

PERG 8.4.9

Ordinary telephone directory entries which merely list names and contact details (for example where they are grouped together under a heading such as 'stockbrokers') will not be inducements. They will be sources of information. Were they to be presented in a promotional manner or accompanied by promotional material they would be capable of being inducements. Even so, they may merely be inducements to make contact with the listed person. Specialist directories such as ones providing details of venture capital providers, unit trust managers or investment trusts will usually carry greater detail about the services or products offered by the listed firms and are often produced by representative bodies. Such directories may also be essentially sources of information. Whether or not this is the case where individual entries are concerned will depend on their contents. If they are not promotional, the entries will not be inducements to engage in investment activity. However, it is possible that other parts of such a directory might seek to persuade recipients that certain controlled investments offer the best opportunity for financial gain. They may go on to incite recipients to contact one of the member firms listed in the directory in order to make an investment. In such cases, that part of the directory will be an inducement to engage in investment activity. But this does not mean that the individual entries or any other part of the directory will be part of the inducement. PERG 8.6 provides guidance on the meaning of 'communicate' and 'causing a communication'. This is of relevance to this example and those which follow.

01/07/2005

Tombstone advertisements (announcements of a firm's past achievements)

PERG 8.4.10

Such advertisements are almost invariably intended to create awareness, hopefully generating future business. So they may or may not be inducements. This depends on the extent to which their contents seek to persuade or incite persons to contact the advertiser for details of its services or to do business with it. Merely stating past achievements with no contact details will not be enough to make such an advertisement an inducement. Providing contact details may give the advertisement enough of a promotional feel for it to be an inducement. But, if this is the case, it will be an inducement to contact the advertiser to find out information or to discuss what he can offer. Only if the advertisement contains other promotional matter will it be capable of being an inducement to engage in investment activity. In practice, such advertisements are often aimed at influencing only investment professionals. Where this is the case, the exemption in article 19 of the Financial Promotion Order (Investment professionals) may be relevant (see PERG 8.12.21 G). Tombstone advertisements will not usually carry the indicators required by article 19 to establish conclusive proof. However, article 19 may apply even if none of the indicators are present if the financial promotion is in fact directed at investment professionals.

01/07/2005

Links to a website

PERG 8.4.11

Links on a website may take different forms. Some will be inducements. Some of these will be inducements under section 21 and others not. Links which are activated merely by clicking on a name or logo will not be inducements. The links may be accompanied by or included within a narrative or, otherwise, referred to elsewhere on the site. Whether or not such narratives or references are inducements will depend upon the extent to which they may seek to persuade or incite persons to use the links. Simple statements such as 'these are links to stockbrokers' or 'click here to find out about stockmarkets - we provide links to all the big exchanges' will either not amount to inducements or be inducements to access another site to get information. If they are inducements, they will be inducements to engage in investment activity only if they specifically seek to persuade or incite persons to use the link for that purpose. Where this is the case, but the inducement does not identify any particular person as a provider of a controlled investment or as someone who carries on a controlled activity, the exemption in article 17 of the Financial Promotion Order (Generic promotions) may be relevant (see PERG 8.12.14 G).

01/07/2005

Banner advertisements on a website

PERG 8.4.12

These are the Internet equivalent to an advertisement in a newspaper and are almost bound to be inducements. So whether they are inducements to engage in investment activity will depend upon their contents as with any other form of advertising and the comments in PERG 8.4.11 G will be relevant.

01/07/2005

Publication or broadcast of prices of investments (historic or live)

PERG 8.4.13

These may or may not involve invitations or inducements. Where a person such as a newspaper publisher, broadcaster or data supplier merely presents prices of investments whether historic or live the information can be purely factual and not be an inducement. Historic prices on their own will never be invitations or inducements. Merely adding simple contact details to such prices will not make them invitations or inducements to engage in investment activity. However, any additional wording seeking to persuade or incite persons to contact firms so that they may buy or sell such investments may do so. In other circumstances, the publication of prices may involve an invitation or an inducement to engage in investment activity. For example, persons may use an electronic trading system to display prices and other terms such as lot size and volume at which they are prepared to deal, on screens viewed by potential counterparties. The price and other terms may be firm or indicative. The persons using the trading systems will have accepted the general terms and conditions for trading. Where prices and terms quoted are firm, the screen display may be an invitation to engage in investment activity by entering into a transaction at that price and on those terms. This will be where the offer may be accepted by the counterparty by a simple electronic response. Where the price or other terms are indicative, the screen display may be an inducement to engage in investment activity after negotiating acceptable terms. But in either case, the display of prices and other terms will only be invitations or inducements to engage in investment activity if it also contains material which seeks to persuade or incite the recipient to do so.

01/07/2005

Company statements and announcements and analyst briefings

PERG 8.4.14

Encouraging (or discouraging) statements may be made by a company director. These will typically be made in reports or accounts or at a presentation or road show or during a briefing of analysts. Alternatively, such statements may be made on the company's behalf by its public relations adviser. Statements of fact about a company's performance or activities will not, themselves, be inducements to engage in investment activity even if they may lead persons to decide to buy or sell the company's shares. However, statements which speculate about the company's future performance or its share price may have an underlying purpose or intent to encourage investors to act. If this is so, whether they will be inducements to engage in investment activity will depend entirely on their contents and the extent to which they seek to promote investment in the company. PERG 8.21 contains detailed guidance on the various exemptions which may apply in this area.

01/07/2005

Journalism

PERG 8.4.15

Journalism can take many forms. But typically a journalist may write an editorial piece on a listed company or about the investments or investment services that a particular firm provides. This may often be in response to a press release. The editorial may or may not contain details of or, on a website, a link to the site of the company or firm concerned. Such editorial may specifically recommend that readers should consider buying or selling investments (whether or not particular investments) or obtaining investment services (whether or not from a particular firm). If so, those recommendations are likely to be inducements to engage in investment activity (bearing in mind that a recommendation not to buy or sell investments cannot be an inducement to engage in investment activity). In other cases, the editorial may be an objective assessment or account of the investment or its issuer or of the investment firm and may not encourage persons to make an investment or obtain investment services. If so, it will not be an inducement to engage in investment activity. Article 20 of the Financial Promotion Order (Communications by journalists) contains a specific exemption for journalism and journalists may be able to make good use of the generic promotions exemption in article 17 of the Financial Promotion Order (see PERG 8.12.23 G and PERG 8.12.14 G). Journalists should bear in mind that they may communicate a financial promotion by repeating a recommendation that originates from another source. That source could be, for example, an authorised person, an academic or another publication. Such a financial promotion would be viewed as communicated by the journalist where he has editorial control over its form and content. In the FSA's view, a person is not causing the communication of a financial promotion merely by providing material, including a press release or a quotation, to a journalist who uses it in an article. This is provided that the person has no control over the way in which the article is prepared and published. The press release or quotation itself, if it is a financial promotion, should be exempt under article 47 of the Financial Promotion Order (Persons in the business of disseminating information) - see PERG 8.21.10 G.

01/07/2005

Performance tables

PERG 8.4.16

League tables showing the past performance of investment products of a particular kind or investment firms of a particular class (such as investment managers) and determined by the application of pre-set criteria will not, in themselves, be inducements. The fact that such tables represent pure information could, for example, be made clear by their being accompanied by a statement to the effect that the fact of a product or firm being well placed in the tables based on past performance is no guide to their likely future performance. The effectiveness of such a statement will, of course, depend upon it being the case that they do, in fact, represent mere information. But if, for example, the tables are accompanied by or presented or provided in a way that they are an actual or implied recommendation that a particular product's performance suggests it is a potential buy or sell they may become inducements.

01/07/2005

PERG 8.4.17

Tables or other forms of list may identify products with their relevant features such as interest rates, redemption periods and charges. Again, provided that the tables amount to purely factual information enabling comparison of products they will not be inducements. This includes such things as electronic systems that allow users to programme in their requirements and find details of the products that meet them. Producers of the table or list may, to some extent, expect that the information will lead persons to make investments. Or they might have negotiated a payment from the firms featured that reflects leads generated. In either case, the absence of a promotional element in the table will be determinative. As with performance tables, these can become inducements to engage in investment activity. This will happen when there is an actual or implied recommendation that either the products which come out best in respect of certain features or a specific combination of features or those that have been chosen for inclusion are likely to be good or best buys. This might, for example, include identifying the top ten deposit accounts for persons looking for deposit accounts offering certain features. The mere inclusion in tables of the kind referred to generally in this paragraph or those in PERG 8.4.16 G of contact details should not turn what is otherwise factual or neutral information into an inducement. Both types of table may benefit, if necessary, from the exemption for journalists in article 20 (see PERG 8.12.23 G). This will be where they are prepared by a person acting as a journalist and are included in a publication, service or broadcast as described in article 20(5)(b). Where the tables are merely a reproduction of information supplied by a third party data source which does not provide them as a journalist article 20 will not be available.

01/07/2005

Decision Trees

PERG 8.4.18

A decision tree (or flow chart) will generally be used in one of two ways. Either it will be an educational tool (for instance, where an employer wishes to help his employees understand their pension options) or a promotional tool. As an educational tool which does no more than enable a person to identify generic investment options it will not be an inducement. But if its use is intended to procure business for an investment firm then it is likely to be an inducement. For example, electronic decision trees on websites may typically invite persons to enter basic information about their circumstances and objectives leading to a recommendation or choice of products or services, or both, possibly with links to other firms' sites. These decision trees will be inducements to engage in investment activity although, in some cases, the journalists' exemption in article 20 of the Financial Promotion Order may be relevant (see PERG 8.12.23 G).

01/07/2005

Investment agreements, share purchase agreements and customer agreements

PERG 8.4.19

These types of agreements will only rarely be inducements or invitations. For instance, where the terms of a deal have been agreed in principle and the agreement is merely the means of giving it effect, the inducement phase has clearly passed. And an agreement or draft agreement itself may usually be seen as a document setting out the terms and conditions of a deal and not itself an inducement (or an invitation) to deal. However, an agreement or draft agreement may often be accompanied by an invitation or inducement such as a covering letter or an oral communication that seeks to persuade or incite a person to enter into the agreement. Whilst such accompaniments are capable of being inducements (or invitations), merely offering concessions or amendments to a draft agreement during negotiations will not turn those accompaniments into inducements. It is, however, possible for an agreement itself to be or to include an invitation or inducement. For example, an advertisement that contains the terms and conditions and the means to enter into it as a binding contract, a direct offer financial promotion or a prospectus with an application form included.

01/07/2005

Image advertising

PERG 8.4.20

Activities which are purely profile raising and which do not identify and promote particular investments or investment services may not amount to either an invitation or inducement of any kind. Examples of this include where listed companies sponsor sporting events or simply put their name or logo on the side of a bus or on an umbrella. This is usually done with a view, among other things, to putting their names in the minds of potential investors or consumers. In other cases, an image advertisement for a company which provides investment services (for example, on a pencil or a diary) may include, along with its name or logo, a reference to its being an investment adviser or fund manager or a telephone or fax number or both. Profile raising activities of this kind may involve an inducement (to contact the advertiser) but will be too far removed from any possible investment activity to be considered to be an inducement to engage in investment activity.

01/07/2005

Advertisements which invite contact with the advertiser

PERG 8.4.21

These will be advertisements that contain encouragement to contact the advertiser. They are likely to be inducements to do business with him or to get more information from him. If so, they will be inducements to engage in investment activity if they seek to persuade or incite persons to buy or sell investments or to get investment services. See PERG 8.4.7 G for more guidance on preliminary communications and whether they are a significant step in the chain of events which are intended to lead to the recipient engaging in investment activity. Where advertisements invite persons to send for a prospectus, article 73 (Material relating to prospectus for public offer of unlisted securities) may provide an exemption. Any financial promotion which contains more information than is allowed by article 73 but which is not the prospectus itself is likely to require approval by an authorised person unless another exemption applies.

06/10/2007

Introductions

PERG 8.4.22

(1) Introductions may take many forms but typically involve an offer to make an introduction or action taken in response to an unsolicited request. An introduction may be an inducement if the introducer is actively seeking to persuade or incite the person he is introducing to do business with the person to whom the introduction is made. So it may fall under section 21 if its purpose is to lead to investment activity. For example, if a person answers the question 'do you or can you provide investment advice' with a simple 'no, but I can introduce you to someone who does', that may be an inducement. But, if so, it is likely to be an inducement to contact someone to find out information about his services rather than to engage in investment activity.
(2) Where a person calls in to an office or branch of a company and asks to see 'the investment adviser', a person who responds merely by directing or showing the way is not making an inducement.
(3) Neither would a person be making an inducement by responding to an enquiry with 'we do not provide investment services - you need to consult an authorised person' or words to that effect. That is provided he does not go on to seek to persuade or incite the enquirer to contact a particular authorised person for investment services.
(4) But a person would be making an inducement to engage in investment activity if, for example, he seeks to persuade or incite persons to allow him to introduce them to a particular authorised person so that they may take advantage of the cheap dealing rates which that person offers.
(5) Where introductions do amount to inducements under section 21 they may fall under the exemption for generic promotions (article 17 of the Financial Promotion Order) (see PERG 8.12.14 G). This will be the case provided the financial promotion does not identify any particular investment or person to whom introductions are to be made or identify the introducer as a person who carries on a regulated activity (typically of making arrangements with a view to transactions in investments under article 25(2) of the Regulated Activities Order - (see PERG 8.33 (Introducing)) or making arrangements with a view to regulated mortgage contracts under article 25A(2) of the Regulated Activities Order (see PERG 4.5 (Arranging regulated mortgage contracts)). It is most likely to apply where the financial promotion relates to deposits or contracts of insurance which are not contractually based investments.
(6) The journalists' exemption in article 20 of the Financial Promotion Order (Communications by journalists) may be relevant where the introduction is made through or in a publication, broadcast or regularly updated news or information service (see PERG 8.12.23 G).
(7) Article 15 (Introductions) may apply provided certain conditions are met (see PERG 8.12.11 G). In addition, article 28B (Real time communications: introductions) may apply where an introduction is a real time financial promotion about home finance transactions and home finance activities (see PERG 8.17.12 G).

06/04/2007

Distributors

PERG 8.4.23

A person may be distributing financial promotions which have been issued or approved by an authorised person. This may be by displaying copies or delivering them or handing them out whether or not on request. PERG 8.6 explains when such a person will be communicating the financial promotions. Where this is so, the exemption for mere conduits in article 18 of the Financial Promotion Order may apply (see PERG 8.12.18 G). But article 18 will not apply if the distributor creates his own financial promotion by seeking to persuade or incite the recipient to act upon the financial promotions he is distributing.

01/07/2005

Investment trading methods and training courses

PERG 8.4.24

Trading methods and techniques, such as traded options training courses and software-based or manual trading tools will, in many cases, be too remote from any eventual investment dealing activities to be inducements to engage in investment activity. Promotions of such things will be inducements (or invitations) to receive training and general trading tips and techniques. However, such things may be sold on the basis that they are almost certain to produce profits from the trading which the recipient will undertake using the training or technique. If this is the case, the promotions are capable of being inducements to engage in those trading activities. Such financial promotions are capable of being generic promotions under article 17 of the Financial Promotion Order (see PERG 8.12.14 G).

01/07/2005

Invitations to attend meetings or to receive telephone calls or visits

PERG 8.4.25

These are clearly invitations or inducements. Whether they will involve invitations or inducements to engage in investment activity rather than to attend the meeting or receive the call or visit, will depend upon their purpose and content. PERG 8.4.7 G discusses communications which are a significant step in the chain of events leading to an agreement to engage in investment activity. The purpose of the meeting, call or visit to which the invitation or inducement relates may be to offer the audience or recipient investment services. In this case, the invitation or inducement will be a significant step in the chain if it seeks to persuade or incite the invitee to engage in investment activity at the meeting, call or visit. Any financial promotions made during the meeting, call or visit would still need to be communicated or approved by an authorised person or be exempt.

01/07/2005

Explanation of terms

PERG 8.4.26

An explanation of the terms of an agreement or of the consequences of taking a particular course of action can be merely factual information unless it includes or is accompanied by encouragement to enter into the agreement or take the course of action. The mere fact that the explanation may present the investment in a good light or otherwise influence the recipient will not make it an inducement. Where such communications are financial promotions they may fall under one of the exemptions for one-off promotions in articles 28 and 28A of the Financial Promotion Order (see PERG 8.14.3 G).

01/07/2005

Enquiries about a person's status or intentions

PERG 8.4.27

A person ('A') may enquire:

(1) whether another person is certified as a high net worth individual or a sophisticated investor so that A may determine whether an exemption applies; or

(2) whether a person has received material sent to him; or

(3) how a person might propose to react to a take-over offer.

Enquiries of this or a similar kind will not amount to inducements to engage in investment activity unless they involve persuasion or incitement to do so. The enquiry may be accompanied by a brief statement of the reason why it is being made. This may, for example, include a reference to the type of investment to which any subsequent financial promotions would relate. Such initial enquiries may be followed up with an inducement but this fact alone will not turn the initial enquiry into a financial promotion. For example, an enquiry about whether a person is certified for the purposes of article 48 (Certified high net worth individuals), article 50 (Sophisticated investors) or article 50A (self-certified sophisticated investors) may, where the answer is positive, be followed by a financial promotion. That financial promotion can then rely on article 48, 50 or 50A as the case may be.

01/07/2005

Solicited and accompanying material

PERG 8.4.28

Solicited or accompanying material which does not contain any invitation or inducement to engage in investment activity will not itself be a financial promotion. This is provided that the material is not part of any financial promotion which may accompany it. This is explained in greater detail in PERG 8.4.29 G to PERG 8.4.30 G.

01/07/2005

PERG 8.4.29

Persons may sometimes be asked to send material which has not been prepared for use as a financial promotion to a person who is interested in making an investment. For example, a prospective participant in a Lloyd's syndicate may ask for a copy of the business plan or forecast prepared by the managing agent to comply with Lloyd's requirements. As another example, a prospective purchaser of, or investor in, a company may wish to see a valuation report, a due diligence report or legal advice. The fact that the person requesting the material may intend to rely on it in making his investment decision does not, itself, make the material an inducement under section 21.

01/07/2005

PERG 8.4.30

The person who responds to the request for the material in the circumstances in PERG 8.4.29 G may make a financial promotion in the form of a covering letter or oral communication ('C'). This will not mean that the material accompanying C must itself be treated as an inducement. This will depend on the circumstances. The material itself would only become an inducement if it is turned into part of the financial promotion in C. For example, C may refer to the contents or part of the contents of the accompanying material and claim that they will convince the recipient that he should engage in investment activity. In such a case, the contents, or the relevant part of the contents as the case may be, would become part of the financial promotion in C. In other cases, C may simply refer to the fact that certain material has been enclosed or is available without using it as a selling point to persuade or incite the recipient to engage in investment activity. In that case, the material will not become part of the financial promotion. A similar situation arises if a person other than the person who originated an oral or written communication which is not itself a financial promotion uses it to persuade or incite a potential investor.

01/07/2005

Telephone services

PERG 8.4.31

A person ('P') may be engaged, typically by investment product companies, to provide telephone services. Where such services require P to seek to persuade or incite prospective customers to receive investment literature or a personal call or visit from a representative of his principal they will frequently involve inducements to engage in investment activity. This is so whether the inducement results from P making unsolicited calls or by his raising the issue during a call made by the prospective customer. Generally speaking, it is likely that P would be carrying on a regulated activity under article 25(2) of the Regulated Activities Order and require authorisation or exemption (for example, as an appointed representative) if he is required to procure leads for his principal. In other cases, P may merely respond to a request from a prospective customer. This may be a request for investment literature or to arrange a call or visit. P will not be making an inducement simply by agreeing to send the literature, referring the caller to a representative of his principal or agreeing to arrange for the visit or call. Where persons providing telephone services are appointed representatives the exemption in article 16 of the Financial Promotion Order (Exempt persons) may apply (see PERG 8.12.12 G).

01/07/2005

Personal illustrations

PERG 8.4.32

A personal illustration (for instance, of the costs of and benefits under a particular investment product) may or may not be an invitation or inducement. This will depend on the extent to which it seeks to persuade or incite the recipient to invest as opposed to merely providing him with information. A personal illustration may, however, be accompanied by an invitation or inducement to buy the investment in which case the exemptions for one-off financial promotions in articles 28 or 28A may apply (see PERG 8.14.3 G). Authorised persons should note that, where personal quotations or illustrations do amount to a financial promotionthe financial promotion rules will not usually apply to them.

06/01/2008

Instructions or guidance on how to invest

PERG 8.4.33

Things such as help-lines for persons who wish to make an investment will not usually involve invitations or inducements to engage in investment activity. This is where their purpose is merely to explain or offer guidance on how to invest or to accept an offer. In such cases, the investor will already have decided to invest and there will be no element of persuasion on the part of the person giving the explanation or guidance.

01/07/2005

Communications by employers to their employees

PERG 8.4.34

Employers may communicate with theiremployees on matters which involve controlled investments. For example, personal pension schemes (including stakeholder schemes) and other employee benefit schemes other than occupational pension schemes. Interests under the trusts of an occupational pension scheme are not a controlled investment (see paragraph 27 (2) of Schedule 1 to the Financial Promotion Order). Such communications will only be invitations or inducements to engage in investment activity if they seek to persuade or incite employees to do things such as:

(1) participate in or leave the pension or other benefit scheme;

(2) exercise certain rights under such a scheme, includemaking additional contributions or exercising options.

Communications which are intended to educate or give employees information with no element of persuasion or incitement will not be invitations or inducements under section 21. Employers may wish to give their employees investment material prepared and approved by an authorised person. This material may be given under cover of a communication from the employer. If so, the covering communication will not itself be an inducement if all it does is to refer employees to the material and explain what they should do if they wish to act on it, without seeking to persuade or incite them to act. Where the covering communication is itself a financial promotion it will need to be approved by an authorised person provided it is a non-real time financial promotion unless an exemption applies. If it is a real time financial promotion it cannot be approved (see, for example, COB 3.12.2 R ). In such cases, an exemption would need to apply. Where employee share schemes are concerned, the exemption in article 60 of the Financial Promotion Order (Participation in employee share schemes) is likely to apply to any financial promotions made by employers or members of their group. Where an employer's financial promotions relate to such things as company health or general insurance benefit packages, the exemptions in article 24 (Relevant insurance activity: non real time communications) or 26 (Relevant insurance activity: real time communications) of the Financial Promotion Order may apply. Employers who promote pension products to their employees will be able to use the exemption in article 72 (Pension products offered by employers)provided certain conditions are met. These conditions are explained in PERG 8.14.40A G(Pension products offered by employers (article 72)). Any financial promotion made by an employer for the purpose of meeting his obligations under the Welfare Reform and Pensions Act 1999 to offer his employees a stakeholder pension scheme should be able to use the exemption in article 29 (Communications required or authorised by enactments).

01/10/2005

PERG 8.5

In the course of business

01/07/2005

PERG 8.5.1

Under section 21(4) of the Act, the Treasury has the power to specify circumstances in which a person is viewed as 'acting in the course of business' or 'not acting in the course of business'. The power under section 21(4) relates only to financial promotions and is distinct from the power in section 419 which relates to regulated activities. To date, the Treasury has not used the power in section 21(4). As a result, the phrase has its ordinary or natural meaning.

01/07/2005

PERG 8.5.2

The FSA considers that 'in the course of business' requires a commercial interest on the part of the communicator. This does not necessarily have to be a direct interest. And the communicator does not need to be carrying on regulated activities (the test in section 19 of the Act) as or as part of his business. Neither does the communication need to be made in the course of carrying on activities as a business in their own right (the test in article 3 of the Financial Services and Markets Act 2000 (Carrying on Regulated Activities by Way of Business) Order 2001) (SI 2001/1177). For example, if a holding company proposes to sell one of its subsidiaries, that sale will be 'in the course of business' irrespective of the fact that the company may well not be in the business of selling subsidiaries.

01/07/2005

PERG 8.5.3

The position is slightly more blurred with individuals. The 'in the course of business' test is intended to exclude genuine non-business communications. Examples of these would be friends talking in a pub, letters between family members or e-mails sent by individuals using an Internet chat-room or bulletin board for personal reasons. An issue arises where capital is raised for small private companies. Where such a company is already in operation, it will be acting 'in the course of business' when seeking to generate additional share or loan capital. At the pre-formation stage, however, it will often be the case that individuals who are proposing to run the company will approach a small number of friends, relatives and acquaintances to see if they are willing to provide start-up capital. In the FSA's view, such individuals will not be acting 'in the course of business' during the pre-formation stage of a small private company. This is provided that they are not:

(1) forming companies with such regularity that they would be regarded as carrying on the business of forming companies; or

(2) already running the business which the company will carry on (for example, as a partnership).

01/07/2005

PERG 8.5.4

There is, of course, no reason why an individual cannot act 'in the course of business'. For example, sole traders who are independent financial advisers will give investment advice 'in the course of business' and so satisfy the test. Individuals who are merely seeking to make personal investments will not be acting 'in the course of business' by approaching a company about making an investment in its shares. However, it is possible that an individual who regularly seeks to invest in companies who are seeking to raise venture capital with a view to becoming a director and influencing their affairs may be regarded as acting in the course of business. In approaching companies, such a person should be able to make use of the exemptions for one-off financial promotions in articles 28 and 28A of the Financial Promotion Order (see PERG 8.14.3 G).

01/07/2005

PERG 8.5.5

Persons who carry on a business which is not a regulated activity will need to be particularly careful in making communications which may amount to financial promotions (because they seek to persuade or incite persons to engage in investment activity (see PERG 8.4)). For example, where a company makes financial promotions to its employees, they may well be made in the course of business. Examples of these include financial promotions concerning employee share schemes, group wide insurance arrangements and stakeholder pension schemes. These would need to be approved by an authorised person unless an appropriate exemption is available. PERG 8.4.34 G provides further guidance on this.

01/07/2005

PERG 8.6

Communicate

01/07/2005

PERG 8.6.1

The word 'communicate' is extended under section 21(13) of the Act and includes causing a communication to be made. This means that a person who causes the communication of a financial promotion by another person is also subject to the restriction in section 21. Article 6(d) of the Financial Promotion Order also states that the word 'communicate' has the same meaning when used in exemptions in the Order. Article 6(a) also states that the word 'communication' has the same meaning as 'financial promotion'. It appears to the FSA that a person is communicating where he gives material to the recipient or where, in certain circumstances (see PERG 8.6.5 G), he is responsible for transmitting the material on behalf of another person. As both causers and communicators communicate under section 21 the distinction between them is not usually of great significance. What is important is whether a person who is not himself communicating is or is not causing a communication to be made by another. In the FSA's view, primary responsibility for a communication to which section 21 applies and which is capable of being read will rest with its originator. This is the person responsible for its overall contents. Where it is an oral communication primary responsibility will rest with the speaker. A speaker will, of course, be an individual. But where the individual speaks on behalf of his employer, it will be the employer who is responsible. The same will apply if the individual is an officer of a company or partner in a partnership and speaks on behalf of the company or partnership. Individuals who make financial promotions otherwise than in their capacity as employees, officers or partners will need to consider their own position (they may not be acting in the course of business (see PERG 8.5)). Where a person other than the originator (for example a newspaper publisher) transmits a communication on the originator's behalf he is communicating it and the originator is causing its communication.

01/07/2005

Persons who communicate or cause a communication

PERG 8.6.2

Apart from the originators of a financial promotion, the FSA considers the following persons to be communicating it or causing it to be communicated:

(1) publishers and broadcasters who carry advertisements (including websites carrying banner advertisements); and

(2) intermediaries who redistribute another person's communication probably with their own communications.

01/07/2005

Persons who do not communicate or cause a communication

PERG 8.6.3

In the FSA's view, the following persons will not be causing or communicating:

(1) advertising agencies and others when they are designing advertising material for originators;

(2) persons who print or produce material for others to use as advertisements;

(3) professional advisers when they are preparing material for clients or advising them on the need to communicate or the merits or consequences of their communicating a financial promotion; and

(4) persons who are responsible for securing the placing of an advertisement provided they are not responsible for its contents.

01/07/2005

Need for an active step to communicate or cause a communication

PERG 8.6.4

The FSA considers that, to communicate, a person must take some active step to make the communication. This will be a question of fact in each case. But a person who knowingly leaves copies of a document where it is reasonable to presume that persons will pick up copies and may seek to act on them will be communicating them.

01/07/2005

PERG 8.6.5

The Financial Promotion Order contains an exemption for mere conduits in article 18. It does not follow that all persons who provide services for facilitating the distribution of financial promotions are communicating. Where persons of this kind would normally be unaware of the fact that they may be distributing financial promotions or are indifferent as to whether they are doing so, or both, they will not be regarded as communicating them. This may, for example, include:

(1) postal services providers;

(2) telecommunication services providers;

(3) broadcasting services providers;

(4) courier services providers;

(5) persons employed to hand out or disseminate communications;

(6) a newsagent who sells newspapers and journals containing financial promotions.

In other cases, persons of this kind may need to rely on the mere conduit exemption (see PERG 8.12.18 G).

01/07/2005

Website operators

PERG 8.6.6

Where a website operator provides links to other sites he is not usually to be regarded as causing the communication of the contents of those other sites to persons who may use the links. See further guidance on Internet issues in PERG 8.22.

01/07/2005

Application of exemptions to persons causing a communication

PERG 8.6.7

A general point arises about causing and communicating on whether a particular exemption that applies to a communication made by a specified person also applies to a person who is causing that communication to be made. For example, article 55 of the Financial Promotion Order(Communications by members of professions) applies only to a communication by an exempt professional firm. This exemption may apply where a person ('P') requests an exempt professional firm ('E') to communicate an offer to a client of E. In this case, where P causes E to communicate, it is the FSA's view that the exemption that applies to E will also apply to P. This is because, as 'communicate' includes 'causing to communicate', the exemption applies where P causes the communication of the financial promotion by E.

01/10/2005

PERG 8.6.7A

The position of an unauthorised person ('U') who, in the course of business, causes an authorised person to communicate a financial promotion is somewhat different. This is because the authorised person ('A') is not subject to section 21 of the Act and so will not necessarily be communicating the financial promotion in circumstances in which an exemption would apply. To avoid any doubt about the application of section 21 to U, a specific exemption is provided in article 17A of the Financial Promotion Order (Communications caused to be made or directed by unauthorised persons). This exemption applies where U causes A to make or direct a real time financial promotion. It also applies to a non-real time financial promotion but only where the content is prepared by A. This means that U will remain subject to section 21 where, for example, he provides A with copies of a financial promotion for the purpose of A distributing them to other persons or where he is placing an advertisement in a publication issued by A.

01/10/2005

Application of exemptions to persons who communicate on behalf of others

PERG 8.6.8

Another general point arises about the scope of exemptions that apply only to financial promotions by a particular person. This is whether the exemption applies to the communication of a financial promotion by an unauthorised person on behalf of the person to whom the exemption applies. In the FSA's view, this will not be the case unless the exemption specifically states that it applies to a communication made on behalf of the person identified in the exemption. For example, article 62 (Sale of body corporate) applies to 'any communication by or on behalf of a body corporate'.

01/07/2005

Meaning of 'made to', 'directed at' and 'recipient'

PERG 8.6.9

Section 21(1) of the Act refers only to the communication of an invitation or inducement. It says nothing about communications being 'made to' or 'directed at' persons or about who the 'recipient' of a communication will be. These facts are determined by the following sequence:

(1) section 21(13) of the Act indicates that communications are 'made';

(2) article 6 of the Financial Promotion Order (Interpretation: communications) indicates that communications are made by being 'addressed to' a person;

(3) article 6 then indicates that communications may be addressed:

(a) to a particular person or persons whether verbally or in a legible form (for example, in a telephone call or letter) - these are referred to as communications which are 'made to' persons; or

(b) to persons generally (for example, in a television broadcast or on a website) - these are referred to as communications which are 'directed at' persons;

(4) article 6 also indicates that a recipient of a communication is the person to whom the communication is made, or, in the case of a non-real time communication directed at persons generally, anyone who reads or hears the communication.

01/07/2005

PERG 8.6.10

In the FSA's opinion, the matters in PERG 8.6.9 G have the following effects.

(1) Any one particular communication will either be real time or non-real time but not both. This is because:

(a) a real time communication is one made in the course of an interactive dialogue (see PERG 8.10.2 G for guidance on the meaning of real time);

(b) those exemptions which concern real time communications apply only to communications which are made to persons and not those which are directed at persons;

(d) the persons to whom a real time communication is addressed are those persons who take part in the interactive dialogue; and

(e) where a communication is addressed to a particular person or persons it is not made to anyone else who may read or hear it.

This means that a real time communication cannot also be a non-real time communication made to persons other than those to whom it is addressed. But it is possible for the same communication to be issued in different forms. For example, the text of a real time financial promotion may be made available to persons generally in writing intending to persuade or incite them to engage in investment activity. In that case, the written version will be a separate non-real time financial promotion which will need to be approved or exempt. A similar situation may arise where a real time financial promotion made during a meeting is recorded on video and then made available to the public. Also, a person may, in the course of an interactive dialogue with a particular person, address an invitation or inducement to others who may be present. Where this does not result in an interactive dialogue taking place with those other persons, the invitation or inducement will be a separate non-real time communication.

(2) A communication in the form of a letter or e-mail addressed to a particular person is not made to anyone else who, legitimately or otherwise, may read it. For example, it will not be made to any persons to whom it is copied unless any invitation or inducement that may be in it is addressed also to those persons.

(3) A communication in the form of a personal conversation or telephone call will not be communicated to anyone else who may eavesdrop or otherwise listen to the conversation.

(4) The recipient of a communication to whom it is addressed, will not always be the person who physically receives it. As a communication under section 21 is an invitation or inducement to engage in investment activity, it will be addressed to the person or persons (P) who is or are being invited or induced. An invitation or inducement may be communicated to someone such as a friend or relative of P who is asked to pass it on. If so, the communication will be regarded as addressed to P and not to the friend or relative. The same will usually apply where an invitation or inducement is communicated to P's adviser or other agent. However, this will not always be the case. The communication made to the agent may be aimed at getting him to act in a particular way. For example, to exercise discretion on his client's behalf. In this case, the communication may be an invitation or inducement to the agent himself to engage in investment activity, In the FSA's view, the friend, relative or agent should not himself be regarded as communicating the invitation or inducement simply because he faithfully relays the message to P. This is provided that the friend, relative or adviser, in relaying the message, does not make his own invitation or inducement. Friends and relatives would not, in any case, be communicating in the course of business. Should agents be making their own financial promotions in relaying messages, it is likely that the exemptions for one-off financial promotions in articles 28 and 28A of the Financial Promotion Order will apply.

(5) It is important to consider whether any particular financial promotion is 'made to' or 'directed at' persons as some exemptions in the Financial Promotion Order apply only to financial promotions which are made to persons.

01/07/2005

PERG 8.7

Engage in investment activity

01/07/2005

PERG 8.7.1

A communication must be an invitation or inducement to engage in investment activity for the restriction in section 21 to apply. Section 21(8) defines this phrase as:

(1) entering or offering to enter into an agreement the making or performance of which by either party is a controlled activity; or

(2) exercising any rights conferred by a controlled investment to acquire, dispose of, underwrite or convert a controlled investment.

01/07/2005

PERG 8.7.2

Controlled activity and controlled investment are defined in Schedule 1 to the Financial Promotion Order and are listed in PERG 8.36.3 G and PERG 8.36.4 G. Broadly speaking, controlled activities and controlled investments are similar to regulated activities and specified investments under the Regulated Activities Order. However, with controlled activities, the exclusions set out in the Regulated Activities Order do not, in most cases, apply. It is important to note, however, that there are certain differences between controlled activities and regulated activities and between controlled investments and specified investments. This is most notable where the financial promotion is about:

(1) certain credit agreements (see PERG 8.17 (Financial promotions concerning agreements for qualifying credit));

(2) funeral plan contracts (see PERG 8.16 (Financial promotions concerning funeral plans)); and

(3) contracts of insurance other than life policies (see PERG 8.17A (Financial promotions concerning insurance mediation activities)).

So, it is quite possible for a person to be carrying on a business in the United Kingdom for which he does not require authorisation because the business activity either is not connected with financial services or falls within one of the exclusions in the Regulated Activities Order but find that the restriction in section 21 applies to his communications. It should also be noted that e-money is not a controlled investment. This means that the restriction in section 21 does not apply to the communication of an invitation or inducement that concerns e-money. This is unless the communication is a financial promotion for some other reason.

01/07/2005

PERG 8.7.3

The overall effect is that a financial promotion must relate in some way to a controlled investment and may be summarised as the communication, in the course of business, of an invitation or inducement to:

(1) acquire, dispose of or underwrite certain investments or exercise rights conferred by such an investment for such purpose or for the purpose of converting it; or

(2) receive or undertake investment services such as dealing in investments as principal or as agent, managing investments, advising on investments or safeguarding and administering investments.

01/07/2005

PERG 8.7.4

So a financial promotion will not include an invitation or inducement to:

(1) refrain from doing any of the things in PERG 8.7.3 G; or

(2) exercise rights conferred by an investment other than to acquire, dispose of, underwrite or convert an investment.

This means that most invitations or inducements to exercise voting rights will not be financial promotions.

01/07/2005

PERG 8.7.5

In the FSA's opinion, section 21 will apply to a communication (made in the course of business) if it contains an invitation or inducement to engage in investment activity which is addressed to a particular person or to persons generally. Where this is the case, it will not matter that the communication may be physically delivered to someone other than the person who is intended to engage in investment activity. PERG 8.6.10 G gives more guidance on this.

01/07/2005

PERG 8.8

Having an effect in the United Kingdom

01/07/2005

PERG 8.8.1

Section 21(3) of the Act states that, in the case of a communication originating outside the United Kingdom, the restriction in section 21(1) applies only if it is capable of having an effect in the United Kingdom. In this respect, it is irrelevant whether the communication has an effect provided it is capable of doing so.

01/07/2005

PERG 8.8.2

This appears to give a potentially broad jurisdictional scope to section 21. It seems clear that a communication which originates overseas will be capable of having an effect in the United Kingdom if it is an invitation or inducement to engage in investment activity which is communicated to a person in the United Kingdom. It would seem that communications made in other circumstances may also be capable of having an effect in the United Kingdom. However, the exemption for communications to overseas recipients in article 12 of the Financial Promotion Order (Communications to overseas recipients) (see PERG 8.12.2 G) prevents section 21 from applying to communications which are not directed at persons in the United Kingdom.

01/07/2005

PERG 8.8.3

Where communications by persons in another EEA State are made to or directed at persons in the United Kingdom account must be taken of the effect of any relevant EU Directives. For example, the E-Commerce Directive will, with limited exceptions, prevent the United Kingdom from imposing restrictions on incoming financial promotions in information society services. The Treasury has given effect to this through the Financial Promotion Order (see PERG 8.12.38 G ). Other potentially relevant directives include the Television Without Frontiers Directive (89/552/EEC). This prevents the United Kingdom from restricting the re-transmission in the United Kingdom of television broadcasts from other EEA States. The Financial Promotion Order does not have any specific provisions about the Television Without Frontiers Directive. However, it is not intended to block incoming television programmes from other EEA States. The FSA will take this into account in interpreting the Financial Promotion Order and enforcing the restriction in section 21 of the Act.

01/10/2005

PERG 8.9

Circumstances where the restriction in section 21 does not apply

01/07/2005

PERG 8.9.1

Section 21(2) of the Act sets out two circumstances in which a financial promotion will not be caught by the restriction in section 21(1). These are where the communicator is an authorised person or where the content of the financial promotion has been approved for the purposes of section 21 by an authorised person. Where approval is concerned it must be specifically for the purposes of enabling the financial promotion to be communicated by unauthorised persons free of the restriction under section 21. For example, if a solicitor who is an authorised person approves a financial promotion for legality generally, that would not suffice unless the solicitor also specifically approves the financial promotion for the purposes of section 21. And it will not be enough that an authorised person has ensured that the financial promotion complies with the appropriate financial promotion rules purely so that he can communicate it himself. In the FSA's view an unauthorised person should be able to rely on a statement made by an authorised person on the face of a financial promotion that its approval has been given for the purpose of section 21. Such approval may be stated to be made for limited purposes. For example, as with the approval of a financial promotion for an unregulated collective investment scheme (see PERG 8.20). In other cases, the unauthorised person may satisfy himself that it is evident from the facts that approval has been given for the purposes of section 21.

06/01/2008

PERG 8.9.2

Where an authorised person makes a financial promotion, he is not subject to the restriction in section 21. So, the communication of the financial promotion by the authorised person will not be a criminal offence under the provisions of section 25 of the Act (Contravention of section 21) and any resulting contract will not be unenforceable under section 30 of the Act (Enforceability of agreement resulting from unlawful communications). However, the appropriate financial promotion rules may apply wholly or partially to any such financial promotion.

06/01/2008

PERG 8.9.3

An unauthorised person may wish to pass on a financial promotion made to him by an authorised person. In this case, the fact that the financial promotion was made to him by an authorised person will not be enough for the restriction in section 21 not to apply to him. The authorised person must also both have approved its content and have done so for the purpose of section 21 of the Act. If an authorised person wishes to ensure that an unauthorised person can communicate a financial promotion made by the authorised person to third parties, it may approve its own financial promotion for the purposes of section 21 of the Act (see COBS 4.10.3G (2)).

06/05/2008

PERG 8.9.4

With approval generally, issues may arise as to what would be subject to the restrictions in section 21 where an invitation or inducement to engage in investment activity is made through a publication, broadcast or website or is accompanied by other material. In any such instances, it is necessary to consider the circumstances in which the financial promotion is made. For example, where a financial promotion takes the form of an advertisement or advice in a newspaper, broadcast or website, the rest of the newspaper, broadcast or website would not ordinarily be part of the financial promotion. There may, of course, be a number of financial promotions in the same publication, broadcast or website. They will be regarded as separate financial promotions unless it is clear that they are part of the same invitation or inducement. PERG 8.4.28 G offers guidance about when accompanying material may be part of a financial promotion.

01/07/2005

PERG 8.9.5

The restriction in section 21 is also disapplied by means of an order made under section 21(5) (the Financial Promotion Order). This contains a number of specific exemptions which are referred to in PERG 8.12 to PERG 8.15, PERG 8.17 and PERG 8.21.

01/10/2005

PERG 8.10

Types of financial promotion

01/07/2005

PERG 8.10.1

Although the restriction in section 21 addresses all forms of financial promotion, it is necessary to distinguish between particular types of financial promotion as these are treated differently under the Financial Promotion Order. This regime recognises two types of financial promotion. These are real time and non-real time financial promotions. Real time financial promotions are then divided into solicited or unsolicited real time financial promotions.

01/07/2005

Real time v non-real time financial promotions

PERG 8.10.2

The terms real time financial promotion and non-real time financial promotion are defined in article 7 of the Financial Promotion Order (Interpretation: real time communications). Article 7(1) defines a real time financial promotion as a financial promotion made in the course of a personal visit, telephone conversation or other interactive dialogue. A non-real time financial promotion is one that is not a real time financial promotion. Article 7(5) states that financial promotions made by letter or e-mail or in a publication (defined in article 2 (Interpretation: general) as a newspaper, journal, magazine or other periodical publication, a website, a television or radio programme or a teletext service) are non-real time financial promotions. Articles 7(4) and (5) provide certain indicators that a financial promotion is a non-real time financial promotion. These are that:

(1) the financial promotion is made to or directed at more than one recipient in identical terms (save for details of the recipient's identity);

(2) the financial promotion is made or directed by way of a system which in the normal course is or creates a record of the financial promotion which is available to the recipient to refer to at a later time; and

(3) the financial promotion is made by way of a system which in the normal course does not enable or require the recipient to respond to it immediately.

PERG 8.6.9 G explains the meaning of 'made to' and 'directed at'.

01/07/2005

PERG 8.10.3

In the FSA's view, the matters identified in PERG 8.10.2 G mean that:

(1) for a communication to be real time it must be made in course of an interactive dialogue; but that

(2) if the interactive dialogue takes place by means of the exchange of letters or e-mails or in a publication, the communication will be deemed to be non-real time. In this case, publications include newspapers, journals, magazines or other periodical publications, websites or similar systems for the electronic display of information, television or radio programmes and teletext services.

01/07/2005

PERG 8.10.4

The words 'personal visit, telephone conversation or other interactive dialogue' clearly imply that the first two are types of the third. In the FSA's view, it is difficult to envisage circumstances in which a personal visit or telephone conversation would not be interactive. The very fact of a conversation taking place would mean two or more persons were interacting with each other. A telephone call is not the same thing as a conversation. It may be made to, or even by, an intelligent machine which asks questions and responds to answers. That is, in the FSA's view, no more an interactive dialogue than a questionnaire or an electronic decision tree. The FSA cannot see how a scripted call can avoid being an interactive dialogue. The caller presumably has prompts as to what to say depending on the response given or question asked by the recipient of the call. However, the recipient is clearly able to and likely to interact and the degree of interaction cannot be determined in advance.

01/07/2005

PERG 8.10.5

In the FSA's view, the fact that scope for interaction is essential if a financial promotion is to be real time leads to the following conclusions.

(1) Most communications made in written or pictorial form will not offer scope for interaction. The most likely exception to this is where persons are expected to respond immediately. This situation may arise, for example, where the equivalent of a telephone conversation is conducted by e-mail. This is the basis of the exemption in article 20A(1)(b)(ii) (see PERG 8.12.37 G). However, the only communications in written or pictorial form which can be real time communications are those which are not contained in a letter, e-mail or publication. This results from article 7(3) as explained in PERG 8.10.2 G and PERG 8.10.3G (2).

(2) The factors in article 7(5), whilst they are helpful as indicators, do not necessarily have to be satisfied for a communication to be non-real time provided it does not represent an interactive dialogue. For example, in the FSA's view, a broadcast made by megaphone from a moving vehicle or temporary chalk markings on a board are non-real time communications even though there may be no lasting record.

(3) Some oral communications will not involve an interactive dialogue. This is because:

(a) they are recorded or broadcast, so preventing interaction; or

(b) they represent a one-way flow such as a speech, address or presentation.

01/07/2005

PERG 8.10.6

An issue arises where a person (P), during the course of a presentation or meeting, invites or is asked to answer questions from the audience. P's response may or may not be a real time communication. For example, the question may not be personal to the questioner and P may respond by addressing the audience in a way that precludes or does not call for any interaction. This will be a non-real time communication. On the other hand, the question may call for P to pursue a conversation with the questioner, in which case the communication will be an interactive dialogue and a real time communication. In this case, the communication will not involve a non-real time communication made to or directed at the rest of the audience as it is addressed and made to the questioner. It may be that P, in the course of an interactive dialogue with a questioner, makes an invitation or inducement that is addressed to the audience as a whole. This will be a separate communication that will be non-real time. Any handout or slide or other visual aids used during the presentation will be non-real time communications.

01/07/2005

PERG 8.10.7

In the FSA's view, a communication which may exist in enduring form will be a non-real time communication. Examples of this include videos, audio cassettes, bulletin boards, websites and recorded telephone messages. Messages placed on Internet chat-rooms will also be non-real time. Radio or television programmes or teletext services may contain communications that involve an interactive dialogue. For example, a communication made by the broadcaster and addressed to an interviewee studio guest, a member of the audience or a person who speaks to the broadcaster by telephone. These will always be non-real time communications. This is again the effect of article 7(3) as explained in PERG 8.10.2 G and PERG 8.10.3G (2). Broadcasters may be able to use the exemption for journalists in article 20 of the Financial Promotion Order (see PERG 8.12.23 G). Interviewee studio guests, if they make financial promotions during a broadcast, may be able to use the exemption in article 20A of the Financial Promotion Order (Promotion broadcast by company director etc) (see PERG 8.12.32 G).

01/07/2005

Solicited v unsolicited real time financial promotions

PERG 8.10.8

Article 8(1) of the Financial Promotion Order (Interpretation: solicited and unsolicited real time communications) states that a real time financial promotion is solicited where it is made in the course of a personal visit, telephone conversation or other interactive dialogue which was initiated by or takes place in response to an express request from the recipient. An express request for these purposes may have been made before section 21 entered into force. An unsolicited real time financial promotion is any real time financial promotion which is not solicited.

01/07/2005

PERG 8.10.9

Article 8(3) of the Financial Promotion Order clarifies that a person will not have expressly requested a call, visit or dialogue merely:

(1) because he does not indicate that he does not wish to receive any or any further visits or calls or to engage in any or any further dialogue; or

(2) because he agrees to standard terms that state that such visits, calls or dialogue will take place, unless he has signified clearly that, in addition to agreeing to the terms, he is willing for the visit, call or dialogue to take place.

01/07/2005

PERG 8.10.10

Article 8(3) of the Financial Promotion Order also has the effect in broad terms that financial promotions made during a visit, call or dialogue will be solicited only if they relate to controlled activities or controlled investments of the kind to which the recipient envisaged that they would relate. In determining whether this is the case, account must be taken of all the circumstances when the call, visit or dialogue was requested or initiated. For example, a person may ask for a visit from a representative of an investment product company with a view to receiving advice on an appropriate pension product. In this case, the representative would be likely to be making an unsolicited real time financial promotion if, during conversation, he attempts to persuade or incite the recipient to make an investment which would not be for the purposes of pension provision.

01/07/2005

PERG 8.10.11

PERG 8.6.9 G explains that article 6 of the Financial Promotion Order has the broad effect that a communication is made to another person where it is addressed to a particular person or persons. It also states that a 'recipient' of a communication is the person or persons to who it is made (that is to whom it is addressed). This takes on importance where certain exemptions which apply to real time financial promotions made to a person are concerned. It appears to the FSA that, in certain situations, a person may make a financial promotion to someone who has expressly asked that it be made or who has initiated it but where, at the same time, it is also made (that is addressed) to persons who may have not requested or initiated it. For example, a married couple may visit their financial adviser. One partner may request or initiate the dialogue which the adviser then addresses to both. Article 8(4) of the Financial Promotion Order recognises this and has the effect that an unsolicited real time financial promotion will have been made to the persons other than the person who expressly asked for or initiated the call, visit or dialogue in which it was made unless they are:

(1) close relatives of that person (that is, a person's spouse, children and step-children, parents and step-parents and brothers and sisters and step-brothers and step-sisters, including a spouse of any of those persons); or

(2) expected to engage in any investment activity jointly with that person.

01/07/2005

PERG 8.10.12

In the FSA's view, persons who may be engaging in investment activity jointly include:

(1) a married couple;

(2) two or more persons, who will invest jointly in a product (for example, a cohabiting couple who are not married or members of a family);

(3) the directors of a company or partners in a firm;

(4) members of a group of companies;

(5) the participants in a joint commercial enterprise;

(6) the members of an investment club; and

(7) the managers or prospective managers of a company who are involved in a management buy-out or buy-in.

01/07/2005

PERG 8.10.13

There will be occasions when financial promotions are received by persons other than those in PERG 8.10.11G (1) or PERG 8.10.11G (2) who will not have solicited them. For example, a more distant relative or friend ('F') who acts as a support to the person who is to engage in investment activity ('P') or P's professional adviser ('A'). As explained in PERG 8.6.10 G, in such cases the financial promotion will not be made to F or A unless it is also addressed to them. And it will only be addressed to F or A if the invitation or inducement relates to F or A engaging in investment activity. So a solicited financial promotion made to P will not also be an unsolicited financial promotion made to F or A.

01/07/2005

PERG 8.10.14

In the FSA's view, the mere fact of a person accepting an invitation to attend a meeting does not automatically mean that he has initiated any dialogue which may take place during the meeting and which may amount to a financial promotion. This will depend on the facts of each case and such matters as the manner in which the invitations are made, the arrangements for acceptance and how the meeting is conducted. For example, the fact that investments or investment services will be offered during the meeting may be made clear in the invitation.

01/07/2005

PERG 8.11

Types of exemption under the Financial Promotion Order

01/07/2005

PERG 8.11.1

The various exemptions in the Financial Promotion Order are split into three categories:

(1) exemptions applicable to all controlled activities (Part IV of the Order);

(2) exemptions applicable only to controlled activities concerning deposits and contracts of insurance other than life policies (Part V of the Order); and

(3) exemptions applicable to any other types of controlled activity (Part VI of the Order).

01/07/2005

PERG 8.11.2

Each individual exemption indicates the type of financial promotion (for example, non-real time) to which it relates. PERG 8.36.6 G contains a table showing this breakdown. Each exemption also indicates whether it applies to any communication or only to those made to or directed at persons.

01/07/2005

PERG 8.11.3

Article 11 of the Financial Promotion Order (Combination of different exemptions) allows for certain exemptions to be combined when no single exemption may apply. The overall effect of article 11 is that any relevant exemptions may be combined except where the conditions applicable to an exemption prevent this (see PERG 8.11.4 G).

01/10/2005

PERG 8.11.4

In a few instances, the requirements of a particular exemption may affect the practicality of its being combined with another. These are article 12 (Communications to overseas recipients) and article 52 (Common interest group of a company). Article 12, for example, requires that financial promotions must be made to or directed only at overseas persons and certain persons in the United Kingdom. This presents no difficulty with article 12 being combined with other exemptions in Parts IV or VI of the Financial Promotion Order where financial promotions are being made to persons. But, where a financial promotion is directed at the persons mentioned in article 12, it is difficult to see how the requirement that it must be directed only at those persons can be satisfied if it is also directed at other persons under another exemption. However, in the FSA's view, this does not prevent the same financial promotion being communicated under another exemption in another form or at any other time. For example, an electronic version of a financial promotion may be directed at overseas persons from a person's website in the United Kingdom using article 12. That person may then use another exemption to send paper copies of the same financial promotion.

01/07/2005

PERG 8.11.5

A number of exemptions require that a financial promotion must be accompanied by certain indications. Article 9 of the Financial Promotion Order states that indications must be presented in a way that can be easily understood and in such manner as is 'best calculated' to bring the matter to the recipient's attention. In the FSA's opinion, the expression 'best calculated' should be construed in a sensible manner. It does not, for instance, demand that the indication be presented in bold red capitals at the start of a document or advertisement. If the indication is given enough prominence, taking account of the medium through which it is communicated, to ensure that the recipient will be aware of it and able to consider it before deciding whether to engage in investment activity, the FSA would regard article 9 as being satisfied.

01/07/2005

PERG 8.11.6

Some exemptions are based on the communicator believing on reasonable grounds that the recipient meets certain conditions. For example, articles 19(1)(a), 44, 47 and 49. What are reasonable grounds for these purposes will be a matter for the courts to decide. In the FSA's view, it would be reasonable for a communicator to rely on a statement made by a potential recipient that he satisfies relevant conditions. This is provided that there is no reason to doubt the accuracy of the statement. In case of doubt, further checks may be necessary. These could include:

(1) checking on the record kept by the FSA under section 347 of the Act (The record of authorised persons etc) that a person is authorised; or

(2) checking with a person's employer that he is employed in a particular capacity; or

(3) in the case of a person claiming to be a certified high net worth individual or a sophisticated or self-certifiedsophisticated investor, asking to see a copy of the current certificate.

01/10/2005

PERG 8.12

Exemptions applying to all controlled activities

01/07/2005

PERG 8.12.1

Part IV of the Financial Promotion Order contains several exemptions which apply to all controlled activities. These are summarised in PERG 8.12.2 G to PERG 8.12.38 G.

01/07/2005

Financial promotions to overseas recipients (article 12)

PERG 8.12.2

This exemption concerns financial promotions which are made to or directed only at overseas persons (except in the circumstances referred to in PERG 8.12.8 G).

01/07/2005

PERG 8.12.3

The exemption applies to situations where a financial promotion is either:

(1) made to a person who receives it outside the United Kingdom; or

(2) directed at persons who are outside the United Kingdom.

01/07/2005

PERG 8.12.4

The exemption applies whether or not the financial promotion is made from the United Kingdom. However, there is the exception that, if it is an unsolicited real time financial promotion, it must be made from a place outside the United Kingdom and be for the purposes of a business carried on entirely outside the United Kingdom. To give effect to the principle of country of origin regulation of information society services as required by the E-Commerce Directive, article 12(7) of the Financial Promotion Order prevents the exemption applying to an outgoing electronic commerce communication.

01/11/2007

PERG 8.12.5

Articles 12(3) and (4) of the Financial Promotion Order (subject to article 12(5) - see PERG 8.12.8 G) have the effect that, where a financial promotion is directed from a place outside the United Kingdom, it will be conclusive proof that it is not directed at persons in the United Kingdom even if it is received by a person in the United Kingdom, if:

(1) the financial promotion is not referred to in or directly accessible from another communication (for example, an advertisement in a UK newspaper or a UK website) which is itself made to or directed at persons in the United Kingdom by the overseas person who is directing it; and

(2) there are proper systems and procedures in place to prevent recipients in the United Kingdom other than persons to whom the communication might otherwise lawfully have been made from engaging in the investment activity to which the financial promotion relates with the overseas person or his close relative or group company.

01/10/2005

PERG 8.12.6

There is no definition in the Financial Promotion Order of what 'proper systems and procedures' are, and the matter will ultimately be for the courts to determine. This is unsurprising as systems and procedures may take many different forms depending upon the precise circumstances in which financial promotions are made. But it is clear that persons seeking conclusive proof that the exemption applies must consciously make arrangements to prevent their dealing with certain recipients in the United Kingdom. In the FSA's view, proper systems and procedures will involve arrangements for scrutinising enquirers or applications with a view to identifying persons who are located in the United Kingdom and are not persons to whom the communication could lawfully have been made. Persons to whom the financial promotion could lawfully have been made does not mean only those covered by article 12. For example, depending on the controlled investment which the financial promotion is about, they could include a certified high net worth individual or a sophisticated investor. Such arrangements may be conducted manually using a questionnaire or electronically through password-protected access to information or the programming of software to recognise and reject United Kingdom addresses or both. The need for proper systems and procedures does not automatically mean that there will no longer be conclusive proof should, on isolated occasions, the systems or procedures fail to prevent dealings with a recipient in the United Kingdom. Provided the systems and procedures were and remain proper there will be conclusive proof that the exemption applies. A financial promotion from overseas might lead to a recipient in the United Kingdom engaging in investment activity with another group company (G) of the person (P) who makes the financial promotion. In this situation, it is not necessary that P operates the proper systems and procedures to get conclusive proof that the exemption applies. It will be enough that G operates the proper systems and procedures.

01/07/2005

PERG 8.12.7

Where a financial promotion is directed from within the United Kingdom, articles 12(3) and (4) also state (subject to article 12(5) - see PERG 8.12.8 G) that there can be conclusive proof that the financial promotion is directed only at persons outside the United Kingdom. This will be the case if, in addition to the conditions referred to in PERG 8.12.5G (1) and PERG 8.12.5G (2), the financial promotion is accompanied by an indication that:

(1) it is directed only at persons outside the United Kingdom; and

(2) it must not be acted upon by persons in the United Kingdom.

01/07/2005

PERG 8.12.8

In any case, some but not all of the conditions referred to in PERG 8.12.5G (1) to PERG 8.12.5G (2) and PERG 8.12.7G (1) to PERG 8.12.7G (2) (or the additional condition that the communication is included in a website, newspaper or periodical publication which is principally accessed in or intended for a non-UK market or in a radio or television broadcast or teletext service transmitted principally for reception overseas) may be met. In these cases, those conditions being satisfied will be taken into account in assessing whether the financial promotion is directed only at persons outside the United Kingdom. Even if none of the conditions are satisfied, it is still possible that a financial promotion which has been received by a person in the United Kingdom may properly be regarded as not having been directed at him. In the FSA's view, it will be an indication that a financial promotion in a website is directed at the United Kingdom if the website is registered with a UK search engine. Article 12(5) of the Financial Promotion Order also states that a financial promotion may be regarded as directed only at persons outside the United Kingdom where it is also directed at persons in the United Kingdom. This is provided those persons are limited to:

(1) investment professionals (article 19); or

(2) high net worth companies etc (article 49) ; or

(3) previously overseas customers of overseas communicators (article 31); or

(4) any combination of (1), (2) and (3).

Where a financial promotion is also directed at such persons in the United Kingdom the conclusive conditions referred to in PERG 8.12.5G (1) to PERG 8.12.5G (2) and PERG 8.12.7G (1) to PERG 8.12.7G (2) should be read as if references to persons to whom the financial promotion may be made or directed included investment professionals or high net worth companies etc. PERG 8.11.4 G explains how article 12 may be combined with other exemptions.

01/10/2005

Financial promotions from customers and potential customers (article 13)

PERG 8.12.9

Financial promotions made by a prospective customer to a person who supplies a controlled investment or services comprising controlled activities with a view to his acquiring the investment, or receiving the services or receiving information about those investments or services, are exempted. This exemption will only be of relevance to corporate customers or others who are acting in the course of business. Other types of customers will not be subject to section 21 to begin with.

01/07/2005

Follow up financial promotions (article 14)

PERG 8.12.10

Financial promotions other than unsolicited real time financial promotions are exempt where they follow up an earlier financial promotion which, in compliance with another exemption (such as that for promotions made to high net worth individuals or sophisticated investors - see PERG 8.14.21 G and PERG 8.14.27 G), contains certain indications or information. This is provided the financial promotion:

(1) is made by the person who made or directed the earlier financial promotion;

(2) is made to a recipient of the earlier financial promotion;

(3) relates to the same matter as the earlier financial promotion; and

(4) is made within 12 months of the earlier financial promotion.

This exemption does not help in situations where the original financial promotion was made or directed under an exemption which did not require it to include any indications or information. However, it is likely that, in many cases where no indications or information are required, the exemption to which the earlier financial promotion applies would also apply to any follow up financial promotion. The requirement that the follow up financial promotion be made by the person who made or directed the earlier one would seem to prevent use of the exemption by someone acting on behalf of that person. However, the earlier financial promotion may have been made or directed by an individual in his capacity as an officer or employee of a company or a partner or employee of a partnership. If so, the exemption will be satisfied if the follow-up financial promotion is made by another employee, director or partner of the same company or partnership.

01/07/2005

Introductions (article 15)

PERG 8.12.11

This exemption applies to any financial promotion that is made with a view to or for the purposes of introducing the recipient to certain kinds of person. These are authorised persons who carry on the controlled activity to which the financial promotion relates, or exempt persons where the financial promotion relates to a controlled activity that is also a regulated activity in relation to which he is an exempt person. This is subject to the requirement that:

(1) the person making the financial promotion ('P') is not a close relative or group company of the authorised or exempt person;
(2) P does not receive any financial reward for making the introduction other than from the recipient of the financial promotion; and
(3) the recipient of the financial promotion has not, in his capacity as investor, sought advice from P or, if he has, P has declined to provide it and has recommended that he seek advice from an authorised person.

For the purposes of (2), it is the FSA's view that P may be viewed as not receiving any financial reward other than from the recipient where P treats any commission or other financial benefit received from third parties to whom introductions are made as belonging to and held to the order of the recipient. P cannot simply tell the recipient that P will receive commission. The position must be that the commission belongs to the recipient and must be paid to him unless he agrees to its being kept by P. Where this occurs, the payment may be seen to be received by P from the recipient. In the FSA's opinion, the condition would be satisfied by P paying over to the recipient any third party payment he receives. Otherwise, it would be satisfied by P informing the recipient of the sum and that he has the right to require that the sum to be paid to him. This would allow the sum to be used to offset fees due from the recipient for other services provided to him by P. This could take the form of an agreement between P and the recipient that sums received by P will be used to offset any other fees due to P from the recipient. This is provided that P informs the recipient of sums which P has received and of the fees which they have been used to offset. However, it does not allow P to keep third party payments by seeking the recipient's agreement through standard terms and conditions. Similarly, a mere notification to the recipient that a particular sum has been received coupled with a request to keep it does not satisfy the condition.

01/10/2005

Exempt persons (article 16)

PERG 8.12.12

This exemption covers twodistinct situations. Article 16(1) applies to all exempt persons where they make financial promotions for the purpose of their exempt activities. These persons would include appointed representatives, recognised investment exchanges, recognised clearing houses and those who are able to take advantage of the Exemption Order. So, it allows exempt persons both to promote that they have expertise in certain controlled activities and to make financial promotions in the course of carrying them on. Article 16(1) does not apply to unsolicited real time financial promotions. Persons to whom the general prohibition does not apply because of Part XX (Provision of financial services by members of the professions) or Part XIX (Lloyd's members and former underwriting members) of the Act are not, for the purposes of article 16, exempt persons for their Part XX or Part XIX activities.

01/07/2005

PERG 8.12.13

Article 16 (2) applies to unsolicited real time financial promotions made by an appointed representative in carrying on the business:

(1) for which his principal has accepted responsibility for the purposes of section 39 of the Act (Exemption of appointed representatives); and

(2) in relation to which the appointed representative is exempt under section 39.

In addition, the financial promotion may only be made in the circumstances in which it could be made by the appointed representative's principal under the appropriate financial promotion rules. This ensures a level playing field as between employed and tied sales forces. This exemption may be of particular use to telephone sales agencies who will often need to be appointed representatives of investment product companies.

06/01/2008

Generic promotions (article 17)

PERG 8.12.14

Under this exemption, the financial promotion itself must not relate to a controlled investment provided by a person who is identified in it, nor must it identify any person as someone who carries on any controlled activity. So, it will apply where there is a financial promotion of a class of products. For example 'ISAs are great' or 'buy into an investment trust and help the economy'. Such financial promotions may be made by a person such as a trade association which is not itself carrying on a controlled activity. But this is provided there is no mention of any particular ISA or investment trust or of any person who may give advice on or arrange, sell or manage such investments.

01/07/2005

PERG 8.12.15

The exemption can also be used in certain circumstances where an intermediary is advertising its services as an intermediary. This is because advising on and arranging deposits and contracts of insurance other than life policies are not controlled activities. This means that an unauthorised intermediary offering to find the best rates on deposits may identify himself in the financial promotion as he will not be carrying on a controlled activity. This is provided that the financial promotion does not identify any particular deposit-taker. The same considerations would apply to an authorised intermediary who offers to advise on the best available motor insurance.

01/07/2005

PERG 8.12.16

Other persons may be able to take advantage of the exemption. For example, a person making a generic financial promotion may identify himself, whether he may carry on a controlled activity or not. This is provided that the financial promotion does not (directly or indirectly) identify him as someone who carries on a controlled activity.

01/07/2005

PERG 8.12.17

Journalists may be able to take advantage of this exemption when writing about investments generally. But the exemption would not apply if the financial promotion recommends the purchase or sale of particular investments such as XYZ Plc shares. This is because it will be identifying XYZ Plc as a person who provides the controlled investment (being its shares) and as a person who carries on the controlled activity of dealing in securities and contractually based investments (by issuing its own shares). Nor would the exemption apply if the financial promotion identifies an exchange on which investments are traded. That would indirectly identify the exchange as a person who carries on the controlled activities of dealing in securities or contractually based investments or arranging deals in investments. Journalists may also be able to use the exemption for journalists in article 20 (See PERG 8.12.23 G).

01/07/2005

Mere conduits (article 18 and 18A)

PERG 8.12.18

The purpose of these exemptions is to ensure that, subject to certain conditions, the restriction in section 21 of the Act does not apply to those who merely transport the financial promotions of other persons. Obvious examples here are postal and Internet service providers, courier companies and telecommunications companies. PERG 8.6.5 G explains that such persons may not be regarded as communicating a financial promotion simply because they have distributed it. Article 18 (Mere conduits) does not apply to the person who causes the mere conduit to make the communication. Neither does itapply where the financial promotion is an electronic commerce communication that is, or will be, communicated from an establishment in the United Kingdom to a person in an EEA State other than the United Kingdom. A person acting as a mere conduit for financial promotions of this kind will, however, be able to use article 18A (Outgoing electronic commerce communications: mere conduits, caching and hosting). Article 18A is not subject to the conditions that apply to other forms of mere conduit (as referred to in PERG 8.12.19 G and PERG 8.12.20 G). However, it does require compliance with the conditions in articles 12(1), 13(1) and 14(1) of the E-Commerce Directive that relate to the liability of intermediary service providers.

01/11/2007

PERG 8.12.19

The conditions in article 18(2) include a requirement that the person making the financial promotion does not select, modify or otherwise exercise control over its content before it is transmitted or received. Article 18(3) provides that a person is not selecting, modifying or exercising control merely as a result of having power to remove material which is illegal, defamatory or in breach of copyright or at the request of a regulatory body or where the law requires him to do so. However, in the FSA's view, the control normally exercised by newspaper publishers or broadcasters over traditional forms of advertising they carry is likely to be enough for the exemption not to be available to such persons.

01/07/2005

PERG 8.12.20

The conditions in article 18 also require that the person acting as the mere conduit must communicate in the course of an activitycarried on by him the principal purpose of which is transmitting or receiving material provided to him by others. In the FSA's view, what matters is that the person is carrying on an activity which has the required principal purpose. Such an activity might represent but a part of a person's overall businessactivities (however small), so long as it represents a discrete activity. A discrete activity is an activity whose principal purpose is to receive and transmit other persons' communications and which is not simply an activity that is carried on incidentally or as an adjunct to another activity. For example, a person who operates a website will not be entitled to the exemption (should he be communicating financial promotions see PERG 8.6) simply because he chooses to provide a chatroom or bulletin board for the use of his customers.

01/10/2005

Investment professionals (article 19)

PERG 8.12.21

Financial promotions made only to or directed only at certain types of person who are sophisticated enough to understand the risks involved are exempt. These are:

(1) authorised persons;

(2) exempt persons (where the financial promotion relates to a controlled activity which is a regulated activity for which the person is exempt);

(3) governments and local authorities; and

(4) persons whose ordinary business involves carrying on a controlled activity of the kind to which the financial promotion relates and which may include:

(a) investment trust companies;

(b) companies which provide venture capital;

(d) other persons who carry on an activity such as dealing in, arranging or advising on investments but who do not require authorisation because of an exclusion in the Regulated Activities Order; and

(e) professional firms who are exempt under Part XX of the Act.

This also includes persons acting in their capacity as directors, officers or employees of such persons.

01/07/2005

PERG 8.12.22

Article 19(4) sets out conditions which, if all are satisfied, offer conclusive proof that a financial promotion is directed only at investment professionals. These conditions relate to indications accompanying the financial promotion and the existence of proper systems and procedures. The guidance about proper systems and procedures in PERG 8.12.6 G applies equally to article 19. Article 19(6) specifically states that a financial promotion may be treated as made only to or directed only at investment professionals even is it is also made to or directed at other persons to who it may lawfully be communicated. This would include overseas persons and high net worth companies, etc. Where this is the case, the conditions in article 19(4) should, in the FSA's view, be satisfied if:

(1) the indications make it clear that the financial promotion is directed only at investment professionals and other persons to whom it may lawfully be promoted; and

(2) the systems and procedures are designed to prevent persons other than such types of persons engaging in investment activity.

01/07/2005

Journalists (article 20)

PERG 8.12.23

The broad scope of the restriction in section 21 of the Act will inevitably mean that it will, from time to time, apply to journalists and others who make their living from commenting on news including financial affairs (such as broadcasters). This is liable to happen when such persons offer share tips or recommend the use of a particular firm for investment purposes. Such tips or recommendations are likely to amount to inducements to engage in investment activity.

01/07/2005

PERG 8.12.24

The Treasury, in making the Financial Promotion Order, noted that financial journalism has an important part to play in increasing consumer awareness of financial services and products. It further observed the need to strike the right balance between protecting consumers and ensuring that the level of regulation is as light as possible, while respecting the principle of the freedom of the press.

01/07/2005

PERG 8.12.25

With this objective in mind, the exemption in article 20 applies to any non-real time financial promotion the contents of which are devised by a person acting as a journalist where the financial promotion is in:

(1) a newspaper, journal, magazine or other periodical publication;

(2) a regularly updated news or information service (such as a website or teletext service); or

(3) a television or radio broadcast or transmission.

In addition, the publication, service or broadcast must be one which satisfies the principal purpose test set out in article 54 of the Regulated Activities Order. This means that the principal purpose must not be to advise on or lead or enable persons to buy or sell securities or relevant investments. See PERG 7 for further guidance on this. Article 20 does not define what is meant by a person 'acting in the capacity of a journalist'. In the FSA's opinion, this expression has a potentially wide meaning. It will apply to anyone who writes for or contributes to a publication, service or broadcast. This includes experts or analysts who may be asked to contribute articles for a publication or website service or to offer their opinion in a broadcast.

01/10/2005

PERG 8.12.26

Provided the conditions in PERG 8.12.25 G are met, the exemption in article 20 applies to any non-real time financial promotion. However, there is an additional condition where the subject matter of the financial promotion is shares or options, futures or contracts for differences relating to shares and the financial promotion identifies directly a person who issues or provides such an investment. In such cases, the exemption is subject to a disclosure requirement which is itself subject to certain exceptions (see PERG 8.12.27 G). This requirement is that the financial promotion must be accompanied by an indication of the nature of any financial interest held by the person responsible for the promotion (that is, the journalist or editor) or member of his family (his spouse or children under 18). A financial interest would be subject to disclosure where the person or a member of his family would be likely to get a financial benefit or avoid a financial loss if persons acted in line with the financial promotion. Article 20 does not specify the way in which a financial interest should be indicated. In the FSA's view, a financial interest should be disclosed in a way that will enable recipients to understand readily its nature. For example, 'the writer has a substantial holding of traded call options in these shares'.

01/07/2005

PERG 8.12.27

The exceptions to the disclosure requirement are where the financial promotion is in either:

(1) a publication, service or broadcast which has proper systems and procedures which prevent the publication of communications without disclosure of financial interests; or

(2) a publication, service or broadcast which falls within the remit of:

(a) the Code of Practice issued by the Press Complaints Commission; or

(b) the OFCOM BroadcastingCode; or

01/10/2005

PERG 8.12.28

The effect of PERG 8.12.27G (2) is that financial promotions made by journalists in publications, services or broadcasts to which one of the codes or the guidelines apply are not subject to the disclosure requirement. This is so even if a financial promotion is made in breach of the codes or guidelines. Such financial promotions would remain to be dealt with by the body responsible for the code or guidelines and the publisher concerned. The code or guidelines may, of course, themselves require disclosure but the fact that they have been specified does not necessarily mean that they will or will always require disclosure. That is something which depends on the requirements of the particular code or guidelines.

01/07/2005

PERG 8.12.29

The effect of PERG 8.12.27G (1) is that a journalist will not breach section 21 by not disclosing a financial interest, providing that the publication, service or broadcast concerned operates proper systems and procedures. As with the exemption in article 12 of the Financial Promotion Order (see PERG 8.12.6 G), what proper systems and procedures are will be a matter ultimately for the courts to determine and may vary according to the medium used. It will depend upon all the circumstances surrounding the publication, service or broadcast. In the FSA's opinion, proper systems and procedures may achieve the objective of preventing the publication of communications without the required disclosure in one of two ways. They may require that disclosure be made. Or they may seek to prevent journalists from acting in a way which would enable them to profit if persons follow their published recommendations. For example, by banning their dealing in the shares or related investments for a reasonable period following the promotion. This would ensure that the journalist will not have a financial interest to disclose. For example, and in the FSA's opinion, a publication, service or broadcast may be likely to satisfy the test referred to in PERG 8.12.27G (1) if it has set up procedures:

(1) for persons responsible for devising the content of financial promotions, or for deciding that they should be included in the publication, service or broadcast, to register their financial interests in a central log;

(2) for the central log to be properly maintained and regularly reviewed;

(3) where disclosure is required, for all financial promotions to be subject to review before publication or broadcast by an appropriately qualified and senior person; and

(4) for the persons referred to in (1) to be made aware in writing of the procedures and of their obligations to disclose their financial interests or to refrain from any course of action which may be likely to give them a financial interest requiring disclosure and, preferably, to have confirmed their acceptance of those obligations in writing.

01/07/2005

PERG 8.12.30

Persons such as experts or analysts may be approached to contribute at very short notice and may be overseas. In such cases, the systems and procedures referred to in PERG 8.12.29 G may not be practical. It is the FSA's opinion that, where occasional contributors are concerned, proper systems and procedures may include arrangements for ensuring that the need for disclosure (or the avoidance of financial interests) is drawn to the contributor's attention before the communication is made. The contributor's confirmation that he understands and accepts the position on disclosure would also need to be obtained. The arrangements for bringing the position on disclosure to the contributor's attention and for obtaining his understanding and acceptance should be made in whatever way is most appropriate in the circumstances. In other cases, it may be enough that the persons responsible for the broadcast satisfy themselves that contributors represent reputable regulated businesses. And that it would be reasonable to believe that they would not seek to promote an investment or investment service in which they had a financial interest without disclosing that fact. This is, of course, merely an example and not the only circumstances in which overseas broadcasts may be regarded as having proper systems and procedures.

01/07/2005

PERG 8.12.31

It appears to the FSA , however, that there will be situations when it may not be practical for the persons who are responsible for a publication, service or broadcast to apply proper systems and procedures to every person who may, whilst acting in the capacity of a journalist, communicate a financial promotion. For example where persons are asked to stand in at the last moment. In such cases, it is the FSA's opinion that the benefit of the exclusion will not be lost as respects those persons who are subject to the proper systems and procedures. However, any financial promotions communicated by persons who are not subject to them would still be subject to the restriction in section 21 and would need to be approved by an authorised person or otherwise exempt.

01/07/2005

Promotion broadcast by company director etc (article 20A)

PERG 8.12.32

Article 20A provides a further exemption for certain financial promotions communicated by means of a service or broadcast which satisfies the principal purpose test in article 54 of the Regulated Activity Order (see PERG 8.12.25 G and PERG 7). Readers of this section should also refer to the guidance on company statements in PERG 8.21.

01/10/2005

PERG 8.12.33

The main purpose of the exemption appears to be to guard against the possibility that, during the course of a broadcast interview or a live website presentation, a financial promotion is made inadvertently by a director or employee of a company or other business undertaking when he is not acting in the capacity of a journalist (see PERG 8.12.25 G). The exemption applies if the financial promotion relates only to:

(1) shares of the undertaking or of another undertaking in the same group or options, futures or contracts for differences related to those shares; or

(2) any controlled investment issued or provided by an authorised person in the same group as the undertaking.

01/07/2005

PERG 8.12.34

The exemption applies where the financial promotion:

(1) comprises words which are spoken by the director or employee and not broadcast, transmitted or displayed in writing; or
(2) is displayed in writing only because it is part of an interactive dialogue to which the director or employee is a party and in the course of which he is expected to respond immediately to questions put by a recipient of the communication.

This is provided that the financial promotionis not part of an organised marketing campaign. PERG 8.14.4G (3) provides guidance on the meaning of an organised marketing campaign. In the context of article 20A, it is the FSA's view that an individual or isolated financial promotion will not represent or be part of an organised marketing campaign. However, a company representative may use a broadcast interview or webcast to encourage or incite viewers or listeners to acquire investments or investment services which are the subject of an advertising campaign being conducted at the same time. In such cases, any financial promotion contained in that interview or webcast will be part of an organised marketing campaign. Where this is the case, the company representative may be able to rely on other exemptions depending upon the subject matter of the financial promotion - see PERG 8.21.

01/07/2005

PERG 8.12.35

The exemption also requires that the director or employee is identified as such in the financial promotion before it is communicated.

01/07/2005

PERG 8.12.36

The first part of the exemption (referred to in PERG 8.12.34G (1)) specifically precludes any form of written communication. However, the FSA understands that the Treasury did not intend to prohibit the use of written words in the form of subtitling. These may be an aid to those with hearing difficulties or to interpret a foreign language, or the use of captions which supplement a spoken communication by highlighting aspects of it without introducing anything new. The FSA cannot fetter its discretion and must consider potential breaches of section 21 of the Act on their merits. However, where the only reason why a person may have breached section 21 of the Act is because he has used subtitling or captioning in this way the FSA would not expect to take further action. In the FSA's view, the position is different if a transcript of the spoken communication is later made available. This would be a separate communication and would need to be approved or otherwise exempt.

01/07/2005

PERG 8.12.37

The second part of the exemption (referred to in PERG 8.12.34G (2)) envisages that the director or employee will be holding the equivalent of a conversation conducted in writing. Typically this will involve the exchange of e-mails. It is possible that this part of the exemption could be used by companies making so-called webcasts over the Internet. However, this would only be the case if the service through which the webcast is provided is a regularly updated news or information service (and which meets the principal purpose test - see PERG 8.12.25 G). There is no reason why the exemption should not apply to a company website which provides regularly updated news or information about the activities, products or services of the company where the website represents a service provided to those who use it. However, not all company websites will be services of this kind.

01/07/2005

Incoming electronic commerce communications (article 20B)

PERG 8.12.38

Article 20B gives effect to the provisions of the E- Commerce Directive by exempting electronic commerce communications made from an establishment in an EEA State other than the United Kingdom to an ECA recipient in the United Kingdom. However, article 20B does not apply to the following communications:

(1) an advertisement by the operator of a UCITS of units in that scheme; or

(2) an invitation or inducement to enter into a contract of insurance where:

(a) it is made by an undertaking which has received official authorisation in line with article 4 of the Consolidated Life Directive or article 6 ofthe First Non-life Directive; and

(b) the insurance falls within the scope of any of the Insurance Directives; or

(3) an unsolicited communication made by electronic mail.

For the purposes of (3), a communication is unsolicited unless it is made in response to an express request from its recipient.

06/11/2008

PERG 8.13

Exemptions applying to financial promotions concerning deposits and certain contracts of insurance

01/07/2005

PERG 8.13.1

The exemptions in Part V of the Financial Promotion Order concern financial promotions relating to deposits and contracts of insurance other than life policies. The exemptions may be combined with exemptions in Part IV and Part VI (see PERG 8.11.3 G (Types of exemption under the Financial Promotion Order).

01/10/2005

PERG 8.13.2

Part V provides two kinds of exemption of a general nature and one specific exemption. The exemptions of a general nature are:

(1) any form of real time financial promotion (articles 23 (Deposits: real time communications) and 26 (Relevant insurance activity; real time communications)); and

(2) non-real time financial promotions containing certain specified information including the name, country of incorporation (if relevant) and principal place of business of the deposit-taker or insurer and whether it is regulated, details of any redress schemes and, for deposit-takers only, certain financial information (articles 22 (Deposits: non-real time communications) and 24 (Relevant insurance activity: non-real time communications)).

01/07/2005

PERG 8.13.3

Article 25 (Relevant insurance activity: non-real time communications: reinsurance and large risks) exempts financial promotions concerning contracts of insurance which are either contracts of reinsurance or contracts covering certain large risks.

01/07/2005

PERG 8.13.4

Intermediaries involved with arranging and advising on deposits may be unauthorised persons as such activities do not amount to regulated activities (other than where they involve giving basic advice on a stakeholder product (article 52A of the Regulated Activities Order (Giving basic advice on a stakeholder product))) and so do not require authorisation under section 19 of the Act. However, the combination of the exemptions in Part V together with certain of the exemptions in Part IV (such as generic promotions - see PERG 8.12.14 G - and follow up communications - see PERG 8.12.10 G) should mean that it will often be possible for such persons to avoid any need to seek approval for their financial promotions from an authorised person. Guidance on the application of these exemptions to financial promotions about insurance mediation activities is in PERG 8.17A (Financial promotions concerning insurance mediation activities).

01/07/2005

PERG 8.14

Other financial promotions

01/07/2005

PERG 8.14.1

The exemptions in Part VI apply to different types of financial promotion, and the exemption available may be based on a number of facts. These may be the identity of the maker of the financial promotion, the identity of the recipient of the financial promotion, the subject matter of the financial promotion or the nature of the financial promotion itself. Some of these exemptions apply to non-real time financial promotions, others to solicited real time financial promotions and others to unsolicited real time financial promotions. Many of the exemptions apply to more than one category of financial promotion. PERG 8.36.6 G contains a table showing which types of financial promotion are covered by each individual exemption.

01/07/2005

PERG 8.14.2

PERG 8.14.3 G to PERG 8.14.42 G describe some of the more significant exemptions contained in Part VI. See the Financial Promotions Order for full details of all the exemptions in Part VI.

01/07/2005

One-off financial promotions (articles 28 and 28A)

PERG 8.14.3

Article 28 exempts financial promotions, other than unsolicited real time financial promotions, which are one-off in nature. Whether or not any particular financial promotion is one-off in nature will depend upon the individual circumstances in which it is made. Article 28(3) sets out conditions which, if all are met, are conclusive. Otherwise they are indicative. Even if none are met the exemption may still apply. This makes it clear that the overriding issue is whether the financial promotion is, in fact, a one-off. The conditions are that:

(1) the financial promotion is made only to one recipient or to a group of recipients in the expectation that they would engage in investment activity jointly;

(2) the product or service involved has been determined having regard to the circumstances of the recipient or recipients; and

(3) the financial promotion is not part of an organised marketing campaign.

01/07/2005

PERG 8.14.4

The FSA considers the effect of each of the conditions in PERG 8.14.3G (1) to PERG 8.14.3G (3) to be as follows.

(1) The first condition requires the financial promotion to be made, so ruling out any financial promotions which are directed at persons. The effect of article 6(b) and (e) of the Financial Promotion Order is that a communication is made to a person when it is addressed to him and that person to whom the financial promotion is addressed is its recipient. This means that when one person addresses a financial promotion to another person, it will not be regarded as having been made to anyone else. So, in the case of a real time financial promotion, it is not made to any other person who may be present. And in the case of a non-real time financial promotion, it is not made to any other person who may read or hear it. If the financial promotion is addressed to more than one person they must be proposing to engage in investment activity jointly (see PERG 8.14.6 G).

(2) The second condition requires the financial promotion to apply to the personal circumstances of the recipient so not benefiting a financial promotion which take no account of the personal circumstances of the recipient or recipients.

(3) The third condition requires that the financial promotion must not be part of an organised marketing campaign. There is no definition of an organised marketing campaign but, in the FSA's view, it is appropriate to consider each of the words and their effect in this context:

(a) 'organised' suggests that the campaign is planned in advance and not something done on the spur of the moment;

(b) 'marketing' suggests an element of public promotion so as not to apply to anything of a personal or very limited nature even if it is promotional; and

01/07/2005

PERG 8.14.5

In the FSA's opinion, the indicators referred to in PERG 8.14.4 G suggest that there are two essential elements of a one-off financial promotion. These are that it is tailored to the circumstances of the recipient and that it is individual in nature (in that it is not simply a personalised letter sent out as part of a general mailshot). Apart from this there is no need for the communication to be an isolated instance. For example, the fact that there may be a considerable number of communications made during negotiations for a transaction will not prevent each communication from being one-off. The FSA is of the view that none of the three conditions carries significantly more weight than the others. Each financial promotion must be assessed against the conditions on its merits. The FSA regards the following to be financial promotions which will meet the conclusive conditions provided, in each case, that the financial promotion is tailored to the personal circumstances of and addressed to the recipient.

(1) Individual personal written communications or one-to-one conversations.

(2) A response printed in a publication or website or given during a broadcast in response to an enquiry from a reader, viewer or listener.

(3) A response given to a person who asks a question at a presentation or meeting.

(4) A response to a question raised by another person using an internet chatroom or bulletin board.

01/07/2005

PERG 8.14.6

In the FSA's view, a group of recipients who may be engaging in investment activity jointly could include:

(1) a married couple;

(2) two or more persons who will invest jointly in a product (for example, a cohabiting couple who are not married or members of a family);

(3) the directors of a company or partners in a firm;

(4) members of a group of companies;

(5) the participants in a joint commercial enterprise;

(6) the members of an investment club; and

(7) the managers or prospective managers of a company who are involved in a management buy-out or buy-in.

01/07/2005

PERG 8.14.7

A financial promotion may fail to satisfy all of the indicators referred to in PERG 8.14.4 G because it is addressed to more than one recipient and they are not persons who will engage in investment activity jointly. In the FSA's view, such a financial promotion is capable of being one-off where the persons are to enter into the same transaction and the promotion is tailored to their individual circumstances. This may typically happen during negotiations for the sale of a company or the raising of corporate finance where a small number of parties are involved.

01/07/2005

PERG 8.14.8

The fact that a financial promotion may be made following an organised marketing campaign does not mean that it must automatically be regarded as part of the campaign or that it cannot be one-off. For example, after a person has responded to a general promotion, an investment manager may make financial promotions to him and tailor them to his individual objectives. Such subsequent financial promotions can be one-off. Similarly, a person who provides corporate finance services may use an organised marketing campaign to find a potential investor or investee company. Any subsequent financial promotions made during negotiations for the deal may be one-off even though they may represent a series of communications to the same recipient. On the other hand, the situation is slightly different where an organised marketing campaign involves the sale of an investment product such as a life policy. There will be fewer instances where subsequent financial promotions to individual recipients will be capable of being one-off. For example, any financial promotion which has the basic elements of selling the product is likely to be part of an organised marketing campaign and will not be a one-off.

01/07/2005

PERG 8.14.9

In the FSA's view, a person such as an investment manager or adviser is not conducting an organised marketing campaign purely because he regularly provides a particular client with financial promotions as part of his service. Neither is such a person conducting an organised marketing campaign purely because he may have several clients whose personal circumstances and objectives may suggest that a particular investment opportunity may attract them. If he considers the individual circumstances and objectives of each client before determining that the opportunity would be suitable for that client the financial promotions should be capable of being one-off.

01/07/2005

PERG 8.14.10

In the FSA's view, a person will not be making one-off financial promotions simply by sending out a series of letters to a number of customers or potential customers where a few details are changed (such as the name and address) but the bulk of the letter is standard. Such letters would be likely to be part of an organised marketing campaign.

01/07/2005

PERG 8.14.11

Article 28A exempts one-off unsolicited real time financial promotions provided that the person making the financial promotion believes on reasonable grounds:

(1) that the recipient understands the risks associated with engaging in the investment activity to which the financial promotion relates; and

(2) (at the time the communication is made) that the recipient would expect to be contacted by him about the investment activity to which the financial promotion relates.

01/10/2005

PERG 8.14.12

In the FSA's view, the article 28A exemption should provide scope for persons such as professional advisers to make unsolicited real time financial promotions in various situations. For example, when approaching persons with whom their clients are proposing to do business or those persons' professional advisers. The exemption will not apply where the financial promotions are part of an organised marketing campaign (see PERG 8.14.4G (3)). So, in cases where a professional adviser is to contact a number of persons on a matter which involves each of them it will be necessary for him to consider whether the approaches would be part of an organised marketing campaign. For example, where they are significant shareholders in a company for which an offer has been made. In the FSA's opinion, provided the professional adviser considers the circumstances of each recipient and tailors the financial promotions to them it should be possible for the financial promotions to be regarded as one-off. Ultimately, however, the matter depends on the precise circumstances in which the financial promotions are made.

01/07/2005

PERG 8.14.13

Whether or not it would be reasonable to believe that any person understands the risks associated with the investment activity covered in a financial promotion or would expect to be contacted about it must be judged on the particular circumstances. In the FSA's opinion, the exemption requires that the recipient has the required understanding of risk at the time the promotion is made to him. However, it would be reasonable to believe that a person understands the risk involved if:

(1) he is understood to be a professional in relation to the investment activity to which the financial promotion relates; or
(2) he is advised about the risks by a person who is professionally qualified to give such advice; or
(3) he has a position in a company which it is reasonable to suppose would require him to have such an understanding (such as a person who is in charge of a company's treasury function).

In the FSA's opinion, a person such as the managing director or finance director of a company that is seeking venture capital may reasonably be regarded as expecting to be contacted by or on behalf of a potential investor.

01/07/2005

Overseas communicators (articles 30-33)

PERG 8.14.14

There are a number of exemptions in the Financial Promotion Order relating to financial promotions sent into the United Kingdom by an overseas communicator who does not carry on certain controlled activities in the United Kingdom. These exemptions apply in addition to any other exemptions which may apply to any particular financial promotion by an overseas communicator.

01/07/2005

PERG 8.14.15

Article 30 exempts any solicited real time financial promotion made by an overseas communicator in the course of or for the purposes of certain controlled activities which he carries on outside the United Kingdom. This enables an overseas communicator, for example, to respond to an unprompted telephone enquiry made by a person in the United Kingdom or an enquiry which follows a financial promotion made by the overseas communicator and which was approved by an authorised person.

01/07/2005

PERG 8.14.16

In order to make an unsolicited real time financial promotion, an overseas communicator must rely on either article 32 or article 33. Article 32 provides an exemption for unsolicited real time financial promotions made by an overseas communicator to persons who were previously overseas and were a customer of his then. This is subject to certain conditions, including that, in broad terms, the customer would reasonably expect to be contacted about the subject matter of the financial promotion. Article 33 is similar to a sophisticated investor exemption and applies where the overseas communicator has reasonable grounds to believe that the recipient is knowledgeable enough to understand the risks associated with the controlled activity to which the financial promotion relates. It is also necessary for the recipient to have been informed that he will not gain the protections under the Act in respect of the activity or of the making of unsolicited real time financial promotions, and whether he will lose the benefit of dispute resolution and compensation schemes. The recipient must also have signified clearly that he accepts the position after having been given a proper opportunity to consider the information. There is no definition of a proper opportunity for this purpose. In the FSA's opinion it is likely to require the recipient to have a reasonable time to reflect on the matter and, if appropriate, seek other advice. What is a reasonable time, will depend upon the circumstances of the recipient, but, in the FSA's opinion, it is unlikely that a time of less than 24 hours will be enough.

01/07/2005

PERG 8.14.17

Article 31 exempts non-real time financial promotions made to previously overseas customers and subject to certain conditions. Again, to satisfy this exemption, the communicator must be based overseas and must be communicating with a person who was previously a customer of his while that person was overseas.

01/07/2005

Nationals of EEA States other than the United Kingdom (article 36)

PERG 8.14.18

This exemption allows a person in another EEA State who lawfully carries on a controlled activity in that State to promote into the United Kingdom. The terms of the exemption are that the promotion must comply with the rules in COB 3 or MCOB 3 (as relevant). Care should be taken as any failure to satisfy any of the relevant requirements of these rules may mean that this exemption is not satisfied and that the financial promotion may breach section 21 if it has not been approved and no other exemption applies to it. The FSA recommends that anyone seeking to rely on this exemption either seeks professional advice or contacts the FSA before communicating the financial promotion. This exemption does not apply to unsolicited real time financial promotions.

01/07/2005

Joint enterprises (article 39)

PERG 8.14.19

Article 39 of the Financial Promotion Order exempts a financial promotion that:

(1) is communicated by one participator or potential participator in a joint enterprise to another; and

(2) is in connection with or for the purposes of that enterprise.

A joint enterprise means, in general terms, arrangements entered into by two or more persons for commercial purposes related to a business that they carry on. The business must not involve a controlled activity. The term 'participant' includes other members of a group of which a participant is a member.

01/07/2005

PERG 8.14.20

In the FSA's opinion;

(1) it will not matter that a person enters into arrangements for investment or other purposes provided that he also enters them into for commercial purposes; and

(2) each participant must be carrying on the business in question in their own right.

This means that the sponsors or promoters of a company who arrange for private investors to become shareholders will not be setting up a joint enterprise simply because the company may intend to carry on a relevant business which is not a controlled activity. Examples of a joint enterprise include a special purpose company owned by the participants and set up to operate a commercial project or to hold property of some kind. The participants in joint enterprises of this kind would typically be businesses which are to undertake work on the project or property development and investment companies.

01/07/2005

Certified high net worth individuals (article 48)

PERG 8.14.21

This exemption disapplies the restriction in section 21 of the Act from non-real time financial promotions or solicited real time financial promotions which are made to a person who the communicator believes on reasonable grounds to be a certified high net worth individual and which relate to certain investments. These investments must be either;

(1) shares in or debenturesof an unlisted company; or

(2) warrants, certificates representing certain securities, options, futures or contracts for differences relating to shares in or debenturesof an unlisted company; or

(3) collective investment schemes investing predominantly in shares in or debenturesof an unlisted company.

There is an additional requirement that the recipient must have no contingent liability so that the maximum he may lose is the amount he invests. The term 'unlisted company' is defined in article 3 of the Financial Promotion Order. This exemption is expected to be of help to unlisted companies seeking venture capital.

01/07/2005

PERG 8.14.22

A certified high net worth individual is an individual who has signed a statement in the form prescribed in Part I (Statement for certified high net worth individuals) of Schedule 5 to the Financial Promotion Order. This requires the individual to certify that he has earned at least £100,000 or have held net assets to the value of more than £250,000 throughout the financial year before the date of the certificate. Where the financial promotion is an outgoing electronic commerce communication, the earnings or net assets may be of an equivalent amount in another currency. For the exemption to apply, the certificate must have been signed within twelve months of the date on which the communication is made. The validity of the statement is not affected by a defect in its wording or form provided the defect does not alter its meaning or involve failure to place certain paragraphs in bold.

01/11/2007

PERG 8.14.23

In addition, the financial promotion must be accompanied by:

(1) a warning in the terms prescribed in article 48(5) and which satisfies certain conditions regarding its form as set out in article 48(6) - this warning must either be given in legible form at the time the communication is made or given orally at that time and a copy in legible form sent to the recipient within two business days; and

(2) certain indications as set out in article 48(7).

01/07/2005

PERG 8.14.24

A person seeking to make a financial promotion to another person may wish to make enquiries of that person to establish whether he is certified. Unless another exemption applies or the financial promotion is approved by an authorised person, such enquiries will not be possible if the enquiry communication is an inducement or invitation to engage in investment activity. In the FSA's view, a communication which is merely an enquiry seeking to establish that a person holds a current certificate will not itself be an inducement or invitation. Once it has been established that the person qualifies as a certified high net worth individual financial promotions about the controlled investments in PERG 8.14.21 G may then be sent to him under article 48. PERG 8.4.27 G offers further guidance on this.

01/07/2005

High net worth companies, unincorporated associations and trusts (article 49)

PERG 8.14.25

This exemption works on a different basis to that for high net worth individuals. There is no requirement for a certificate or statement to be signed. Instead, the person making the promotion must believe on reasonable grounds that the recipients are high net worth companies, unincorporated associations or trusts or be reasonably regarded as directing the financial promotion only at such persons. A high net worth company, unincorporated association or trust is a person who satisfies the conditions in article 49(2)(a) to (d) which, for the most part, involve the amount of assets held. In addition, the exemption allows a financial promotion that is made to, or directed at, persons coming under article 49(2)(a) to (d) also to be made to, or directed at, any other persons to whom it may lawfully be made (article 49(2)(e)). This would include persons such as overseas recipients (article 12 (Communications to overseas recipients)) and investment professionals (article 19 (Investment professionals)).

01/10/2005

PERG 8.14.26

Article 49(4) gives the list of conditions which, if all are met, is proof that the financial promotion is directed at relevant persons. It is not necessary for all or any of the conditions to be met for a financial promotion to be regarded as directed at relevant persons. Ultimately the matter will be one of fact to be determined by taking account of the circumstances in which the financial promotion is made. In the FSA's opinion, it is not necessary for a financial promotion, to comply with the condition in article 49(4)(a) that there be an indication of the types of person to whom it is directed, to refer in detail to the terms of article 49(2). It will be enough that it is clear that the financial promotion is directed at persons to whom article 49 applies. Persons using article 49 will need, however, to consider the extent to which recipients of the financial promotion are likely to understand the indication. An appropriate approach may often be to refer to the financial promotion being 'directed at high net worth companies, unincorporated associations etc for the purposes of article 49' or similar.

01/07/2005

Sophisticated investors (articles 50 and 50A)

PERG 8.14.26A

There are two exemptions that relate to sophisticated investors. The first (article 50 (Sophisticated investors)) applies to persons who are certified by an authorised person and to a broad range of specified investments. The second (article 50A (Self-certified sophisticated investors)) is similar to the exemption for certified high net worth individuals and applies where the investor has self-certified himself and to a narrower range of specified investments. PERG 8.14.27 G to PERG 8.14.28D G describe these exemptions in greater detail.

01/07/2005

PERG 8.14.27

To be a sophisticated investor for the purposes of article 50, the recipient of a financial promotion must have a current certificate from an authorised person stating that he has enough knowledge to be able to understand the risks associated with the description of investment to which the financial promotion relates. Where the financial promotion is an outgoing electronic commerce communication, the certificate may be signed by a person who is entitled, under the law of an EEA State other than the United Kingdom, to carry on regulated activities in that EEA State. The FSA considers that a 'description of investment' relates to a category of investments with similar characteristics. Examples are given below.

(1) The shares in a private company are not the same 'description of investment' as shares in a plc as there will usually be certain significant distinctions. For instance, there will often be restrictions on the transfer of shares in a private company.

(2) Shares traded on a market or exchange will be a different 'description of investment' to unlisted shares.

(3) Shares which have similar characteristics will be of the same 'description of investment' irrespective of whether they are shares of companies in the same market or geographical sector.

The recipient must also have signed a statement in the terms in article 50(1)(b). The validity of the statement is not affected by a defect in its wording provided the defect does not alter its meaning. The exemption applies to all kinds of financial promotion made to a certified sophisticated investor. However, it does not, unlike articles 48 and 50A, provide for the communicator to have reasonable belief that the recipient is a certified sophisticated investor. The financial promotion must not invite or induce the recipient to engage in investment activity with the person who has signed the certificate. But it may invite or induce the recipient to engage in investment activity with an associate or group member of that person.

01/11/2007

PERG 8.14.28

The exemption also requires that certain warnings are given to the potential investor. In this respect, article 50(3)(d) provides that the financial promotion must state that there is a significant risk of losing all monies invested or of incurring additional liability. In the FSA's view, these are alternative statements and whichever is the relevant statement should be included. If there is no risk of incurring additional liability the statement may simply say that there is a risk of losing the sum invested. This is a mandatory requirement, although the exemption under article 50 may be used to promote investments for which either statement would be inappropriate or potentially confusing (for instance if it is used to offer gilts). The FSA cannot fetter its discretion to decide individual cases on their merits. However, where a person seeks to rely on the article 50 exemption for a financial promotion which would otherwise satisfy the terms of article 50 but which omits the statement required under article 50(3)(d), on the grounds that it would be misleading to include it, the FSA would, generally, take no further action.

01/07/2005

PERG 8.14.28A

The second exemption in article 50A disapplies the restriction in section 21 of the Act from any financial promotions which are made to a person who the communicator believes on reasonable grounds to be a self-certified sophisticated investor and which relate to one or more of the specified investments in PERG 8.14.21G (1) to (3) (Certified high net worth individuals (article 48)).

06/05/2008

PERG 8.14.28B

A self-certified sophisticated investor is an individual who has signed a statement in the form prescribed in Part II (Statement for certified sophisticated investor) of Schedule 5 to the Financial Promotion Order. This requires the individual to certify that one or more of the following statements apply to him:

(1) he is a member of a network or syndicate of business angels and has been so for at least the last six months prior to the date on which the certificate was signed; or

(2) he has made more than one investment in an unlisted company in the two years prior to that date; or

(3) he is working, or has worked in the two years prior to that date, in a professional capacity in the private equity sector, or in the provision of finance for small and medium enterprises; or

(4) he is currently, or has been in the two years prior to that date, a director of a company with an annual turnover of at least £1 million.

01/07/2005

PERG 8.14.28C

For the exemption to apply, the certificate must have been signed within twelve months of the date on which the communication is made. The validity of the statement is not affected by a defect in its wording or form provided the defect does not alter its meaning or involve failure to place certain paragraphs in bold.

01/07/2005

PERG 8.14.28D

In addition, the financial promotion must be accompanied by:

(1) a warning in the terms prescribed in article 50A(5) and which satisfies certain conditions regarding its form as set out in article 50A(6) - this warning must either be given in legible form at the time the communication is made or given orally at that time and a copy in legible form sent to the recipient within two business days; and

(2) certain indications as set out in article 50A(7).

01/07/2005

Associations of high net worth or sophisticated investors (article 51)

PERG 8.14.29

(1) This exemption allows a non-real time or solicited real time financial promotion to be made to an association with a particular membership. Membership of this association must be reasonably believed to be wholly or predominantly made up of certified high net worth individuals, high net worth companies or unincorporated associations or trusts, or certified or self-certified sophisticated investors. The financial promotion must not relate to an investment under the terms of which a person can incur additional liability of more than his original investment. In each case, whether the membership of an association is predominantly made up of certified high net worth individuals, high net worth companies or unincorporated associations or trusts, or certified or self-certified sophisticated investors will be a question of fact. The exemption may be expected to be likely to apply, for example, to financial promotions to business angel networks.
(2) The exemption extends to financial promotions made to persons who are members of an association with a particular membership and not simply to financial promotions made to the operator or secretariat of the association. It would appear that this includes members who are not themselves certified high net worth individuals, high net worth companies or unincorporated associations or trusts, or certified or self-certified sophisticated investors.

01/10/2005

Common interest group of a company (article 52)

PERG 8.14.30

Article 52 concerns non-real time and solicited real time financial promotions about offers of shares or debentures of a company. The offers must be made only to or be reasonably regarded as only directed at certain persons. These persons must belong to an identified group of persons who, when the financial promotion is made, might reasonably be regarded as having an existing and common interest with each other and the company.

01/07/2005

PERG 8.14.31

The exemption is subject to certain conditions. In broad terms, these are that the financial promotion must be accompanied by an indication:

(1) that the directors or promoters of the company have taken all reasonable care to ensure that the financial promotion is true and not misleading;

(2) that the directors or promoters have not limited their liability;

(3) that any person who is in doubt about the investment should consult an authorised person; and

(4) that:

(a) the directors or promoters of the company have taken all reasonable care to ensure that potential investors have access to relevant information about the company; or

(b) any person considering investing in the company should regard his subscription as helping the company to meet its non-financial objectives and only secondarily, if at all, as an investment.

Where the financial promotion is an outgoing electronic commerce communication, the reference in (3) to an authorised person includes a person who is entitled, under the law of an EEA State other than the United Kingdom, to carry on regulated activities in that EEA State.

01/11/2007

PERG 8.14.32

In line with other exemptions, article 52 contains indicators which, if all are met, mean that the financial promotion is directed at relevant persons.

01/07/2005

PERG 8.14.33

Example of situations where article 52 is likely to apply include offers made by:

(1) a club or association which is considering incorporation to its members;

(2) a private school to the parents of its pupils; and

(3) a company to its existing members or creditors (where the exemption in article 43 might also be expected to apply).

01/07/2005

PERG 8.14.34

However, persons are not to be regarded as having a common interest with each other and a company simply because:

(1) they would have such an interest if they became its members or creditors; or

(2) they all carry on a particular trade or profession; or

(3) they have an existing business relationship with the company whether by being it clients, customers, contractors, suppliers or otherwise.

01/07/2005

Sale of body corporate (article 62)

PERG 8.14.35

The exemption in article 62 of the Financial Promotion Order applies to any financial promotion communicated by or on behalf of a body corporate, a partnership, an individual or a group of connected individuals. The financial promotion must relate to a transaction which is one to acquire or dispose of shares in a body corporate and either:

(1) it is the case that:

(a) the shares, in addition, where appropriate, to any shares already held by the buyer, amount to 50% or more of the voting shares in the body corporate; and

(b) the party or parties who act as seller is a body corporate, a partnership, a single individual or a group of connected individuals and the party or parties who act as buyer is also one or other of these (but not necessarily the same type as the seller); or

(2) where the conditions in (1) are not met, but the object of the transaction may reasonably be regarded as being the acquisition of day to day control of the affairs of the body corporate.

01/07/2005

PERG 8.14.36

A group of connected individuals is defined in article 62(4) of the Financial Promotion Order as being a group of persons each of whom is (for sellers) or is to be (for buyers):

(1) a director or manager of the body corporate;

(2) a close relative of such a person; or

(3) a person acting as trustee for a person as referred to in (1) or (2)

01/07/2005

PERG 8.14.37

In the FSA's view, a main aim of the exemption (see PERG 8.14.35G (1)) is to remove from the scope of section 21 a financial promotion concerning the sale of a corporate business by a person who, either alone or with others, controls the business to another person who, either alone or with others, proposes to control the business.

01/07/2005

PERG 8.14.38

In any case where the conditions referred to in PERG 8.14.35G (1) are not met, it will be necessary to consider the circumstances in which the transaction is to take place in order to determine whether its objective is the acquisition of day-to-day control (see PERG 8.14.35G (2)). In situations where the 50% holding of voting shares test is not met it is still possible that the objective of a transaction could be the acquisition of day-to-day control. For instance, because the remaining shareholders represent a large number of small shareholders who it is reasonable to suppose will not regularly act in concert.

01/07/2005

PERG 8.14.39

Where the nature of the parties test (see PERG 8.14.35G (1)(b)) is not met and the purpose for which the person who is the buyer holds or proposes to hold the voting shares is considered, it may still be the case that the objective of the transaction is the acquisition of day-to-day control. This may typically be because there are two or more parties involved as buyer and they do not collectively represent a group of connected individuals as defined. For example, this may happen where the shares are to be held by one of the following persons who intends to acquire control either alone or with others:

(1) a person (of either sex) with whom a person who is to be a manager or director cohabits; or

(2) a venture capital company which proposes to invest in the company and which is to provide a representative to act as a manager or director of the company; or

(3) a private company used as a vehicle to hold shares by a person who is to be a manager or director of the company (or his close relative).

01/07/2005

PERG 8.14.40

In the FSA's opinion, provided that the purpose of the transaction is for the buyer to acquire the necessary control, it is irrelevant who is the seller. The exemption specifically applies to financial promotions which are communicated on behalf of the parties or potential parties to the transaction. The Treasury, in its consultative document "Financial Services and Markets Act two year review: Changes to secondary legislation Proposals for change, February 2004" proposed changes to article 62 aimed primarily at limiting its scope in relation to the objective test referred to in PERG 8.14.35 G. In its response to the comments received during the consultation, the Treasury announced, in its document "Financial Services and Markets Act two year review: Changes to secondary legislation Government response, November 2004" that it intends to make certain changes to article 62 in due course.

01/07/2005

Pension products offered by employers (article 72)

PERG 8.14.40A

Article 72 exempts any financial promotion made by an employer to an employee in relation to a group personal pension scheme or a stakeholder pension scheme. This is subject to certain requirements as follows:

(1) the financial promotion must inform the employee that the employer will make a contribution to the pension that the employee will receive from the pension scheme to which the financial promotion relates in the event of the employee becoming a member;

(2) the employer must not receive or have received any direct financial benefit from that scheme (such as commission from, or a reduction in the amount of the premium payable by the employer in respect of any insurance policy issued to the employer by, the provider of the scheme);

(3) the employer must notify the employee in writing, prior to the employee becoming a member, of the amount of the contribution that the employer will make to the scheme in respect of that employee and

(4) where the communication is a non-real time financial promotion, it must contain, or be accompanied by, a statement informing the employee of his right to seek independent advice from an authorised person or an appointed representative.

This exemption should enable employers to promote pension schemes to their employees without undue concern that they may be breaching the restriction in section 21 of the Act. PERG 8.4.34 G (Communications by employers to their employees) has further guidance about the application of section 21 to employers generally.

01/10/2005

Advice centres (article 73)

PERG 8.14.40B

Article 73 exempts any financial promotion made by a person in the course of carrying out his duties as an adviser for, or employee of, an advice centre. This is provided the financial promotion relates to:

(1) a home finance transaction; or

(2) rights under, or rights to or interests in rights under, a life policy; or

(3) a child trust fund within the meaning of section 1(2) of the Child Trust Funds Act 2004.

06/04/2007

PERG 8.14.40C

An advice centre is defined in article 73 as a body which:

(1) gives advice which is free and in respect of which it does not receive any fee, commission or other reward;

(2) provides debt advice as its principal financial services activity; and

(3) in the case of a body which is not part of a local authority, holds adequate professional indemnity insurance or a guarantee providing comparable cover.

This exemption should be of particular use to bodies such as Citizens Advice Bureaux.

01/10/2005

Other issues

PERG 8.14.41

Several exemptions, including article 43 of the Financial Promotion Order (Members and creditors of certain bodies corporate), apply only in relation to relevant investments being shares or debenturesin the body corporate or a member of its group, or warrants or certificates representing certain securities relating to such shares or debentures. In the FSA's view, an exchangeable debt security which is partly a debenture and partly an option is a relevant investment for these purposes.

01/07/2005

PERG 8.14.42

The exemptions for bearer instruments (articles 41 and 42 of the Financial Promotion Order) relate to financial promotions made to or directed at persons entitled to bearer instruments. For clarity, the FSA takes the view that persons who hold bearer instruments through a clearing system such as Euroclear or Clearstream are persons entitled to those instruments for the purposes of articles 41 and 42.

01/07/2005

PERG 8.15

Financial promotions by members of the professions (articles 55 and 55A)

01/07/2005

Real time financial promotions by professional firms

PERG 8.15.1

Article 55 of the Financial Promotion Order contains a specific exemption for professional firms allowing them to make solicited or unsolicited real time financial promotions. This is provided the financial promotion is made:

(1) by a person who carries on a regulated activity without needing authorisation under the Part XX exemption; and

(2) to someone who has already (that is, before the financial promotion is made) engaged the person making the financial promotion to provide professional services (that is services which are not regulated activities and whose provision is supervised and regulated by a Designated Professional Body).

01/07/2005

PERG 8.15.2

The article 55 exemption also requires that:

(1) the financial promotion relates to an activity to which the Part XX exemption applies or which would be a regulated activity but for the exclusion in article 67 of the Regulated Activities Order (Activities carried on in the course of a profession or non-investment business) which concerns activities which are a necessary part of professional services; and

(2) the activity to which the financial promotion relates would be undertaken for the purposes of, and be incidental to, the provision of professional services to or at the request of the recipient.

01/07/2005

PERG 8.15.3

The FSA considers that, to satisfy the condition in PERG 8.15.2G (2) that an activity be incidental to the provision of professional services, regulated activities cannot be a major part of the practice of the professional firm. The FSA also considers that the following further factors are relevant.

(1) The scale of regulated activity in proportion to other professional services provided.
(2) Whether and to what extent services that are regulated activities are held out as separate services.
(3) The impression given of how the professional firm provides regulated activities, for example, through its advertising or other promotions of its services.

In the FSA's opinion, one consequence of this is that the professional firm cannot provide services which are regulated activities if they amount to a separate business to the provision of professional services. This does not, however, preclude the professional firm operating its professional business in a way which involves separate teams or departments one of which handles the regulated activities.

01/07/2005

PERG 8.15.4

One of the effects of the requirements in PERG 8.15.2 G concerns financial promotions which relate to an activity which is not a regulated activity as the result of an exclusion in the Regulated Activities Order. In this case, a professional firm using the Part XX exemption cannot make a real time financial promotion relying on article 55 of the Financial Promotion Order unless the exclusion is provided by article 67 of the Regulated Activities Order. Neither can a professional firm rely on article 55 to make real time financial promotions, in connection with the provision of professional services to an existing client, if the financial promotions are made to a third party. Third parties may be prospective counterparties, rather than a client. In such circumstances, another exemption would need to be available.

01/07/2005

Non-real time financial promotions by professional firms

PERG 8.15.5

Article 55A of the Financial Promotion Orderexempts non-real time financial promotions where the financial promotion:

(1) is made by a person who carries on a regulated activity without needing authorisation under the Part XX exemption (referred to in PERG 8.15.6 G and PERG 8.15.7 G as 'Part XX activities'); and

(2) contains a specified statement and is limited in its content to the matters referred to in PERG 8.15.6 G.

01/10/2005

PERG 8.15.6

A financial promotion made under article 55A must contain a statement in the following terms: "The [firm/company] is not authorised under the Financial Services and Markets Act 2000 but we are able in certain circumstances to offer a limited range of investment services to clients because we are members of [relevant designated professional body]. We can provide these investment services if they are an incidental part of the professional services we have been engaged to provide". The financial promotion may also set out the Part XX activities which the person is able to offer to his clients, provided it is clear that these are the incidental services to which the statement relates. The exemption also provides that a defect in the wording of the statement does not affect its validity. This is provided that the defect does not alter the meaning of the communication.

01/10/2005

PERG 8.15.7

The article 55A exemption should enable professional firms to issue brochures, websites and other non-real time financial promotions without any need for approval by an authorised person. This is provided the financial promotion does not also contain an invitation or inducement relating to regulated activities other than those covered by the Part XX exemption. In this respect, it should be noted that, unlike article 55, the article 55A exemption does not extend to activities which are excluded under article 67 of the Regulated Activities Order. The FSA takes the following views in relation to article 55A.

(1) It is not necessary for the details of the Part XX activities to be set out in one place or adjacent to the statement. A brochure or website, for example, may contain details of Part XX activities in various places so long as it is made clear that they will be incidental investment activities as referred to in the statement. So, this only needs to be set out once in the brochure or website.

(2) The inclusion of contact details would be regarded as part of the description of Part XX activities.

(3) A financial promotion made under article 55A may be likely, on occasion, to result in the carrying on by the professional firm of activities which are excluded under the Regulated Activities Order. However, this does not mean that the financial promotion will fail to satisfy the terms of article 55A. There will be occasions where a professional firm will have to offer to provide services which may or may not involve Part XX activities or excluded activities. In the area of corporate finance, for example, a professional firm may offer its services in relation to the sale of an incorporated business or a substantial shareholding in such a business. It will not be clear whether the professional firm's services will be Part XX activities or excluded activities until the details of a proposed deal are known. Similarly, a professional firm may offer services which in some instances, will fall under the 'necessary' exclusion in article 67 of the Regulated Activities Order but, in others, will be Part XX activities. In practice, it will often be impossible for a professional firm to distinguish between Part XX activities and excluded activities at the preliminary stage of a brochure or website offering its services. In the FSA's view, the article 55A exemption will apply provided the only regulated activities held out in the brochure, website or other non-real time financial promotion are Part XX activities. It will, of course, be possible for a professional firm to make an offer involving excluded activities to a person who responds to a financial promotion issued under article 55A. But this is provided another exemption (such as the one-off financial promotion exemption (see PERG 8.14.3 G)) is available in respect of any subsequent financial promotions.

01/07/2005

PERG 8.16

Financial promotions concerning funeral plans

01/07/2005

PERG 8.16.1

Section 21 of the Act came into force for financial promotions about funeral plans on 1 January 2002. A financial promotion about funeral plans is subject to the restriction in section 21 of the Act if it relates to a pre-paid funeral plan of any kind where the provider of the plan carries on the regulated activity of entering as provider into a funeral plan contract under article 59 of the Regulated Activities Order (see PERG 2.8.14 G). This is the case even if the actual plan being promoted is excluded under article 60 of the Regulated Activities Order. However, providers may choose only to enter into funeral plan contracts which are excluded under article 60 of the Regulated Activities Order. If this is the case, any financial promotion relating to those plans will not be subject to the restriction in section 21 of the Act.

01/07/2005

PERG 8.17

Financial promotions concerning agreements for qualifying credit

01/07/2005

PERG 8.17.1

Section 21 applies to financial promotions concerning agreements for qualifying credit. PERG 8.17.1A G to PERG 8.17.18 G has guidance about the treatment of such financial promotions . Section 21 applies not only to financial promotions about regulated mortgage contracts but also to financial promotions about certain other types of credit agreement. This is explained in more detail in PERG 8.17.2 G. to PERG 8.17.3 G.

06/04/2007

Introduction

PERG 8.17.1A

Section 21 also applies to financial promotions concerning home reversion plans and home purchase plans. Guidance on these activities and related financial promotions is given in PERG 14 (Guidance on home reversion and home purchase activities).

06/04/2007

Controlled investment: agreement for qualifying credit

PERG 8.17.2

Rights under an agreement for qualifying credit are a controlled investment.Qualifying credit is defined in paragraph 10 of Schedule 1 to the Financial Promotion Order (Controlled activities) as credit provided pursuant to an agreement under which:

(1) the lender is a person who carries on the regulated activity of entering into a regulated mortgage contract (whether or not he is an authorised or exempt person under the Act); and

(2) the obligation of the borrower to repay is secured (in whole or in part) on land.

01/07/2005

PERG 8.17.3

An agreement for qualifying credit includes the following types of loan in addition to those that would be a regulated mortgage contract, but in each case only if the lender carries on the regulated activity of entering into regulated mortgage contracts:

(1) loans secured by a second or subsequent charge;

(2) secured loans for buy-to-let or other purely investment purposes;

(3) loans secured on land situated outside the United Kingdom;

(4) loans that include some unsecured credit such as a flexible mortgage that includes an unsecured credit card; and

(5) commercial mortgages.

01/07/2005

Controlled activities

PERG 8.17.4

There are four controlled activities involving qualifying credit:

(1) providing qualifying credit;

(2) arranging qualifying credit;

(3) advising on qualifying credit; and

(4) agreeing to carry on any of (1) to (3).

01/07/2005

PERG 8.17.5

Providing qualifying credit is a controlled activity under paragraph 10 of Schedule 1 to the Financial Promotion Order. In the FSA's view, 'providing' means, in this context, providing as lender; an intermediary does not 'provide' qualifying credit.

01/07/2005

PERG 8.17.6

Arranging qualifying credit is a controlled activity under paragraph 10A of Schedule 1 to the Financial Promotion Order; that is, making arrangements:

(1) for another person to enter as borrower into an agreement for qualifying credit; or

(2) for a borrower under a regulated mortgage contract entered into on or after 31 October 2004 to vary the terms of that contract in such a way as to vary his obligations under that contract.

This means that invitations and inducements relating to the services of mortgage arrangers will potentially be within the scope of section 21 of the Act.

01/07/2005

PERG 8.17.7

Advising on qualifying credit will be a controlled activity under paragraph 10B of Schedule 1 to the Financial Promotion Order; that is, advising a person if the advice is:

(1) given to the person in his capacity as a borrower or potential borrower; and

(2) advice on the merits of his doing any of the following:

(a) entering into an agreement for qualifying credit; or

(b) varying the terms of a regulated mortgage contract entered into by him on or after 31 October 2004 in such a way as to vary his obligations under that contract.

This means that invitations and inducements relating to the services of mortgage advisers will potentially be within the scope of Section 21 of the Act.

01/07/2005

PERG 8.17.8

Agreeing to carry on each of these three controlled activitieswill also be a controlled activity under paragraph 11 of Schedule 1 to the Financial Promotion Order.

01/07/2005

Application of exemptions to financial promotions about agreements for qualifying credit

PERG 8.17.9

The exemptions in Part IV of the Financial Promotion Order (Exempt communications: all controlled activities) will apply to financial promotions about qualifying credit. Some of the exemptions in Part VI of the Financial Promotion Order (Exempt communications: certain controlled activities) will also apply. Those of particular note are referred to in PERG 8.17.10 G to PERG 8.17.12 G.

06/04/2007

PERG 8.17.10

Article 46 (Qualifying credit to bodies corporate) exempts any financial promotion about providing qualifying credit if it is:

(1) made to or directed at bodies corporate only; or

(2) accompanied by an indication that the qualifying credit to which it relates is only available to bodies corporate.

01/07/2005

PERG 8.17.12

Article 28B (Real time communications: introductions) exempts a real time financial promotion that relates to one or more of the controlled activities about regulated mortgage contracts, as well as home reversion plans and home purchase plans. The exemption is subject to the following conditions being satisfied:

(1) the financial promotion must be made for the purpose of, or with a view to, introducing the recipient to a person ('N') who is:

(a) an authorised person who carries on the controlled activity to which the communication relates; or

(b) an appointed representative, where the controlled activity is also a regulated activity in respect of which the appointed representative is exempt; or

(c) an overseas person who carries on the controlled activity to which the communication relates; for this purpose, an 'overseas person' is a person who carries on any of the controlled activities about home finance transactions but does not do so, or offer to do so, from a permanent place of business maintained by him in the United Kingdom; and

(2) the person ('M') communicating the financial promotion:

(a) must not receive any money paid by the recipient in connection with any transaction that the recipient enters into with or through N as a result of the introduction, other than money payable to M on M's own account; and

(b) before making the introduction, must disclose to the borrower the following information where it applies to M:

(i) whether M is a member of the same group as N;

(ii) details of any payment which M will receive from N, by way of fee or commission, for introducing the recipient to N; and

(iii) an indication of any other reward or advantage arising out of M's introducing to N.

06/04/2007

PERG 8.17.13

Introducers can check whether a person is an authorised person or an appointed representative by visiting the FSA's register at http://www.fsa.gov.uk/register/.If an authorised person has permission to carry on a regulated activity (which can be checked on the FSA's register) it is reasonable, in the FSA's view, to conclude that the authorised person carries on that activity (but not a controlled activity which is not a regulated activity). The FSA would normally expect introducers to request and receive confirmation of other facts necessary to satisfy the condition in PERG 8.17.12G (1), prior to proceeding with an introduction.

01/07/2005

PERG 8.17.14

In the FSA's view, money payable to an introducer on his own account includes money legitimately due to him for services rendered to the borrower, whether in connection with the introduction or otherwise. It also includes sums payable in connection with transfer of property to an introducer (for example, a housebuilder) by a borrower. For example, article 28B allows a housebuilder to receive the purchase price on a property that he sells to a borrower, whom he previously introduced to an authorised person or appointed representative to help him finance the purchase in return for a fee payable by the borrower, and still take the benefit of the exclusion. This is because the sums that the housebuilder receives in connection with the introduction and the sale of his property to the borrower are both 'payable to him on his own account'. The housebuilder could also receive a commission from the person introduced to.

01/07/2005

PERG 8.17.15

In the FSA's view, the provision of details of fees or commission referred to in PERG 8.17.12G (2)(b)(ii) does not require an introducer to provide an actual sum to the borrower, where it is not possible to calculate the full amount due prior to the introduction. This may arise in cases where the fee or commission is a percentage of the eventual loan taken out and the amount of the required loan is not known at the time of the introduction. In these cases, it would be sufficient for the introducer to disclose the method of calculation of the fee or commission, for example the percentage of the eventual loan to be made by N.

01/07/2005

PERG 8.17.16

In the FSA's view, the information condition in PERG 8.17.12G (2)(b)(iii) requires the introducer to indicate to the borrower any other advantages accruing to him as a result of ongoing arrangements with N relating to the introduction of borrowers. This may include, for example, indirect benefits such as office space, travel expenses, subscription fees. This and other relevant information may, where appropriate, be provided on a standard form basis to the borrower. The FSA would normally expect an introducer to keep a written record of disclosures made to the borrower under article 33A of the Regulated Activities Order including those cases where disclosure is made on an oral basis only.

01/07/2005

Interaction with the Consumer Credit Act

PERG 8.17.17

Most credit advertisements are, with various exceptions, regulated under the Consumer Credit Act 1974. However, article 90(3) (Consequential amendments of the Consumer Credit Act 1974) and Article 91(1) (Consequential amendments to subordinate legislation under the Consumer Credit Act 1974) of the Regulated Activities Order disapply the provisions of the Consumer Credit Act 1974 to any financial promotion other than an exempt generic communication. An exempt generic communication is a financial promotion that is exempt under article 17 of the Financial Promotion Order (Generic promotions) (see PERG 8.12.14 G (Generic promotions (article 17))). Hence, an advertisement about credit of any kind will either be regulated under Section 21 of the Act or under the Consumer Credit Act 1974. Such an advertisement will only be subject to regulation under both statues if it is about secured and unsecured lending. Typical examples showing which statute regulates particular types of credit advertisements are given in the table in PERG 8.17.18 G (Table - Guide to the application of the Act and the Consumer Credit Act 1974 to credit advertisements).

01/07/2005

PERG 8.17.18

Guide to application of the Act and the Consumer Credit Act 1974 to credit advertisements. This table belongs to PERG 8.17.17 G

Subject of advertising or promotion

FSMA regulated

CCA regulated

(1)

regulated mortgage contracts

Yes

(2)

other loans secured on land where the lender also enters into regulated mortgage contracts as lender

Yes

(3)

loans not secured on land whether or not the lender also enters into regulated mortgage contracts as lender

Yes

(4)

loans not secured on land but which form part of a loan product that is otherwise secured on land and where the lender enters into regulated mortgage contracts as lender

Yes

(5)

loans as in (1), (2) or (4) but where the advertisement is subject to exemptions under the Financial Promotion Order other than article 17 (Generic promotions)

Yes

(6)

loans as in (1), (2) or (4) but where the advertisement is exempt under article 17 of the Financial Promotion Order (Generic Promotions)

Yes

(7)

loans with features as in (1), (2), (4) or (5) promoted in combination with other loans

Yes

01/07/2005

PERG 8.17A

Financial promotions concerning insurance mediation activities

01/07/2005

PERG 8.17A.1

The application of section 21 of the Act and of exemptions in the Financial Promotion Order to invitations or inducements about insurance mediation activities will vary depending on the type of activity. The implementation of the Insurance Mediation Directive has not led to any changes in the definitions of a controlled investment or a controlled activity under the Financial Promotion Order. So:

(1) rights under any contract of insurance are a controlled investment;

(2) rights to or interests in rights under life policies are controlled investments but rights to or interests in rights under other contracts of insurance are not;

(3) the activities of:

(a) dealing in investments as agent;

(b) arranging (bringing about) deals in investments;

(d) advising on investments;

where they relate to contracts of insurance, are controlled activities only where the contract of insurance is a life policy; and

(4) the activity of assisting in the administration and performance of a contract of insurance is not a controlled activity.

01/07/2005

PERG 8.17A.2

This means that an insurance intermediary will not be communicating a financial promotion:

(1) where the only activity to which the promotion relates is assisting in the administration and performance of a contract of insurance; or
(2) purely by reason of his inviting or inducing persons to make use of his advisory or arranging services where they relate only to general insurance contracts or pure protection contracts or both.

But as regards (2), an intermediary will be communicating a financial promotion if he is also inviting or inducing persons to enter into a contract of insurance. This is because the making and performance of the contract by the insurer will be a controlled activity (of effecting and carrying out a contract of insurance). Insurance intermediaries will, however, be able to use the exemptions in Part V of the Financial Promotion Order (see PERG 8.13 (Exemptions applying to financial promotions concerning deposits and certain contracts of insurance) where they promote a general insurance contract or a pure protection contract. Where an insurance intermediary is promoting life policies, he will be able to use any exemptions in Part VI of the Financial Promotion Order that apply to a contractually based investment.

01/07/2005

PERG 8.18

Financial promotions concerning the Lloyd's market

01/07/2005

PERG 8.18.1

A person involved in insurance business written at Lloyd's may be making financial promotions when attracting another person:

(1) to effect or carry out contracts of insurance written at Lloyd's (where the controlled activity which is the subject of the financial promotion is effecting and carrying out contracts of insurance); or
(2) to have assets held under funds at Lloyd's (where the controlled activity may involve dealing in securities and contractually based investments, arranging deals in investments, managing investments or safeguarding and administering investments); or
(3) to participate in particular syndicates at Lloyd's (where the controlled activity is advising on syndicate participation or arranging deals in syndicate participations or underwriting capacity); or
(4) to participate indirectly in the Lloyd's market as a shareholder of a corporate underwriting member or a limited partner in a limited liability partnership which is an underwriting member (where the controlled activity is dealing in, arranging deals in or advising on shares or units); or
(5) to take out insurance which is written at Lloyd's (where the controlled activity is effecting a contract of insurance).

01/07/2005

PERG 8.18.2

Most persons making financial promotions as referred to in this section are likely to be authorised persons. As such they will be subject to the appropriate financial promotion rules. Any persons who are making financial promotions as referred to in PERG 8.18.1 G and who do not need to be authorised persons will need to ensure that their financial promotions are approved by an authorised person or that a specific exemption applies (see PERG 8.13).

06/01/2008

PERG 8.19

Additional restriction on the promotion of life policies

01/07/2005

PERG 8.19.1

Article 10 of the Financial Promotion Order (Application to qualifying contracts of insurance) precludes any of the exemptions from applying to a financial promotion which invites or induces a person to enter into a life policy with a person who is not:

(1) an authorised person; or

(2) an exempt person who is exempt in relation to effecting or carrying out contracts of insurance of the class to which the promotion relates; or

(3) a company with its head office or a branch or agency in another EEA State and which is entitled to carry on in that country the class of insurance business being promoted; or

(4) a company authorised in one of the following countries or states to carry on the class of insurance business being promoted:

(a) Guernsey; or

(b) the Isle of Man; or

(d) Iowa;

(e) Jersey.

COB 3.13.1 R imposes a similar restriction on authorised persons concerning their communicating or approving financial promotions in the precluded circumstances.

01/07/2005

PERG 8.20

Additional restriction on the promotion of collective investment schemes

01/07/2005

PERG 8.20.1

Where collective investment schemes are concerned additional restrictions are placed on their promotion to ensure that only those which are regulated are promoted to the general public. This is achieved by a combination of sections 21 and 238 (Restrictions on promotion) of the Act as explained in PERG 8.20.2 G. A regulated collective investment scheme is:

(1) an authorised unit trust scheme; or

(2) an investment company with variable capital; or

(3) a scheme recognised under section 264 of the Act (Schemes constituted in other EEA States); or

(4) a scheme recognised under section 270 of the Act (Schemes authorised in designated countries or territories); or

(5) a scheme recognised under section 272 of the Act (Individually recognised overseas schemes).

01/07/2005

PERG 8.20.2

Section 21 precludes the promotion by unauthorised persons of unregulated collective investment schemes unless the financial promotion is approved by an authorised person or is exempt. Section 238 then precludes the promotion of an unregulated collective investment scheme by authorised persons except where:

(1) there is an exemption in an order made by the Treasury under section 238(6); or

(2) the financial promotion is permitted under rules made by the FSA under section 238(5) to exempt the promotion, otherwise than to the general public, of schemes of certain descriptions; or

(3) the scheme is a single property scheme and its promotion is exempt under regulations made by the Treasury under section 239 of the Act (Single property schemes).

In addition, section 240 of the Act (Restriction on approval of promotion) precludes an authorised person from approving a financial promotion for the purpose of section 21 if he would not be able to communicate it himself under section 238.

01/07/2005

PERG 8.20.3

The Treasury has made an order under section 238(6). This is the Financial Services and Markets Act 2000 (Promotion of Collective Investment Schemes) (Exemptions) Order 2001 (as amended by article 3 of the Financial Services and Markets Act 2000 (Financial Promotion) (Amendment) Order 2001 (SI 2001/2633), by articles 7 to 10 of the Financial Services and Markets Act 2000 (Financial Promotion) (Amendment) (Electronic Commerce Directive) Order 2002 (SI 2002/2157) and by article 3 of the Financial Services and Markets Act 2000 (Financial Promotion and Promotion of Collective Investment Schemes) (Miscellaneous Amendments) Order 2005 (SI 2005/270) ('the CIS Financial Promotion Order'). The overall effect of the CIS Financial Promotion Order is to ensure that authorised persons are able to promote an unregulated collective investment scheme at least as widely as an unauthorised person is allowed to do under section 21 without needing the approval of an authorised person. In general terms, the order contains exemptions equivalent to those in the Financial Promotion Order which are relevant to units in an unregulated collective investment scheme. Guidance in PERG 8 relating to exemptions in the Financial Promotion Order will apply equally to those exemptions where they appear in the CIS Financial Promotion Order. The main exception to this relates to the exemption for one-off financial promotions in article 15 of the CIS Financial Promotion Order. That article provides conditions which, if met, are conclusive proof that a financial promotion is one-off. However, these do not include the condition that the identity of the product or service must be determined having regard to the recipient's circumstances (see PERG 8.14.3G (2) and PERG 8.14.4G (2)).

01/10/2005

PERG 8.20.4

The FSA has made rules under section 238(5) which allow authorised firms to communicate or approve a financial promotion for an unregulated collective investment scheme in certain specified circumstances. These circumstances are set out in COB 3 Annex 5 R and referred to in COB 3.11. To date, the Treasury has not made an order exempting single property schemes under section 239.

01/07/2005

PERG 8.21

Company statements, announcements and briefings

01/07/2005

PERG 8.21.1

There is a general concern that the practice of companies issuing statements and giving briefings may involve a financial promotion. These arise sometimes as a result of requirements imposed by a listing authority or an exchange or market, PERG 8.4.14 G offers guidance on when such statements or briefings may amount to or involve an inducement to engage in investment activity. It indicates that whilst statements of fact alone will not be inducements, there may be circumstances where there is a promotional element which may amount to an inducement (typically to buy the company's shares). In the FSA's experience, it is rare for company statements or briefings to involve an invitation.

01/07/2005

PERG 8.21.2

It is common practice for listed companies to brief analysts, usually at the time of the company's preliminary, interim and, if applicable, quarterly results and after the information has been issued to the market as a whole. Briefings may be made personally to a small or large number of analysts in a meeting or through a conference call. It is increasingly becoming the practice for listed companies to make their briefings available live to journalists and the general public on the basis that they may listen to or view, but not take part in, the briefing and any question and answer session. This is usually done through a conference call or a live broadcast (usually termed a webcast) through the company's website or the website of a specialist provider. Where such briefings include a financial promotion they must be approved by an authorised person (if they are non-real time financial promotions) or exempt.

01/07/2005

PERG 8.21.3

PERG 8.21.4 G to PERG 8.21.21 G set out the FSA's views on the potential relevance of certain exemptions to company statements and briefings. The exemptions are referred to in the same order as the Financial Promotion Order. In the FSA's view, these exemptions (whether alone or, where applicable, in combination) should enable most statements and briefings which involve financial promotions to be made by the company concerned without the need for approval. In particular, the FSA considers that article 69 (see PERG 8.21.17 G) should ensure that financial promotions made during the course of analyst briefings by listed and AIM companies are exempt and do not require approval. Some but not all of these exemptions apply equally to financial promotions which are communicated by a third party (for instance, a public relations adviser) on behalf of its corporate client. Those exemptions which are not available to a third party in such circumstances are those contained in article 20A (see PERG 8.21.6 G), 59 (see PERG 8.21.11 G), and 69 (see PERG 8.21.17 G).

01/07/2005

Article 17: Generic promotions

PERG 8.21.4

Any statement or briefing which did not identify the company as an issuer of securities (for example, by referring to its securities) and which does not identify any other particular investment or provider of investments or investment services will be exempt as a generic promotion (see PERG 8.12.14 G). In practice, it will be unlikely that such a statement or briefing would involve a financial promotion but the article 17 exemption may be useful where any doubt arises.

01/07/2005

Article 19: Investment professionals

PERG 8.21.5

Where statements or briefings are only available to analysts who are, or who work for, authorised persons (including overseas persons who would need to be authorised if they were conducting their business in the United Kingdom), article 19 will exempt any financial promotion that may be made (see PERG 8.12.21 G). Furthermore, where a financial promotion is made in the course of an interactive dialogue with an analyst and is addressed to him, the financial promotion will be regarded as having been made to that analyst irrespective of who else may hear or view it (article 6(b) of the Financial Promotion Order (see PERG 8.6.9 G). For example, where a representative of the company is responding to a particular question article 19 would then apply. This is not to say that every time a company representative answers a question his response, if it involves a financial promotion, will be addressed to the questioner for the purpose of article 6(b). This will depend upon the particular circumstances.

01/07/2005

Article 20A: Promotion broadcast by company director etc

PERG 8.21.6

PERG 8.12.32 G contains detailed guidance on the exemption in article 20A. The exemption is capable of applying to financial promotions in a company statement or briefing where they are communicated through a webcast if the website is a regularly updated news or information service. For this to be the case, the website must be a service provided to persons who use it (so it must not, for example, simply be an advertising vehicle) and that service must be one of providing news or information which will be updated regularly. This is capable of applying to some corporate websites. For example, the website of a company may amount to a service of information about the company's activities, services and products which is regularly updated and the webcast may be seen as part of that service. Not all corporate websites will qualify, however, and each website must be considered on its merits. Company representatives seeking to use this exemption will need to bear in mind any restrictions on the making available of certain information to which they may be subject (for example, under listing rules).

01/07/2005

Article 28 and 28A: One off promotions

PERG 8.21.7

Article 28 applies to one-off non-real time and solicited real time financial promotions. Article 28A applies to one-off unsolicited real time financial promotions. It is possible that articles 28 or 28A could apply to financial promotions in company statements or briefings if they were to be made other than to an analyst or journalist. In this respect, the comments made in PERG 8.14.3 G about one-off financial promotions are relevant.

01/07/2005

Article 43: Members and creditors of certain bodies corporate

PERG 8.21.8

Article 43 applies to non-real time and solicited real time financial promotions made by, or on behalf of, a company ('C') to persons who, in broad terms, are:

(1) members or creditors of C or a group member of C ('G');
(2) entitled to a relevant investment issued by C or G;
(3) entitled to become a member of C or G;
(4) entitled to have transferred to them title to a relevant investment issued by C or G.

The financial promotion must relate only to relevant investments issued or to be issued by C or G or, in certain circumstances, another person (see PERG 8.21.9G (2)). C and G must not be open-ended investment companies.

01/10/2005

PERG 8.21.9

A 'relevant investment' in article 43 means:

(1) shares or debentures; and

(2) warrants and certificates representing certain securities relating to (1) and issued by G or a person acting on behalf of or under arrangements made with C.

Article 43 allows a company to communicate a financial promotion to its shareholders about rights issues or a cash offer by a third party for their shares. It also allows a company to communicate with its creditors about restructuring debt obligations.

01/10/2005

Article 47: Persons in the business of disseminating information

PERG 8.21.10

Article 47 will exempt financial promotions in company statements or briefings where they are made to members of the press and may be combined with article 19 (Investment professionals). This means that companies will only need to look for other exemptions where the recipients of their financial promotions are persons other than analysts or journalists or both.

01/07/2005

Article 59: Annual accounts and directors' report

PERG 8.21.11

Article 59 is capable of applying to financial promotions in company statements and briefings where they are accompanied by:

(1) the whole or any part of the annual accounts of the company (provided it is not an open-ended investment company); or

(2) any report prepared and approved by the directors of such a company under section 234 and 234A of the Companies Act 1985 or corresponding legislation in Northern Ireland or in another EEA State.

In this respect, the FSA considers that the annual accounts (or part of them) or directors' report accompanies a financial promotion where it is made available to the recipients of the financial promotion at the same time. The financial promotion should refer to the accompanying material. For example, the accounts or report may be available on a company's website and referred to in a financial promotion on that website. Or they may be contained in or enclosed with a written communication (including an e-mail) or handed over during a meeting or discussion.

01/07/2005

PERG 8.21.12

Article 59 imposes certain conditions.

(1) The financial promotion must be an inducement and not be an invitation or amount to advice to acquire or dispose of an investment.

(2) The inducement must not relate to any investment other than shares or debenturesissued, or to be issued, by the company making the financial promotion (or a member of its group) or warrants relating to or certificates representing such shares or debentures.

(3) If the financial promotion contains any reference to past prices of or yields on the company's securities as referred to in (2), it must be accompanied by a statement that past performance cannot be relied on as guide to future performance.

01/10/2005

Article 67: Promotions required or permitted by market rules

PERG 8.21.13

Article 67 exempts any financial promotion other than an unsolicited real time financial promotion which relates to shares, debentures, government and public securities, warrants or certificates representing certain securities which are permitted to be traded or dealt in on a relevant market. A relevant market for the purposes of article 67 is one which meets the criteria in Part I of, or is specified in or established under the rules of an exchange specified in Parts II or III of, schedule 3 to the Financial Promotion Order. This includes recognised investment exchanges and EEA regulated markets that are exempt persons under article 36 of the Exemption Order, together with various other overseas markets (including OFEX (UK)). The financial promotion must, however, be required or permitted to be communicated by the rules of the market or by a body which either regulates the market or regulates offers or issues of investments to be traded on the market.

01/07/2005

PERG 8.21.14

The reference to financial promotions which are permitted to be communicated relates, in the FSA's opinion, to something which is expressly permitted rather than simply not expressly prohibited. Article 67 itself does not specify any particular medium for communicating required or permitted material. So, it will be enough for the financial promotion to be part of a document which is itself required or permitted to be communicated (such as reports or financial statements). Market rules or usual market practice may require the financial promotion to be communicated in a particular form or by a particular medium. However. the exemption will still apply if the financial promotion is communicated in a different form or by a different medium provided that its substance is unchanged. But article 67 will not apply to a financial promotion simply because it is included in another document which is required or permitted where the financial promotion amounts to additional information to that which is required or permitted. Neither does article 67 specify what form permission can take. In the FSA's view, however, permission would need to be given either in rules or guidance applicable to the market in question.

01/07/2005

PERG 8.21.15

Article 67 refers to an investment which is permitted to be traded or dealt in on a relevant market. In the FSA's opinion, this includes a situation where a class of securities is traded on a relevant market but the financial promotion relates to new securities of that class which have not yet themselves been issued or started trading. Where securities of that class have not yet been admitted to trading on a relevant market, article 68 may apply - see PERG 8.21.16 G.

01/07/2005

Article 68: Promotions in connection with admission to certain EEA markets

PERG 8.21.16

Article 68 applies where the financial promotion relates to securities which have not yet been admitted to trading but for which application has been or is to be made. It exempts a non-real time or a solicited real-time financial promotion which a relevant EEA market requires to be communicated before admission to trading can be granted. A relevant EEA market for this purpose is a market with its head office in an EEA State and which meets the conditions in Part I of, or is specified in or established under the rules of an exchange specified in Part II of, Schedule 3 to the Financial Promotion Order. Article 68 also requires that the financial promotion be one:

(1) which, if it were included in a prospectus issued in line with prospectus rules made under Part VI of the Act, would be required to be communicated by those rules; and

(2) which is not accompanied by any information other than that information which is required or permitted to be published by the rules of the relevant EEA market.

01/10/2005

Article 69: Promotion of securities already admitted in certain markets

PERG 8.21.17

Article 69 is somewhat similar to article 59 in the conditions it imposes (see PERG 8.21.12 G). There are two main differences between article 69 and article 59.

(1) Article 69 does not apply to unsolicited real time financial promotions.

(2) The requirement in article 59 that the financial promotion be accompanied by accounts or a report is replaced in article 69. It is replaced by a requirement that shares or debenturesof the company or another body corporate in its group (or warrants relating to or certificates representing such investments) are permitted to be traded on a relevant market (relevant market having the same meaning as in article 67 - see PERG 8.21.13 G).

01/10/2005

PERG 8.21.19

In the FSA's opinion, companies whose securities are permitted to be traded or dealt in on a relevant market should be able to make good use of the article 69 exemption. But such companies will need to ensure that they meet the specific requirements in article 69(3). In very general terms, a financial promotion will comply with these requirements if:

(1) the only reason it is a financial promotion is that it contains or is accompanied byan inducement about certain investments issued, or to be issued, by the company or a group member; and

(2) should it contain any reference to past prices of or yields on the company's investments, it is accompanied by a statement that past performance cannot be relied on as a guide to future performance.

01/10/2005

Article 70: Promotions included in listing particulars, etc

PERG 8.21.20

Article 70applies to a non-real time financial promotion included in:

(1) listing particulars ; or

(2) supplementary listing particulars ; or

(3) a prospectus or supplementary prospectus approved in line with Prospectus Rulesor by the competent authority of another EEA State (provided the requirements of section 87H of the Act are met) - including part of such a prospectus or supplementary prospectus; or

(4) any other document required or permitted to be published by listing rules or Prospectus Rules.

Article 70 also applies to a non-real time financial promotion comprising the final terms of an offer or the final offer price or amount of securities which will be offered to the public and that complies with articles 5(4), 8(1) and 14(2) of the Prospectus Directive.
The comments in PERG 8.21.14 G about when something is required or permitted to be published apply also to (4).

06/02/2008

General issues

PERG 8.21.21

A requirement common to the exemptions in articles 59, 67 and 69 is that the financial promotions must not relate to investments other than those issued, or to be issued, by the company or a member of its group. The FSA is aware that there is concern about comments made in company statements or briefings. This is that they may be held to be inducements to acquire or dispose of, or exercise rights conferred by, an investment issued by a third party. For example, traded options on or certificates representing the company's shares. PERG 8.4 sets out the FSA's general views on when a communication is an inducement. It appears to the FSA that, for a company statement or briefing to involve an inducement to persons to, for example, exercise rights under a traded option written on or acquire certificates representing the securities, it must seek to persuade or induce persons specifically to do that. The mere fact that a person reading, hearing or viewing a company statement or briefing containing an inducement to acquire the company's securities may be influenced to exercise traded options which he holds is not enough to make it an inducement to exercise those rights.

01/10/2005

PERG 8.22

The Internet

01/07/2005

PERG 8.22.1

The Internet is a unique medium for communicating financial promotions as it provides easy access to a very wide audience. At the same time, it provides very little control over who is able to access the financial promotion.

01/07/2005

PERG 8.22.2

The test for whether the contents of a particular website may or may not involve a financial promotion is no different to any other medium. If a website or part of a website, operated or maintained in the course of business, invites or induces a person to engage in investment activity, it will be a financial promotion. The FSA takes the view that the person who caused the website to be created will be a communicator. So, any software engineers that may or may not have been involved in establishing the website, provided they have no interest in it other than being paid for its design, will not be communicating financial promotions contained in it. Similarly, an Internet services provider who merely manages a website for another person and who has no control over or responsibility for its contents will not be communicating any financial promotion in the site. An Internet service provider whose circumstances are such that he is communicating financial promotions for other persons may be able to use the exemption for mere conduits (see PERG 8.12.18 G).

01/07/2005

PERG 8.22.3

The Internet also allows hypertext links, where two different sites in the Internet can be connected almost instantaneously by simply clicking on the link. The FSA's views on the position of hypertext links (which should be read with the remainder of PERG 8, especially PERG 8.4 (Invitation or inducement)) are as follows.

(1) A hypertext link may or may not be a financial promotion in itself. This will depend on the nature of the hypertext link and the context in which it is placed. However, taken in isolation, a hypertext link which is purely the name or logo of the destination will not be a financial promotion in its own right. More sophisticated links, such as banners or changeable text, may be financial promotions. This will depend upon the facts in each case.

(2) The material on a host website which contains the hypertext link may in itself be a financial promotion. For example, it may contain text which seeks to encourage or incite persons to activate the link with a view to engaging in investment activity.

(3) Website material which represents a directory of website addresses or e-mail addresses will not be a financial promotion in its own right. That is unless the material also contains an inducement to contact a named addressee with a view to engaging in investment activity.

(4) The destination website (that is, the one that is reached through the hypertext link) may or may not be a financial promotion. This will depend upon the content of that website. Website operators are responsible for the contents of their website if it hosts or creates links to the websites of unauthorised persons. In most cases they will not be causing the communication of any financial promotion in those other websites and so will not be responsible for those websites complying with section 21. In some cases, however, the operator ('O') of a website which hosts a link to another website, may be causing the communication of a financial promotion on that other website. This will only arise when O has made arrangements with the operator of the other website under which O is to procure users of his site to access the link provided with a view to their engaging in investment activity.

(5) An exemption may require certain indications to be made in a financial promotion on a website. In theses cases, the requirement may be satisfied by putting information on separate pages which can be accessed through a link on the page, or one of the pages, which contains the financial promotion.

01/07/2005

PERG 8.23

Regulated activities

01/07/2005

PERG 8.23.1

Under section 19 of the Act (The general prohibition) no person may, by way of business, carry on a regulated activity in the United Kingdom unless he is authorised or exempt. The meaning of regulated activity is set out in Part II of the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 (the Regulated Activities Order) (as amended). Any person who breaches section 19 of the Act commits a criminal offence for which the maximum penalty is two years' imprisonment and an unlimited fine.

01/07/2005

PERG 8.23.2

Anyone who is carrying on a regulated activity is likely to make financial promotions in the course of or for the purposes of carrying on that activity. It is beyond the scope of this guidance to cover regulated activities as such (for a general guide see PERG 2). There are circumstances, however, where persons whose main aim is either:

(1) to make financial promotions for their own purposes or on behalf of others; or

(2) to help other persons to make financial promotions;

may find themselves conducting regulated activities. Such persons may typically include publishers or broadcasters, financial commentators, Internet service providers and website operators and telephone marketing companies.

01/07/2005

PERG 8.23.3

The regulated activities which are likely to be conducted in the circumstances referred to in PERG 8.23.2 G are:

(1) giving advice on certain investments (articles 53 (Advising on investments), 53A (Advising on regulated mortgage contracts), 53B (Advising on regulated home reversion plans), 53C (Advising on regulated home purchase plans) and 56 (Advice on syndicate participation at Lloyd's) of the Regulated Activities Order) - for example, where the financial promotion is the advice;

(2) making arrangements with a view to transactions in investments (article 25(2) of the Regulated Activities Order (Arranging deals in investments));

(2A) making arrangements with a view to regulated mortgage contracts (article 25A(2) of the Regulated Activities Order (Arranging regulated mortgage contracts);

(2B) making arrangements with a view to a home reversion plan (article 25B(2) of the Regulated Activities Order (Arranging regulated home reversion plans);

(2C) making arrangements with a view to a home purchase plan (article 25C(2) of the Regulated Activities Order (Arranging regulated home purchase plans); and

(3) agreeing to carry on either (1) or (2) (article 64 of the Regulated Activities Order (Agreeing to carry on specified kinds of activity)).

06/04/2007

PERG 8.23.4

The guidance that follows is concerned with the regulated activities of making arrangements with a view to transactions in investments and advising on investments. Guidance on the regulated activities of making arrangements with a view to regulated mortgage contracts and advising on regulated mortgage contracts is in PERG 4 (Guidance on regulated activities connected with mortgages). Guidance on the regulated activities of making arrangements with a view to a home reversion plan and advising on a home reversion plan and making arrangements with a view to a home purchase plan and advising on a home purchase plan is in PERG 14 (Guidance on home reversion and home purchase activities).

06/04/2007

PERG 8.24

Advising on investments

01/07/2005

PERG 8.24.1

Under article 53 of the Regulated Activities Order, advising on investments covers advice which:

(1) is given to a person in his capacity as an investor or potential investor, or in his capacity as agent for an investor or a potential investor; and

(2) is advice on the merits of his (whether as principal or agent) buying, selling, subscribing for or underwriting a particular investment which is a security or a relevant investment or exercising any right conferred by such an investment to buy, sell, subscribe for or underwrite such an investment.

01/07/2005

PERG 8.24.2

The effect of advice being given in the circumstances referred to in PERG 8.24.1 G is that:

(1) it must relate to an investment which is a security or a relevant investment;

(2) that investment must be a particular investment;

(3) it must be given to persons in their capacity as investors or potential investors;

(4) it must be advice (that is, not just information); and

(5) it must relate to the merits of investors or potential investors (or their agents) buying, selling, subscribing for or underwriting (or exercising rights to acquire, dispose of or underwrite) the investment.

01/07/2005

PERG 8.24.3

Each of the aspects referred to in PERG 8.24.2 G is considered in greater detail in PERG 8.25 to PERG 8.29. In addition, under article 52A of the Regulated Activities Order, providing basic advice on a stakeholder product is a regulated activity and under article 56 of the Regulated Activities Order, advising a person to become, or continue or cease to be a member of a p rticular Lloyd's syndicate is a regulated activity.

01/07/2005

PERG 8.25

Advice must relate to an investment which is a security or contractually based investment

01/07/2005

PERG 8.25.1

For the purposes of article 53 of the Regulated Activities Order, a security or relevant investment is any one of the following:

(1) shares;

(2) debentures;

(3) government and public securities;

(4) warrants;

(5) certificates representing certain securities;

(6) units in collective investment schemes;

(7) stakeholder pension schemes or personal pension schemes;

(8) options;

(9) futures;

(10) contracts for differences;

(11) contracts of insurance;

(12) funeral plan contracts;

(13) rights to or interests in such investments.

06/04/2007

PERG 8.25.2

Article 53 does not apply to advice given on any of the following:

(1) deposit or other bank or building society accounts (but note that providing basic advice on a stakeholder product including stakeholder deposit accounts is a separate regulated activity under article 52A of the Regulated Activities Order - see the guidance in PERG 2.7.14A G (Providing basic advice on stakeholder products));

(2) interests under the trusts of an occupational pension scheme (but rights under an occupational pension scheme that is a stakeholder pension scheme will be securities);

(3) mortgages or other loans (but note that advising on regulated mortgage contracts is a separate regulated activity under article 53A of the Regulated Activities Order - see the guidance in PERG 4 (Regulated activities connected with mortgages));

(4) National Savings products;

(5) foreign exchange (or cash);

(6) commodities (for example, gold);

(7) real estate;

(8) any other physical property capable of having investment potential (for example, works of art, racehorses) unless investment is made through a collective investment scheme.

01/07/2005

PERG 8.26

The investment must be a particular investment

01/07/2005

PERG 8.26.1

For the purposes of article 53, advice must relate to a particular investment - generic or general advice is not covered. Generic or general advice may, however, be a financial promotion (see PERG 8.4).

01/07/2005

PERG 8.26.2

Generic advice will not be caught by article 53. Examples of generic advice may include:

(1) financial planning;

(2) advice on the merits of investing in Japan rather than Europe;

(3) advice on the merits of investing in investment trusts as opposed to unit trusts or unit-linked insurance; and

(4) advice on the merits of investing offshore, or in fixed income rather than floating rate bonds.

01/07/2005

PERG 8.26.3

In the FSA's view, guiding a person through a decision tree should not, of itself, involve advice within the meaning of article 53 (it should be generic advice). For example, helping a person to understand what the questions or options are and how to determine which option applies to his particular circumstances. But a recommendation that the person concerned should, if the results of using the decision tree so indicate, buy a stakeholder personal pension from a particular provider (or any other particular investment) would be advice for the purpose of article 53. An unauthorised person guiding another through a decision tree needs to make it clear that the decision tree aids generic decisions and that the person doing the guiding is not recommending any particular investment.

01/07/2005

PERG 8.26.4

Examples of a particular investment include:

(1) securities - shares in ABC plc, Treasury 10% 2001 stock, XYZ plc warrants;

(2) units in collective investment schemes - ABC smaller companies fund, XYZ Growth Trust;

(3) exchange-traded derivatives - LME Copper Grade A 3 months, LIFFE Japanese Government bond, ABC plc traded options;

(4) contractual investments, for example, futures and other contracts having specified terms and conditions such as duration, volume, interest rate or price and which are to be entered into with a particular person;

(5) contracts of insurance, which are both products and contractual investments; so a particular investment would include:

(a) the ABC Life Personal Pension or the XYZ Life Guaranteed Bond; or

(b) a contract having essential terms and provider specified - for instance, a 25 year with-profits low cost endowment contract covering husband and wife and to be issued by XYZ Life Plc.

01/07/2005

PERG 8.27

Advice to be given to persons in their capacity as investors (on the merits of their investing as principal or agent)

01/07/2005

PERG 8.27.1

For the purposes of article 53, advice must be given to or directed at someone who either holds investments or is a prospective investor (or their agent). Where the investment is a risk-only contract of insurance such as house contents insurance, the policyholder or prospective policyholder is regarded as an investor.

01/07/2005

PERG 8.27.2

Article 53 does not apply where the advice is given to persons who receive it as:

(1) an adviser who may use it to inform advice given by him to persons for whom he does not act as agent; or

(2) a journalist or broadcaster; or

(3) an employer (for example, on setting up a pension scheme).

01/07/2005

PERG 8.27.3

Article 53 does not apply to advice given to a person (such as an independent financial adviser) who is acting as an agent for an investor if it does not relate to a transaction into which the person is to enter as agent for the investor.

01/07/2005

PERG 8.27.4

Article 53 does apply where the recipient is someone who invests on behalf of other persons (whether as a principal or agent), such as:

(1) a trustee or nominee; or

(2) a discretionary fund manager; or

(3) an attorney or anyone else who enters into investment transactions as agent for investors;

where he receives the advice in that capacity.

01/07/2005

PERG 8.27.5

Advice will still be covered by article 53 even though it may not be given to or directed at a particular investor (for example, advice given in a periodical publication or on a website). The expression 'investor' has a broad meaning and will include institutional or professional investors.

01/07/2005

PERG 8.28

Advice or information

01/07/2005

PERG 8.28.1

01/07/2005

PERG 8.28.2

In general terms, simply giving information without making any comment or value judgement on its relevance to decisions which an investor may make is not advice.

01/07/2005

PERG 8.28.3

Information may often involve:

(1) listings of share and unit prices; or

(2) company news or announcements; or

(3) an explanation of the terms and conditions of an investment; or

(4) a comparison of the benefits and risks of one investment as compared to another; or

(5) league tables showing the performance of investments of a particular kind against set published criteria; or

(6) details of directors' dealings in the shares of their own companies; or

(7) alerting persons to the happening of certain events (for example, XYZ shares reaching a certain price).

01/07/2005

PERG 8.28.4

In the FSA's opinion, however, such information may take on the nature of advice if the circumstances in which it is provided give it the force of a recommendation. For example:

(1) a person may offer to provide information on directors' dealings on the basis that, in his opinion, were directors to buy or sell investors would do well to follow suit;

(2) a person may offer to tell a client when certain shares reach a certain value (which would be advice if the person providing the information has offered to do so on the basis that the price of the shares means that it is a good time to buy or sell them); and

(3) a person may provide information on a selected, rather than balanced, basis which would tend to influence the decision of the recipient.

01/07/2005

PERG 8.29

Advice must relate to the merits (of buying or selling a particular investment)

01/07/2005

PERG 8.29.1

Advice must relate to the buying or selling of an investment - in other words, the pros or cons of doing so.

01/07/2005

PERG 8.29.2

An explanation of the implications of, for example, exercising certain rights or the happening of certain events (such as death) need not involve advice on the merits of exercising those rights or on what to do following the event.

01/07/2005

PERG 8.29.3

Neither does advice on the merits of using a particular stockbroker or investment manager in his capacity as such amount to advice for the purpose of article 53. This is because it is not advice on the merits of buying or selling an investment.

01/07/2005

PERG 8.29.4

Advice in the form of rating issuers of debt securities as to the likelihood that they will be able to meet their repayment obligations need not, of itself, involve any advice on the merits of buying, selling or holding on to that issuer's stock.

01/07/2005

PERG 8.29.5

Without an explicit or implicit recommendation on the merits of buying or selling an investment, advice will not be covered by article 53 if it is advice on:

(1) the likely meaning of uncertain provisions in an investment agreement; or

(2) how to complete an application form; or

(3) the value of investments for which there is no ready market; or

(4) the effect of contractual terms and their commercial consequences; or

(5) how to structure a transaction to comply with regulatory, competition and taxation requirements; or

(6) terms which are commonly accepted in the market.

01/07/2005

PERG 8.29.6

Advice as to what might happen to the price or value of an investment if certain events were to take place, however, may be covered by article 53 in some circumstances.

01/07/2005

PERG 8.30

Medium used to give advice or information

01/07/2005

PERG 8.30.1

With the exception of periodicals, broadcasts and other news or information services (see PERG 8.31.2 G), the medium used to give advice should make no difference to whether or not it is caught by article 53.

01/07/2005

PERG 8.30.2

Advice can be provided in many ways including:

(1) face to face;

(2) orally to a group;

(3) by telephone;

(4) by correspondence (including e-mail);

(5) in a publication, broadcast or website; and

(6) through the provision of an interactive software system.

01/07/2005

PERG 8.30.3

Taking electronic commerce as an example, the use of electronic decision trees does not present any novel problems. The provider of the service will be giving advice for the purpose of article 53 only if the service results in something more than a generic recommendation, as with a paper version.

01/07/2005

PERG 8.30.4

Advice in publications, broadcasts and websites is subject to a special regime - see PERG 8.31.2 G and PERG 7.

01/07/2005

PERG 8.30.5

Some software services involve the generation of specific buy, sell or hold signals relating to particular investments. These signals are liable, as a general rule, to be advice for the purposes of article 53 (as well as financial promotions) given by the person responsible for the provision of the software. The exception to this is where the user of the software is required to use enough control over the setting of parameters and inputting of information for the signals to be regarded as having been generated by him rather than by the software itself.

01/07/2005

PERG 8.31

Exclusions for advising on investments

01/07/2005

PERG 8.31.1

The Regulated Activities Order contains a number of exclusions which prevent certain activities from being a regulated activity.

01/07/2005

PERG 8.31.2

As respects article 53, the main exclusion relates to advice given in periodical publications, regularly updated news and information services and broadcasts (article 54: Advice given in newspapers etc). The exclusion applies if the principal purpose of any of these is not to give advice covered in article 53 or to lead or enable persons to acquire or dispose of securities or contractually based investments. This is explained in greater detail, together with the provisions on the granting of certificates, in PERG 7.

01/07/2005

PERG 8.31.3

It is also possible for advice to be excluded if it is given by a person in the course of carrying on a profession or business (other than a regulated activity). This is if it is reasonably to be regarded as necessary for him to give the advice to provide his professional or other services and he is not separately paid for giving the advice (article 67: Activities carried on in the course of a profession or non-investment business). This could arise in the context of advice given by persons such as:

(1) a solicitor, accountant or tax adviser; or

(2) a debt counsellor; or

(3) an employment agency.

01/07/2005

PERG 8.31.3A

The exclusion in article 67 will not apply to a person who is advising on investments when he does so as a MiFID investment firm or a third country investment firm (see PERG 2.5.4 G to 2.5.5 G (Investment services and activities)).

01/11/2007

PERG 8.31.4

For example, it may be necessary for a person referred to in PERG 8.31.3G (1) or PERG 8.31.3G (2) to advise a client to sell all his assets for tax, legal or debt reduction reasons. However, it may not be necessary for him to recommend selling some investments and not others. Whether or not this is the case will depend on the circumstances in which the advice is given.

01/07/2005

PERG 8.31.5

Certain of the exclusions in the Regulated Activities Order that apply to the regulated activity of advising on investments are not available where the advice either relates to a contract of insurance or amounts to insurance mediation or reinsurance mediation. This results from the requirements of the Insurance Mediation Directive and is explained in more detail in PERG 5 (Insurance mediation activities).

01/07/2005

PERG 8.32

Arranging deals in investments

01/07/2005

PERG 8.32.1

Under article 25 of the Regulated Activities Order, arranging deals in investments covers:

(1) making arrangements for another person (whether as principal or agent) to buy, sell, subscribe for or underwrite a particular investment which is:

(a) a security; or

(b) a relevant investment; or

(c) an investment of the kind specified by article 86, or article 89 so far as relevant to that article (Lloyd's syndicate membership and capacity and rights to or interests in such investments); or

(2) making arrangements with a view to a person who participates in the arrangements buying, selling, subscribing for or underwriting investments falling within PERG 8.32.1G (1)(a) to (c) (whether as principal or agent).

01/07/2005

PERG 8.32.2

Article 25(1) applies only where the arrangements bring about or would bring about the particular transaction in question. This is because of the exclusion in article 26. In the FSA's view, a person brings about or would bring about a transaction only if his involvement in the chain of events leading to the transaction is of enough importance that without that involvement it would not take place. The second limb (article 25(2)) is potentially much wider as it does not require that the arrangements would bring about particular transactions. It is this limb which is of potential relevance within the scope of this guidance.

01/07/2005

PERG 8.32.3

In the course of their business, people such as publishers or broadcasters, Internet service providers, website operators or telephone marketing companies may provide services for authorised or exempt persons or other persons (such as overseas persons) who carry on regulated activities. This does not necessarily mean that any arrangements they make with such persons will fall within the scope of article 25(2). For that to be the case, the arrangements must be made with a view to the authorised or exempt (or overseas) person or that person's customers or counter parties or any or all of them buying or selling investments. This means that a person making arrangements must take account of the purpose for which he makes them.

01/07/2005

PERG 8.32.4

The ordinary business of a publisher or broadcaster can involve him in publishing or broadcasting financial promotions (for example, advertisements) on behalf of authorised or exempt persons. Journalists who write about investments or financial services may promote the services of an authorised or exempt person. In the FSA's opinion, such persons would not normally be regarded as making arrangements under article 25(2). This is the case even if any arrangements they may have made may lead their readers or viewers to buy or sell investments in response to the promotions. In the FSA's view, the publisher or broadcaster may normally be seen to be making arrangements with a view to publishing or broadcasting promotions which may include financial promotions. The same may apply to arrangements made by Internet website operators who may allow the promotion on their site of services including financial promotions through the setting up of hypertext links or the placing of banner advertisements.

01/07/2005

PERG 8.32.5

The Regulated Activities Order contains an exclusion (article 27: Enabling parties to communicate) to bring a degree of certainty to this area. This applies to arrangements which might otherwise fall within article 25(2) merely because they provide the means by which one party to a transaction (or potential transaction) is able to communicate with other parties. In the FSA's view, the crucial element of the exclusion is the inclusion of the word 'merely'. So that, where a publisher, broadcaster or Internet website operator goes beyond what is necessary for him to provide his service of publishing, broadcasting or otherwise facilitating the issue of promotions, he may well bring himself within the scope of article 25(2).

01/07/2005

PERG 8.32.6

For example, in the FSA's view a publisher or broadcaster would be likely to be making arrangements within the meaning of article 25(2) and be unable to make use of the exclusion in article 27 if:

(1) he enters into an agreement with a provider of investment services such as a broker or product provider for the purpose of carrying their financial promotion; and

(2) as part of the arrangements, the publisher or broadcaster does one or more of the following:

(a) brands the investment service or product in his name or joint name with the broker or product provider;

(b) endorses the service, or otherwise encourages readers or viewers to respond to the promotion;

(d) holds out the service as something he has arranged for the benefit of his readers or viewers.

01/07/2005

PERG 8.32.7

It would also be an indicator that a publisher or broadcaster might be making arrangements falling within article 25(2) if he receives a commission or other form of reward based on the amount of regulated business done as a result of his carrying the promotion. This would be on the basis that the existence of the financial interest will inevitably have a bearing on the purpose for which the arrangements are viewed as having been made by him. However, the article 27 exclusion will apply in cases where there is such a reward provided the arrangements are made merely to allow the communication to be made.

01/07/2005

PERG 8.32.8

So, the same considerations are liable to apply to a website operator or an operator of a similar service (such as an intranet or closed user electronic service) who is carrying banner advertising from, or otherwise setting up links to the sites of, authorised or exempt persons.

01/07/2005

PERG 8.32.9

Other persons who may benefit from the exclusion in article 27 include persons who provide the means for someone to route an order to another person. A person providing such order routing services would not, in the FSA's view, be merely facilitating communication (of the orders) if he provides added value. This added value could be in the form, for example, of such things as formatted screens, audit trails, checking completeness of orders or matching orders or reconciling trades.

01/07/2005

PERG 8.32.10

Companies providing telephone marketing and related services to investment firms will face similar issues. If their services are entirely passive - for example, answering telephone calls, sending out literature upon request or referring enquirers to representatives of their client - they may simply be regarded as making arrangements with a view to their providing telephone answering services. On the other hand, where a telephone marketing company:

(1) makes proactive calls to prospective customers of its clients; or

(2) is expected proactively to raise the possibility, during a call made by the prospective customer, of a meeting with or visit by a representative of their client or of the caller being sent promotional literature;

the arrangements are liable to be made with a view to the company's client and its prospective customers buying or selling investments. So such arrangements will be likely to fall within article 25(2) unless another exclusion applies (such as that for introductions - see PERG 8.33).

01/07/2005

PERG 8.32.11

The mere provision by a website operator of a bulletin board or chat room ought not to amount to making arrangements under article 25(2) unless making such arrangements is the specific purpose of the facility. However, operators of websites with such facilities will clearly need to be aware of potential implications (such as the service being used by unauthorised persons to give advice or make financial promotions or to make misleading statements with a view to manipulating market prices). They may wish to consider drawing such matters to the attention of persons who use the facility.

01/07/2005

PERG 8.32.12

Where persons are making arrangements concerning contracts of insurance or are carrying on insurance mediation or reinsurance mediation, certain exclusions to article 25 are not available. This results from the requirements of the Insurance Mediation Directive and is explained in more detail in PERG 5.6 (Insurance mediation activities The regulated activities: arranging deals in, and making arrangements with a view to transactions in, contracts of insurance).

01/07/2005

PERG 8.33

Introducing

01/07/2005

PERG 8.33.1

As with advice, there are various exclusions in the Regulated Activities Order which take certain arrangements out of the scope of article 25. Two of these are likely to be particularly relevant to persons who are mainly concerned with making or helping others to make communications.

01/07/2005

PERG 8.33.2

Article 29 of the Regulated Activities Order states that certain arrangements are not covered by article 25. These are arrangements made by an unauthorised person ('A'). The arrangements must be made for or with a view to a transaction which is or is to be entered into by another person (the client) with or through an authorised person. It must also be the case that:

(1) the transaction is or will be entered into on advice given to the client by an authorised person; or

(2) it is clear, in all the circumstances, that the client, in his capacity as an investor, is not seeking and has not sought advice from A on the merits of his entering into the transaction (or, if the client has sought such advice, A has declined to give it but has recommended that the client seek such advice from an authorised person).

For article 29 to apply, it is also necessary that, in return for making the arrangements, A does not receive from any person other than the client financial reward or other advantage, for which he does not account to the client, arising out of his making the arrangements (PERG 8.12.11 G gives guidance on when a person will be regarded as having received reward from someone other than his client).

01/07/2005

PERG 8.33.3

This exclusion may apply, for example, where a website operator, without offering any advice, sets up links to the sites of investment firms but does not receive any form of payment from any of the firms for doing so.

01/07/2005

PERG 8.33.4

Of potentially greater significance is the exclusion in article 33 of the Regulated Activities Order which excludes arrangements where:

(1) they are arrangements under which persons will be introduced to another person;

(2) the person to whom introductions are to be made is:

(a) an authorised person; or

(b) an exempt person acting in the course of business comprising a regulated activity in relation to which he is exempt; or

(c) a person who is not unlawfully carrying on regulated activities in the United Kingdom and whose ordinary business involves him in engaging in certain activities; and

01/07/2005

PERG 8.33.5

In the FSA's view, article 33 will apply, for example, where persons are finding potential customers for independent financial advisers, advisory stockbrokers or independent investment managers. In this case, the introducer is allowed to receive a payment for making introductions. However, it will not apply where the introductions are made either to a person whose advice or management services would not be independent (for example, a product provider such as a life office or a manager of unit trust schemes) or for the purposes of execution-only dealing.

01/07/2005

PERG 8.33.6

The exclusions in Articles 29 and 33 of the Regulated Activities Order are not available where the investment is a contract of insurance. However, certain other exclusions do apply. This results from implementation of the requirements of the Insurance Mediation Directive and is explained in more detail in PERG 5.6 (The regulated activities: arranging deals in, and making arrangements with a view to transactions in, contracts of insurance).

01/07/2005

PERG 8.33.7

The exclusion in article 29 will not apply to a person who is carrying on an arranging activity when he does so as a MiFID investment firm or a third country investment firm (see PERG 2.5.4 G to 2.5.5 G (Investment services and activities)).

01/11/2007

PERG 8.34

The business test

01/07/2005

PERG 8.34.1

Persons who may be carrying on the activity of advising on investments or making arrangements with a view to transactions in investments will only require authorisation or exemption if they are carrying on those activities by way of business. This is the effect of section 22(1) of the Act. Under section 419 of the Act, the Treasury has the power, by order, to require activities which would otherwise be treated as carried on by way of business to be treated as not carried on by way of business and vice versa. The Treasury has used this power to restrict the business test when applied to regulated activities such as advising on investments or making arrangements with a view to transactions in investments to situations where a person is carrying on the business of engaging in those activities. This is the effect of article 3 of the Financial Services and Markets Act 2000 (Carrying on Regulated Activities by Way of Business) Order 2001 (as amended).

01/07/2005

PERG 8.34.2

In the FSA's view, for a person to be carrying on the business of advising on investments or making arrangements with a view to transactions in investments, he will usually need to be carrying on those activities with a degree of regularity. The person will also usually need to be carrying on the activities for commercial purposes. That is to say, he will normally be expecting to gain a direct or indirect financial benefit of some kind. Activities carried on out of friendship or for altruistic purposes will not normally amount to a business. However, in the FSA's view, it is:

(1) not necessary that a person be seeking to profit from carrying on activities; for example a company set up by a number of other companies operating in a particular area to provide research may simply charge to recover its costs but may still be regarded as carrying on its activities as a business; and

(2) not necessarily the case that services provided free of charge will not amount to a business; for example, much investment advice is provided free of charge to investors but in the course of a business funded by commission payments; services (particularly advice, information or links) available on a website may also be free of charge to users of the site but be part of a business funded by advertising fees or sponsorship; and free newspapers may well represent a business for similar reasons.

01/07/2005

PERG 8.35

Authorisation and exemption

01/07/2005

PERG 8.35.1

Any person who is contemplating carrying on the regulated activities of advising on investments or making arrangements with a view to transactions in investments by way of business will need authorisation or exemption. Exemption would usually be obtained by a person entering into an agreement with an authorised person under section 39 of the Act and the Financial Services and Markets Act 2000 (Appointed Representative) Regulations 2001.

06/10/2007

PERG 8.36

Illustrative tables

01/07/2005

Financial Promotions: flowchart

PERG 8.36.1

This flowchart sets out the matters which a person will need to consider to see if the restriction in section 21 of the Act applies to his communications. It is referred to in PERG 8.2.5 G.

01/07/2005

Controlled activities and controlled investments

PERG 8.36.2

These tables list the activities that are controlled activities and the investments that are controlled investments under the Financial Promotion Order. It is referred to in PERG 8.7.2 G.

01/07/2005

PERG 8.36.3

Table Controlled activities

Accepting deposits

Effecting and carrying out contracts of insurance

Dealing in securities and contractually based investments

Arranging deals in investments

4A.

Operating a multilateral trading facility

Managing investments

Safeguarding and administering investments

Advising on investments

Advising on syndicate participation at Lloyd's

Providing funeral plan contracts

10.

Providing qualifying credit

11.

Arranging qualifying credit etc

12.

Advising on qualifying credit etc

13.

Providing a home reversion plan

14.

Arranging a home reversion plan

15.

Advising on a home reversion plan

16.

Providing a home purchase plan

17.

Arranging a home purchase plan

18.

Advising on a home purchase plan

19.

Agreeing to do anything in 3 to 18 above

01/11/2007

PERG 8.36.4

Table Controlled investments

A deposit.

Rights under a contract of insurance.

Shares etc.

Instruments creating or acknowledging indebtedness (referred to in the Glossary as debentures)

Government and public securities.

Instruments giving entitlement to investments (referred to in the Glossary as warrants).

Certificates representing certain securities.

Units in a collective investment scheme.

Rights under a stakeholder pension scheme or a personal pension scheme.

10.

Options.

11.

Futures.

12.

Contracts for differences etc.

13.

Lloyd's syndicate capacity and syndicate membership.

14.

Funeral plan contracts

15.

Agreements for qualifying credit

16.

Rights under a home reversion plan.

17.

Rights under a home purchase plan.

18.

Rights to or interests in anything falling under 1 to 14 above.

06/04/2007

Application of exemptions to forms of financial promotion

PERG 8.36.5

This table identifies the types of financial promotion to which each exemption in the Financial Promotions Order applies. It is referred to in PERG 8.11.2 G and PERG 8.14.1 G.

01/07/2005

PERG 8.36.6

Table Application of Exemptions to Forms of Promotions

Financial Promotion Order

Applies to

Article No.

Title and PERG 8 reference (where applicable)

Unsolicited real time

Solicited real time

Non-real time
(solicited or unsolicited)

Communications to overseas recipients (8.12.2G)

*¹

Communications from customers and potential customers (8.12.9G)

Follow up non-real time communications and solicited real time communications (8.12.10G)

Introductions (8.12.11G)

Exempt persons (8.12.12G)

*²

*³

Generic promotions (8.12.14G and 8.21.4G)

17A

Communications caused to be made or directed by unauthorised persons (8.6.7AG)

Mere conduits (8.12.18G)

18A

Outgoing electronic commerce communications: mere conduits, caching and hosting (8.12.18G)

Investment professionals (8.12.21G and 8.21.5G)

Communications by journalists (8.12.23G)

20A

Promotion broadcast by company director etc (8.12.23G and 8.21.6G)

20B

Incoming electronic commerce communications (8.12.38G)

Deposits : non-real time communications (8.13)

Deposits : real time communications (8.13)

Relevant insurance activity : non-real time communications (8.13)

Relevant insurance activity : non-real time communications : reinsurance and large risks (8.13)

Relevant insurance activity : real time communications (8.13)

One-off non-real time communications and solicited real time communications (8.14.3G)

28A

One-off unsolicited real time communications (8.14.11G)

28B

Real time communications: introductions in connection with qualifying credit (8.17.12G)

Communications required or authorised by enactments

Overseas communicators: solicited real time communications (8.14.15G)

Overseas communicators: non-real time communications to previously overseas customers (8.14.17G)

Overseas communicators: unsolicited real time communications to previously overseas customers (8.14.16G)

Overseas communicators: unsolicited real time communications to knowledgeable customers (8.14.16G)

Governments, central banks etc

Industrial and provident societies

Nationals of the EEA States other than United Kingdom (8.14.18G)

Financial markets

Persons in the business of placing promotional material

Joint enterprises (8.14.19G)

Participants in certain recognised collective investment schemes

Bearer instruments: promotions required or permitted by market rules (8.14.42G)

Bearer instruments: promotions to existing holders (8.14.42G)

Members and creditors of certain bodies corporate (8.14.41G and 8.21.8G)

Members and creditors of open-ended investment companies

Group companies

Qualifying credit to bodies corporate (8.17.10G)

Persons in the business of disseminating information (8.21.10G)

Certified high net worth individuals (8.14.21G)

High net worth companies, unincorporated associations etc (8.14.25G)

Sophisticated investors (8.14.27G)

50A

Self-certified sophisticated investors {8.14.28AG)

Associations of high net worth or sophisticated investors (8.14.29G)

Common interest group of a company (8.14.30G)

Settlors, trustees and personal representatives

Beneficiaries of trust, will or intestacy

Communications by members of professions (8.15.1G)

55A

Non-real time communication by members of the professions. (8.15.5G)

Remedy following report by Parliamentary Commissioner for Administration

Persons placing promotional material in particular publications

Acquisition of interest in premises run by management companies

Annual accounts and directors' report (8.21.11G)

Participation in employee shares schemes

Sale of goods and supply of services

Sale of body corporate (8.14.35G)

Takeovers of relevant unlisted companies

Takeovers of relevant unlisted companies: warrants etc

Takeovers of relevant unlisted companies: application forms

Promotions required or permitted by market rules (8.21.13G)

Promotions in connection with admission to certain EEA markets (8.21.16G)

Promotions of securities already admitted to certain markets (8.21.17G)

Promotions included in listing particulars etc (8.21.20G)

Mxaterial relating to prospectus for public offer of unlisted securities

Pension products offered by employers (8.14.40A)

Advice centres (8.14.40B)

¹ in limited circumstances only - see article 12(2) of the Financial Promotion Order

² for the purpose of article 16 (2) only

³ for the purpose of article 16 (1) only

06/05/2008

PERG 9

Meaning of open-ended investment company

PERG 9.1

Application and Purpose

01/07/2005

Application

PERG 9.1.1

This guidance applies to persons who need to know whether a body corporate is an open-ended investment company as defined in section 236 of the Act (Open-ended investment companies). This would mean that it is a collective investment scheme.

01/07/2005

Purpose

PERG 9.1.2

The purpose of this guidance is to outline the circumstances in which a body corporate will be an open-ended investment company and, in so doing, to:

(1) give an overview of the definition (see PERG 9.3 (The definition)) and describe its three main elements:

(a) an open-ended investment company must be a collective investment scheme (see PERG 9.4 (Collective investment scheme (section 235 of the Act)));

(b) it must satisfy the 'property' condition in section 236(2) of the Act (see PERG 9.5 (The property condition (section 236(2) of the Act))); and

(c) it must satisfy the 'investment' condition in section 236(3) of the Act (see PERG 9.6 (The investment condition (section 236(3) of the Act): general) to PERG 9.9 (The investment condition: the 'satisfaction test' (section 236(3)(b) of the Act))); and

(2) outline the implications for a body corporate if it does, or does not, fall within the definition of an open-ended investment company (see PERG 9.10 (Significance of being an open-ended investment company)).

01/07/2005

Effect of guidance

PERG 9.1.3

This guidance is issued under section 157of the Act (Guidance). It is designed to throw light on particular aspects of regulatory requirements, not to be an exhaustive description of a person's obligations. If a person acts in line with the guidance in the circumstances it contemplates, the FSA will proceed on the footing that the person has complied with aspects of the requirement to which the guidance relates. Rights conferred on third parties cannot be affected by guidance given by the FSA . This guidance represents the FSA's view, and does not bind the courts. For example, it would not bind the courts in relation to an action for damages brought by a private person for breach of a rule (see section 150of the Act (Action for damages)), or in relation to the enforceability of a contract where there has been a breach of the general prohibition on carrying on a regulated activity in the United Kingdom without authorisation (see sections 26 to 29 of the Act (Enforceability of agreements)). A person may need to seek his own legal advice. Anyone reading this guidance should refer to the Act and to the various Orders that are referred to in this guidance. These should be used to find out the precise scope and effect of any particular provision referred to in this guidance.

01/07/2005

Other guidance that may be relevant

PERG 9.1.4

The only kind of body corporate of an open-ended kind that may currently be formed under the law of the United Kingdom is one that is authorised by the FSA . A person intending to form an open-ended body corporate that has its head office in Great Britain should refer to the Open-ended Investment Companies Regulations 2001 (SI 2001/1228). Bodies corporate formed under these Regulations are referred to in the Handbook as investment companies with variable capital (or ' ICVCs '). COLL 2 (Authorised fund applications)contain rules and guidance on forming such bodies corporate. An open-ended body corporate whose head office is in Northern Ireland should refer to the Open-Ended Investment Companies Regulations (Northern Ireland) 2004 (Statutory Rule of Northern Ireland 2004/335).

01/04/2009

PERG 9.1.5

Open-ended investment companies constituted in other EEA States which are seeking to exercise rights conferred by the UCITS Directive should refer to COLL 9 (Recognised schemes) for guidance on the requirements of section 264 of the Act (Schemes constituted in other EEA States).

01/04/2009

PERG 9.2

Introduction

01/07/2005

PERG 9.2.1

The nature of many bodies corporate means that they will, in most if not all circumstances, come within the definition of collective investment scheme in section 235(1) to (3) of the Act (Collective investment schemes). The property concerned will generally be managed as a whole under the control of the directors of the body corporate or some other person for the purpose of running its business. The idea underlying the investment is that the investors will participate in or receive profits or income arising from the operation of the body corporate's business.

01/07/2005

PERG 9.2.2

However, there are a number of exclusions that apply to prevent certain arrangements from being a collective investment scheme. These are in the Schedule to the Financial Services and Markets Act 2000 (Collective Investment Schemes) Order 2001 (SI 2001/1062) (Arrangements not amounting to a collective investment scheme). The exclusion in paragraph 21 of the Schedule to that Order is of particular significance for bodies corporate. It excludes from being a collective investment scheme certain specified bodies corporate (such as building societies and friendly societies) as well as any other body corporate except a limited liability partnership or an open-ended investment company. This means that if a body corporate is an open-ended investment company it will not be excluded from the definition in section 235(1) to (3) of the Act. So it will be a collective investment scheme. Of course, it may be that other exclusions in the Schedule to the Order are available but this will depend on the circumstances of a particular body corporate (see PERG 9.4.5 G (Collective investment scheme (section 235 of the Act))).

01/07/2005

PERG 9.2.3

Certain consequences flow according to whether or not a body corporate is an open-ended investment company. Different requirements apply to the marketing of the shares or securities issued by a body corporate which is an open-ended investment company, compared with one that is not (see PERG 9.10.1 G to PERG 9.10.6 G (Marketing of shares or securities issued by a body corporate)). In addition, the regulated activities that require permission may differ (see PERG 9.10.7 G to PERG 9.10.10 G (Implications for regulated activities)).

01/07/2005

PERG 9.2.4

Guidance on the application of the definition in particular circumstances is in PERG 9.11 (Frequently asked questions)).

01/07/2005

PERG 9.3

The definition

01/07/2005

PERG 9.3.1

For a body corporate to be an open-ended investment company, as defined in section 236(1) of the Act:

(1) it must be a collective investment scheme;

(2) it must satisfy the property condition in section 236(2); and

(3) it must satisfy the investment condition in section 236(3).

01/07/2005

PERG 9.3.2

Each of these aspects of the definition is considered in greater detail in PERG 9.4 (Collective investment scheme (section 235 of the Act)) to PERG 9.9 (The investment condition: the 'satisfaction test' (section 236(3)(b) of the Act)). Although the definition has a number of elements, the FSA considers that it requires an overall view to be taken of the body corporate. This is of particular importance in relation to the investment condition (see PERG 9.6.3 G and PERG 9.6.4 G (The investment condition (section 236(3) of the Act: general))).

01/07/2005

PERG 9.3.3

An open-ended investment company may be described, in general terms, as a body corporate, most or all of the shares in, or securities of, which can be realised within a reasonable period. Realisation will typically involve the redemption or repurchase of shares in, or securities of, the body corporate. This realisation must be on the basis of the value of the property that the body corporate holds (that is, the net asset value).

01/07/2005

PERG 9.3.4

In the FSA's view, all of the elements of the definition are clearly objective tests. In applying the definition to any particular case, a person would need to have regard to all the circumstances. This includes any changes in the way that the body corporate operates.

01/07/2005

PERG 9.3.5

The FSA understands that the aim of the definition in section 236 of the Act is to include any body corporate which, looked at as a whole, functions as an open-ended investment vehicle. The definition operates against a background that there is a wide range of different circumstances in which any particular body corporate can be established and operated. For example, the definition applies to bodies corporate wherever they are formed. So, in the application of the definition to different cases, the law applicable to, and the detailed corporate form of, particular bodies corporate may differ considerably.

01/07/2005

PERG 9.3.6

For a body corporate formed outside the United Kingdom, there is an additional issue as to how the applicable corporate law and the definition of open-ended investment company in the Act relate to one another. The FSA understands this to operate as follows. The term 'body corporate' is defined in section 417(1) of the Act (Interpretation) as including 'a body corporate constituted under the law of a country or territory outside the United Kingdom'. So, whether or not any particular overseas person is a body corporate will depend on the law applicable in the country or territory in which it is constituted. But if it is a body corporate under that law, the question whether it is an open-ended investment company is determined, as a matter of United Kingdom law, by the definition in section 236 of the Act. This is regardless of whether or not the body corporate would be considered to be open-ended under the laws of the country or territory in which it is constituted.

01/07/2005

PERG 9.4

Collective investment scheme (section 235 of the Act)

01/07/2005

PERG 9.4.1

The first element of the definition is that open-ended investment companies are a corporate form of collective investment scheme. This means that they must have the features in section 235 of the Act.

01/07/2005

PERG 9.4.2

Section 235(1) states that a collective investment scheme means any arrangements with respect to property of any description. The purpose or effect of the arrangements must be to enable the persons taking part in them to participate in or receive profits or income arising from the acquisition, holding, management or disposal of the property or sums paid out of such profits or income. The participants must not have day-to-day control over the management of the property (section 235(2)) and the arrangements must provide:

(1) for the contributions of the participants and the profits or income to be pooled (section 235(3)(a)); or

(2) for the property to be managed as a whole by or on behalf of the operator of the scheme (section 235(3)(b)); or

(3) for both (1) and (2).

01/07/2005

PERG 9.4.3

In the FSA's view, it is the very existence of the body corporate that is the collective investment scheme. There are a number of statutory references that support this view. For example, it is clear that paragraph 21 of the Schedule to the Financial Services and Markets Act 2000 (Collective Investment Schemes) Order 2001 (SI 2001/1062) (Arrangements not amounting to a collective investment scheme) is drafted on the basis that it is the body corporate itself that is (or would be) the collective investment scheme. This provision states that 'no body corporate other than an open-ended investment company, amounts to a collective investment scheme'. So, any particular body corporate is either an open-ended investment company or it is not. It cannot be both at the same time, although it may change from one to the other over time (see PERG 9.7.5 G (The investment condition: the 'reasonable investor') for further guidance on this point).

01/07/2005

PERG 9.4.4

Analysing a typical corporate structure in terms of the definition of a collective investment scheme, money will be paid to the body corporate in exchange for shares or securities issued by it. The body corporate becomes the beneficial owner of that money in exchange for rights against the legal entity that is the body corporate. The body corporate then has its own duties and rights that are distinct from those of the holders of its shares or securities. Such arrangements will, in the FSA's view, qualify as arrangements of the kind described in PERG 9.4.2 G. The holders of the shares or securities in the body corporate do not have day-to-day control over the management of the property (as specified in section 235(2) of the Act) and the property is managed as a whole by or on behalf of the body corporate (as specified in section 235(3) of the Act).

01/07/2005

PERG 9.4.5

Where a body corporate does come within the definition of a collective investment scheme in section 235(1) to (3), the only relevant issue is to determine whether or not it is excluded. As PERG 9.2.2 G (Introduction) explains, the exclusions are in the Schedule to the Financial Services and Markets Act 2000 (Collective Investment Schemes) Order 2001 (SI 2001/1062) (Arrangements not amounting to a collective investment scheme). If a body corporate satisfies any of the exclusions in paragraphs 1 to 20 of the Schedule to the Order it will not be a collective investment scheme. This means that it will not then be necessary to consider whether or not it is an open-ended investment company. In any other case, it will be necessary to consider whether the body corporate is an open-ended investment company to see whether the exclusion in paragraph 21 of the Schedule to the Order (Bodies corporate) for bodies corporate other than open-ended investment companies and limited liability partnerships applies.

01/07/2005

PERG 9.4.6

In the FSA's view, the question of what constitutes a single scheme in line with section 235(4) of the Act does not arise in relation to a body corporate. This is simply because the body corporate is itself a collective investment scheme (and so is a single scheme). Section 235(4) contemplates a 'separate' pooling of parts of the property that is subject to the arrangements referred to in section 235(1). But to analyse a body corporate in this way requires looking through its corporate personality and ignoring the legal entity that exists separately from the holders of shares or securities and their rights. As a corporate entity, it cannot be broken up into component parts in this way. This is so even though a body corporate may issue shares or securities of deferred classes or of classes carrying different rights.

01/07/2005

PERG 9.5

The property condition (section 236(2) of the Act)

01/07/2005

PERG 9.5.1

If a particular body corporate ('BC') comes within the definition of a collective investment scheme, the second element in the definition is whether the property to which the scheme relates meets the property condition. This condition is that the property must belong beneficially to, and be managed by or on behalf of, BC. In addition, BC must have as its purpose the investment of its funds to:

(1) spread investment risk; and

(2) give its members the benefit of the results of the management of those funds by or on behalf of BC.

01/07/2005

PERG 9.5.2

The property belonging to BC may be property of any description, including money. For example, the arrangements may relate to real estate, works of art or a particular enterprise or rural activity. It must, of course, be possible to value the property if the requirements of the investment condition concerned with the link to net asset value are to be met (see PERG 9.9 (The investment condition: the 'satisfaction test' (section 236(3)(b) of the Act))).

01/07/2005

PERG 9.5.3

The property of the collective investment scheme must belong beneficially to BC, although the legal title to it may be held by a third party. However, the holders of shares or securities issued by BC may not have a beneficial interest in that property. In exchange for their contributions, they will only have rights against BC.

01/07/2005

PERG 9.5.4

The purpose of BC will need to be determined bearing in mind its constitutional instruments and any other relevant material: for example, material in a prospectus or offer document or other promotional material. The prevailing law may also be relevant.

01/07/2005

PERG 9.5.5

In the FSA's view, the question of whether funds are invested by BC with the aim of spreading investment risk is not affected by the levels of risk involved in particular investments. What matters for these purposes is that the aim is to spread the risk, whatever it may be. For example, the value of each of BC's investments, if taken separately, might be subject to a high level of risk. However, this would not itself result in BC failing to satisfy the property condition as long as it could be said that the range of different investments demonstrated that the aim was to spread investment risk.

01/07/2005

PERG 9.6

The investment condition (section 236(3) of the Act): general

01/07/2005

PERG 9.6.1

If BC comes within the definition of a collective investment scheme, the third element in determining whether it is an open-ended investment company is whether the 'investment condition' is satisfied. This condition is that, in relation to BC, a reasonable investor would, if he were to participate in the scheme:

(1) expect that he would be able to realise his investment in the scheme, within a period appearing to him to be reasonable; his investment would be represented, at any given time, by the value of the shares in, or securities of, BC held by him as a participant in the scheme; and

(2) be satisfied that his investment would be realised on a basis calculated wholly or mainly by reference to the value of the property for which the scheme makes arrangements.

01/07/2005

PERG 9.6.2

Under the investment condition, the reasonable investor is looking to satisfy two criteria. Both of these are fundamental to his decision to invest. But the thresholds referred to in PERG 9.6.1 G (1) and PERG 9.6.1 G (2) are different. In the FSA's view, a person expects something where he regards it as likely to happen or anticipates that events will turn out in a particular way. A person is satisfied of something where he has made up his mind or is persuaded that it is the case. The first of these criteria is referred to in this guidance as the 'expectation test' and the second as the 'satisfaction test'.

01/07/2005

PERG 9.6.3

Section 236(3) of the Act states clearly that the investment condition must be met 'in relation to BC'. In the FSA's view, this means that the investment condition should not be applied rigidly in relation to specific events such as particular issues of shares or securities or in relation to particular points in time. The requirements of the investment condition must be satisfied in relation to the overall impression of the body corporate itself, having regard to all the circumstances.

01/07/2005

PERG 9.6.4

In the FSA's view, and within limits, the investment condition allows for the possibility that a body corporate that is an open-ended investment company may issue shares or securities with different characteristics. Some shares or securities may clearly satisfy the condition whereas others may not. The FSA considers that a reasonable investor contemplating investment in such a body corporate may still take the view, looking at the body corporate overall, that the investment condition is satisfied. In the FSA's view, a body corporate issuing a number of different classes of shares or securities on different terms might be expected to satisfy the investment condition where the overall balance between those that do and those that do not is strongly in favour of those that do satisfy the investment condition. The FSA considers that, in any case where there is a genuine and reasonable doubt as to where the balance between the different classes lies, it is very likely that the body corporate would not be an open-ended investment company. PERG 9.8.8 G (Some relevant factors in applying the 'expectation test') comments further on this aspect of the investment condition in the specific context of the 'expectation test'.

01/07/2005

PERG 9.6.5

Certain matters are to be disregarded in determining whether the investment condition is satisfied. Section 236(4) of the Act states that, for these purposes, no account is to be taken of any actual or potential redemption or repurchase of shares or securities under:

(1) Chapter VII of Part V of the Companies Act 1985;or

(2) Chapter VII of Part VI of the Companies (Northern Ireland) Order 1986; or

(3) corresponding provisions in force in another EEA State; or

(4) provisions in force in a country or territory other than an EEA State which the Treasury has, by order, designated as corresponding provisions (no orders have yet been made).

01/07/2005

PERG 9.6.6

The FSA considers that the reference in PERG 9.6.5 G (3) to corresponding provisions in force in another EEA State will include provisions that derive from the maintenance of capital requirements of the Second Council Directive on co-ordination of safeguards which, for the protection of the interests of members and others, are required by Member States of companies (77/91/EEC).

01/07/2005

PERG 9.6.7

The FSA's views on the following three elements of the investment condition are explained separately:

(1) the 'reasonable investor' (see PERG 9.7 (The investment condition: the 'reasonable investor'));

(2) the 'expectation' test (see PERG 9.8 (The investment condition: the 'expectation test' (section 236(3)(a) of the Act))); and

(3) the 'satisfaction' test (see PERG 9.9 (The investment condition: the 'satisfaction test' (section 236(3)(b) of the Act)).

01/07/2005

PERG 9.7

The investment condition: the 'reasonable investor'

01/07/2005

PERG 9.7.1

The investor is specifically a reasonable investor and not just a reasonable person. This simply means that the objective standard to be applied is that of the reasonable investor. In all other respects the test is the same as any other objective test applying the standards of the reasonable person.

01/07/2005

PERG 9.7.2

The characteristics that a reasonable investor can be expected to have will inform the use of judgment required by the 'expectation test' and the 'satisfaction test'. These tests relate to the investor's ability to realise an investment within a reasonable period and to do so on the basis of the net value of its assets. In the FSA's view, the characteristics of the reasonable investor include:

(1) sound judgment based on good sense;

(2) some knowledge of, and possibly experience in, the field of investment in property of the same kind as that in which the body corporate is to invest; and

(3) some knowledge of the characteristic features of collective investment.

Where investment in a particular body corporate is clearly targeted at investors with certain characteristics, the reasonable investor can be assumed to have those characteristics.

01/07/2005

PERG 9.7.3

The reasonable investor is a hypothetical investor. The implications of this are that the test does not relate to actual investment by a particular person at a particular time or in relation to a particular issue of any class of shares or securities. In the FSA's view, what underlies the test is what a reasonable investor would think he was getting into if he were contemplating investment in a particular body corporate. In addition, because the investor is hypothetical, the investment condition is capable of operating on a rolling basis over time.

01/07/2005

PERG 9.7.4

In practice, the assessment of the nature of a particular body corporate will have to be made by applying the definition whenever an authorised person proposes to communicate an invitation or inducement to others for them to participate in the body corporate by buying shares or securities issued by it.

01/07/2005

PERG 9.7.5

After an initial assessment, however, the FSA's view is that subsequent applications of the investment condition could produce a different result, but only if there is a change to the constitution or practice of the body corporate which is significant and sustained. For example, this may happen if there is a change in the body corporate's published intentions or regular practices. As the Economic Secretary to the Treasury said in parliamentary debate when commenting on the definition, "It is a test that can be applied from time to time to allow for the possibility that a closed-ended company can become open-ended and vice versa, on account of significant changes to the way in which the operation of the company and its constitution are structured and which push the company over the boundary between the two types". (Hansard HC, 5 June 2000 Col 123).

01/07/2005

PERG 9.7.6

Section 236(3) uses the words "the investor would, if he were to participate in the scheme". This is consistent with the fact that the reasonable investor is hypothetical. But applying the test at this early stage makes it clear that there must be objectively justifiable grounds on which the reasonable investor could base the expectation in section 236(3)(a). And on which he could be satisfied on the matters in section 236(3)(b). In the FSA's view, this requires, for example, that there must be something in the nature of the body corporate or the law applicable to it to give rise to the required expectation or on which to satisfy the investor. The established practice of the body corporate may also provide the necessary grounds.

01/07/2005

PERG 9.8

The investment condition : the 'expectation test' (section 236(3)(a) of the Act)

01/07/2005

PERG 9.8.1

The test in section 236(3)(a) of the Act is whether the reasonable investor would expect that, were he to invest, he would be in a position to realise his investment within a period appearing to him to be reasonable. In the FSA's view, this is an objective test with the appropriate objective judgment to be applied being that of the hypothetical reasonable investor with qualities such as those mentioned in PERG 9.7.2 G (The investment condition: the 'reasonable investor').

01/07/2005

'Realisation' of investment

PERG 9.8.2

In the FSA's view, the 'realisation' of an investment means converting an asset into cash or money. The FSA does not consider that 'in specie' redemptions (in the sense of exchanging shares or securities of BC with other shares or securities) will generally count as realisation. Section 236(3)(a) refers to the realisation of an investment, the investment being represented by the 'value' of shares or securities held in BC. In the FSA's view, there is no realisation of value where shares or securities are simply replaced by other shares or securities. However, an 'in specie' redemption might, in limited circumstances, satisfy the expectation test. This is where shares or securities are exchanged for other shares or securities in the same body corporate and those replacement shares or securities can be converted into cash or money within a period which, for both transactions taken together, can be said to be 'reasonable'. This involves looking through the series of transactions and considering whether their overall effect would satisfy the expectation test.

01/07/2005

PERG 9.8.3

The most typical means of realising BC's shares or securities will be by their being redeemed or repurchased, whether by BC or otherwise. There are, of course, other ways in which a realisation may occur. However, the FSA considers that these will often not satisfy all the elements of the definition of an open-ended investment company considered together. For example, the mere fact that shares or securities may be realised on a market will not meet the requirements of the 'satisfaction test' for the reasons given in PERG 9.9.4 G to PERG 9.9.6 G (Effect of realisation on a market).

01/07/2005

PERG 9.8.4

An investor in a body corporate may be able to realise part, but not all, of his investment. The FSA considers that the fact that partial realisations may take place at different times does not prevent the body corporate coming within the definition of an open-ended investment company. But, in any particular case, the 'expectation test' will only be met if the overall period for realising the whole of the investment can be considered to be reasonable. Apart from this, the simple fact that an investor has the opportunity to realise part of his investment at pre-determined times would not itself make a body corporate open-ended.

01/07/2005

Illustrations of 'expectation'

PERG 9.8.5

The use of an expectation test ensures that the definition of an open-ended investment company is not limited to a situation where a holder of shares in, or securities of, a body corporate has an entitlement or an option to realise his investment. It is enough if, on the facts of any particular case, the reasonable investor would expect that he would be able to realise the investment. The following are examples of circumstances in which the FSA considers that a reasonable investor may have such an expectation.

(1) Where a body corporate, in practice, regularly redeems or repurchases its shares or securities.

(2) Where a body corporate has a declared policy of redeeming or repurchasing its shares or securities; even if it is possible for the body corporate to change its policy, the FSA takes the view that the body corporate is open-ended unless and until it does so. In such cases it would, however, be necessary for the change of policy to be documented and for there to be a public statement or other public evidence of the change.

(3) Where a body corporate makes a public announcement that it will redeem or repurchase its shares or securities on a number of pre-arranged occasions that are identified at the time of the announcement. The issue here is whether there is a demonstrable intention to redeem or repurchase the whole of a person's investment. If there is, then a body corporate may be an open-ended investment company even before it has carried out any actual redemption or repurchase. This is provided that the redemption or repurchase can take place within a reasonable period. In contrast, a body corporate that simply offers the possibility that it may, at some stage, decide to offer redemption, or partial redemption, at certain specified times would not, in the FSA's view, give rise to the expectation required by section 236(3)(a).

01/07/2005

PERG 9.8.6

However, a reasonable investor's expectation of being able to realise his investment is not displaced simply because, in certain circumstances, no active steps need to be taken to realise the investment. This might happen where a redemption or repurchase of shares or securities may become compulsory as a result of some aspect of the applicable law.

01/07/2005

Some relevant factors in applying the 'expectation test'

PERG 9.8.7

In the FSA's view, the fact that a person may invest in the period shortly before a redemption date would not cause a body corporate, that would not otherwise be regarded as such, to be open-ended. This is because the investment condition must be applied in relation to BC as a whole (see PERG 9.6.3 G (The investment condition (section 236(3) of the Act): general).

01/07/2005

PERG 9.8.8

Similarly, if BC issues shares or securities on different terms as to the period within which they are to be redeemed or repurchased (see PERG 9.6.4 G (The investment condition (section 236(3) of the Act): general), BC must be considered as a whole. Whether or not the expectation test is satisfied in relation to a particular body corporate is bound to involve taking account of the terms on which its shares or securities, or classes of shares or securities, are issued. But this is only one of a number of factors to be taken into account. It is subject to any indications there may be in the other relevant factors (such as those in PERG 9.8.9 G).

01/07/2005

PERG 9.8.9

As indicated in PERG 9.3.5 G (The definition), the potential for variation in the form and operation of a body corporate is considerable. So, it is only possible in general guidance to give examples of the factors that the FSA considers may affect any particular judgment. These should be read bearing in mind any specific points considered elsewhere in the guidance. Such factors include:

(1) the terms of the body corporate's constitution;

(2) the applicable law;

(3) any public representations that have been made by or on behalf of the body corporate;

(4) the actual behaviour of the body corporate or of a person acting on its behalf in relation to investors seeking to realise their investment in it;

(5) whether investors in the body corporate are in a position to take advantage of fluctuations in property value in the particular market in which the body corporate invests;

(6) the existence of a guarantee, which may mean that a longer period may appear reasonable than would be the case without the guarantee;

(7) where the underlying property in which the body corporate invests is relatively illiquid; in this case, the period within which realisation of an investment may be regarded as reasonable may be longer than it would be for property which has greater liquidity;

(8) the levels of disclosure of the terms on which investment is made;

(9) the nature of the investment objectives or policy of the body corporate; and

(10) the appropriateness of the name of the body corporate.

01/07/2005

PERG 9.9

The investment condition : the 'satisfaction test' (section 236(3)(b) of the Act)

01/07/2005

PERG 9.9.1

The test in section 236(3)(b) of the Act is whether the reasonable investor would, before he makes a decision to invest, be satisfied that the value of his investment would be realised on a basis calculated wholly or mainly by reference to the value of the property belonging to BC.

01/07/2005

PERG 9.9.2

In the FSA's view, this means that the reasonable investor must be satisfied that what he will get when he realises his investment is his proportionate share in the value of BC's underlying assets, less any dealing costs. In other words, that he is satisfied he will get net asset value. The investment condition focuses on the way the body corporate operates over time, and not by reference to particular issues of shares or securities (see PERG 9.6.3 G (The investment condition (section 236(3) of the Act): general)). This means that this part of the investment condition looks to the general method used to calculate the value of the investment.

01/07/2005

PERG 9.9.3

For the 'satisfaction test' to be met, there must be objectively justifiable grounds on which the reasonable investor could form a view. He must be satisfied that the value of BC's property will be the basis of a calculation used for the whole, or substantially the whole, of his investment. The FSA considers that the circumstances, or combination of circumstances, in which a reasonable investor would be in a position to form this view include:

(1) where the basis of net asset valuation is stated in constitutional documents of BC;

(2) where there is a separate agreement or arrangement made outside BC's constitution under which a person other than BC undertakes:

(a) to redeem or repurchase any shares or securities issued by BC; or

(b) to take steps to ensure that the market value of the shares or securities reflects the value of BC's property (see PERG 9.9.4 G (Effect of realisation on a market)); and

(3) where an undertaking to intervene in the market to support the price of the shares or securities at net asset value has been made publicly known by BC or by another person (see PERG 9.9.4 G (Effect of realisation on a market)).

01/07/2005

Effect of realisation on a market

PERG 9.9.4

PERG 9.9.3 G (2)and PERG 9.9.3 G (3) refer to circumstances where the reasonable investor may be satisfied that he can realise his investment at net asset value because of arrangements made to ensure that the shares or securities trade at net asset value on a market. There may, for example, be cases of market dealing where the price of shares or securities will not depend on the market. An example is where BC or a third party undertakes to ensure that the market value reflects the value of BC's property. This includes taking steps such as intervening in the market. In this case, it seems to the FSA that such an undertaking will constitute the necessary objective grounds on which an investor can be satisfied as to the basis on which the value of his investment will be realised. Unless arrangements of this kind exist, the FSA considers that the satisfaction test will not be met if the primary means for realising any investment in BC is on a market.

01/07/2005

PERG 9.9.5

However, where there is a market, the FSA does not consider that the test in section 236(3)(b) would be met if the price the investor receives for his investment is wholly dependent on the market rather than specifically on net asset value. In the FSA's view, typical market pricing mechanisms introduce too many uncertainties to be able to form a basis for calculating the value of an investment (linked to net asset value) of the kind contemplated by the satisfaction test. As a result, the FSA takes the view that, subject to PERG 9.9.4 G, market dealings or facilities relating to the shares in, or securities of, BC will generally not be relevant in assessing whether or not BC comes within the definition of an open-ended investment company.

01/07/2005

PERG 9.9.6

The fact that the definition must be applied to BC as a whole (see PERG 9.6.3 G (The investment condition (section 236(3) of the Act): general)) is also relevant here. So, for example, in a take-over situation the fact that a bidder may be willing to provide an exit route for an investment at net asset value will be irrelevant within the context of the definition. This is so even if an investor invests in particular shares or securities in the knowledge or expectation or in anticipation of such an offer being made. In the FSA's opinion, this is not a typical situation and does not affect the nature of BC as a whole or the manner in which it functions characteristically.

01/07/2005

'Wholly or mainly'

PERG 9.9.7

The expression 'wholly or mainly' in section 236(3)(b) determines the extent of the permissible departure from the link between the price of BC's shares or securities and the value of its net assets. The word 'mainly' introduces some flexibility to the process to allow for limited account to be taken of factors other than the value of BC's assets that may result in the sum realised failing to reflect the true net asset value. Such factors may include:

(1) the payment by the investor of charges; or

(2) the payment by the investor of an early redemption penalty; or

(3) a discount on a repayment or repurchase of the shares or securities to reflect the payment by or on behalf of BC of the charges required to fund payment from a source other than BC's assets; for example, this might be a loan that is to be repaid from BC's assets once they are available.

01/07/2005

PERG 9.10

Significance of being an open-ended investment company

01/07/2005

Marketing of shares or securities issued by body corporate

PERG 9.10.1

A number of controls apply under the Act to the promotion of shares or securities that are issued by any body corporate. These controls differ according to whether the person making the promotion is an unauthorised person (see PERG 9.10.2 G) or an authorised person (see PERG 9.10.3 G to PERG 9.10.6 G). In addition, where a body corporate is not an open-ended investment company:

(1) the requirements of Prospectus Rules relating to the publication of an approved prospectus may apply if its securities are offered to the public in the United Kingdom; and

(2) the listing requirements under Part VI of the Act (Official listing) will apply if its securities are to be listed.

01/10/2005

PERG 9.10.2

The controls under the Act that apply to promotions of shares or securities by unauthorised persons are in section 21 of the Act (Restrictions on financial promotion). These controls apply where an unauthorised person makes a financial promotion in, or from, the United Kingdom that relates to the shares in or securities of any body corporate. The same controls apply regardless of whether the shares or securities being promoted are issued by a body corporate that is an open-ended investment company or one that is not. There are a number of exemptions from the restriction in section 21 of the Act. These are explained in PERG 8 (Financial promotion and related activities).

01/07/2005

PERG 9.10.3

Promotions made by authorised persons in the United Kingdom are generally subject to the controls in COB 3 (Financial Promotion). However, in the case of shares in, or securities of, a body corporate which is an open-ended investment company, additional controls are imposed by Chapter II of Part XVII of the Act (Restrictions on promotion of collective investment schemes) (see PERG 8.20). Section 238 of the Act (Restrictions on promotion) prevents an authorised person communicating any invitation or inducement to buy shares or securities issued by an open-ended investment company. Section 240 of the Act (Restriction on approval of promotion) prevents an authorised person approving a financial promotion to be communicated by an unauthorised person. This is if the authorised person would not be able to promote the share or security himself.

01/07/2005

PERG 9.10.4

The restrictions mentioned in PERG 9.10.3 G are subject to a number of exemptions. For example, the controls in sections 238 and 240 do not apply to financial promotions about certain kinds of collective investment scheme. These are:

(1) open-ended investment companies formed in Great Britain and authorised by the FSA under the Open-ended Investment Companies Regulations 2001;

(2) authorised unit trust schemes; and

(3) collective investment schemes that are recognised schemes (see COLL 9 (Recognised schemes)).

The position with respect to the promotion by authorised persons of open-ended investment companies formed in Northern Ireland will be considered as part of the implementing process for the relevant Northern Ireland legislation (see PERG 9.1.4 G (Other guidance that may be relevant)).

01/04/2009

PERG 9.10.5

There are a number of other exemptions in the Financial Services and Markets Act 2000 (Promotion of Collective Investment Schemes) (Exemptions) Order 2001 (SI 2001/1060). In general terms, these exemptions are equivalent to the exemptions from section 21 of the Act that apply to units. There is guidance on those exemptions in PERG 8.20.3 G (Additional restriction on the promotion of collective investment schemes).

01/07/2005

PERG 9.10.6

The FSA has also made rules under section 238(5) which allow authorised persons to communicate or approve a financial promotion for an open-ended investment company that is an unregulated collective investment scheme (that is, one that does not fall within PERG 9.10.4 G). The circumstances in which such a communication or approval is allowed are explained in COB 3 Annex 5 R (which is introduced by COB 3.11).

01/07/2005

Implications for regulated activities

PERG 9.10.7

In the Regulated Activities Order, shares in or securities of an open-ended investment company are treated differently from shares in other bodies corporate. They are treated as units in a collective investment scheme under article 81 of the Regulated Activities Order (Units in a collective investment scheme) rather than shares under article 76 (Shares etc).

01/07/2005

PERG 9.10.8

A person who carries on in the United Kingdom the business of engaging in any regulated activity that relates to units or shares will need to be an authorised person (see PERG 2.7 and PERG 2.8 (Authorisation and regulated activities)).

01/07/2005

PERG 9.10.9

In order to be authorised, a person must have permission to carry on the regulated activities in question. What the permission needs to cover may differ according to whether the regulated activity being carried on relates to units or shares. So, for example, a body corporate that is an open-ended investment company will need permission if it carries on the regulated activity of dealing as principal or agent, arranging (bringing about) or making arrangements with a view to transactions in its own shares or securities in the United Kingdom. This applies also to a body corporate that is not an open-ended investment company except that it will not need permission to issue or arrange for the issue of its own shares or securities.

01/07/2005

PERG 9.10.10

A person carrying on the regulated activity of establishing, operating or winding up a collective investment scheme that is constituted by an open-ended investment company will need permission for those activities. In line with section 237(2) of the Act (Other definitions), the operator of a collective investment scheme that is an open-ended investment company is the company itself. But where the open-ended investment company is incorporated outside the United Kingdom, it will only require permission if its operation takes place in the United Kingdom.

01/07/2005

PERG 9.11

Frequently Asked Questions

01/07/2005

PERG 9.11.1

Table There are some frequently asked questions about the application of the definition of an open-ended investment company in the following table. This table belongs to PERG 9.2.4 G (Introduction).

Question

Answer

Can a body corporate be both open-ended and closed-ended at the same time?

In the FSA's view, the answer to this question is 'no'. The fact that the investment condition is applied to BC (rather than to particular shares in, or securities of, BC) means that a body corporate is either an open-ended investment company as defined in section 236 of the Act or it is not. Where BC is an open-ended investment company, all of its securities would be treated as units of a collective investment scheme for the purpose of the Act. A body corporate formed in another jurisdiction may, however, be regarded as open-ended under the laws of that jurisdiction but not come within the definition of an open-ended investment company in section 236 (and vice versa).

Can an open-ended investment company become closed-ended (or a closed-ended body become open-ended)?

In the FSA's view, the answer to this question is 'yes'. A body corporate may change from open-ended to closed-ended (and vice versa) if, taking an overall view, circumstances change so that a hypothetical reasonable investor would consider that the investment condition is no longer met (or vice versa). This might happen where, for example, an open-ended investment company stops its policy of redeeming shares or securities at regular intervals (so removing the expectation that a reasonable investor would be able to realise his investment within a period appearing to him to be reasonable). See also PERG 9.7.5 G.

Does the liquidation of a body corporate affect the assessment of whether or not the body is an open-ended investment company?

The FSA considers that the possibility that a body corporate that would otherwise be regarded as closed-ended may be wound up has no effect at all on the nature of the body corporate before the winding up. The fact that, on a winding up, the shares or securities of any investor in the body corporate may be converted into cash or money on the winding up (and so 'realised') would not, in the FSA's view, affect the outcome of applying the expectation test to the body corporate when looked at as a whole. The answer to Question 4 explains that investment in a closed-ended fixed term company shortly before its winding up does not, in the FSA's view, change the closed-ended nature of the company. For companies with no fixed term, the theoretical possibility of a winding up at some uncertain future point is not, in the FSA's view, a matter that would generally carry weight with a reasonable investor in assessing whether he could expect to be able to realise his investment within a reasonable period.

Does a fixed term closed-ended investment company become an open-ended investment company simply because the fixed term will expire?

In the FSA's view, the answer to this is 'no'. The termination of the body corporate is an event that has always been contemplated (and it will appear in the company's constitution). Even as the date of the expiry of the fixed term approaches, there is nothing about the body corporate itself that changes so as to cause a fundamental reassessment of its nature as something other than closed-ended. Addressing this very point in parliamentary debate, the Economic Secretary to the Treasury stated that the "aim and effect [of the definition] is to cover companies that look, to a reasonable investor, like open-ended investment companies". The Minister added that "A reasonable investor's overall expectations of potential investment in a company when its status with respect to the definition is being judged will determine whether it meets the definition. The matter is therefore, definitional rather than one of proximity to liquidation". (Hansard HC, 5 June 2000 col 124).

In what circumstances will a body corporate that issues a mixture of redeemable and non-redeemable shares or securities be an open-ended investment company?

In the FSA's view, the existence of non-redeemable shares or securities will not, of itself, rule out the possibility of a body corporate falling within the definition of an open-ended investment company. All the relevant circumstances will need to be considered (see PERG 9.6.4 G, PERG 9.2.8.8G and PERG 9.8.9 G). So the following points need to be taken into account.

(1)The precise terms of the issue of all the shares or securities will be relevant to the question whether the investment condition is met, as will any arrangements that may exist to allow the investor to realise his investment by other means.(2)The proportions of the different share classes will be relevant to the impression the reasonable investor forms of the body corporate. A body corporate that issues only a minimal amount of redeemable shares or securities will not, in theFSA's view, be an open-ended investment company. A body corporate that issues a minimal amount of non-redeemable shares or securities will be likely to be an open-ended investment company. A body corporate that falls within the definition of an open-ended investment company is likely to have (and to be marketed as having) mainly redeemable shares or securities. However, whether or not the body corporate does fall within the definition in any particular case will be subject to any contrary indications there may be in its constitutional documents or otherwise.(3)Where shares or securities are only redeemable after the end of a stated period, this factor will make it more likely that the body corporate is open-ended than if the shares or securities are never redeemable.

Does "realised on a basis calculated wholly or mainly by reference to..." in section 236(3)(b) apply to an investor buying investment trust company shares traded on a recognised investment exchange because of usual market practice that the shares trade at a discount to asset value?

In the FSA's view, the answer is 'no' (for the reasons set out in PERG 9.9.4 G to PERG 9.9.6 G).

Does the practice of UK investment trust companies buying back shares result in them becoming open-ended investment companies?

In the FSA's view, it does not, because its actions will comply with company law: see section 236(4) of the Act and PERG 9.6.5 G.

Would a body corporate holding out redemption or repurchase of its shares or securities every six months be an open-ended investment company?

In the FSA's view a period of six months would generally be too long to be a reasonable period for a liquid securities fund. A shorter period affording more scope for an investor to take advantage of any profits caused by fluctuations in the market would be more likely to be a reasonable period for the purpose of the realisation of the investment (in the context of the 'expectation' test, see PERG 9.8 and, in particular, PERG 9.8.9 G which sets out the kind of factors that may need to be considered in applying the test).

Would an initial period during which it is not possible to realise investment in a body corporate mean that the body corporate could not satisfy the investment condition?

In the FSA's view, the answer to that question is 'no'. In applying the investment condition, the body corporate must be considered as a whole (see PERG 9.6.3 G). At the time that the shares or securities in a body corporate are issued, a reasonable investor may expect that he will be able to realise his investment within a reasonable period notwithstanding that there will first be a short-term delay before he can do so. Whether or not the 'expectation test' is satisfied will depend on all the circumstances (see PERG 9.8.9 G).

01/07/2005

PERG 10

Guidance on activities related to pension schemes

PERG 10.1

Background

06/05/2006

Q1. What is the purpose of these questions and answers ("Q&As") and who should be reading them?

These Q&As are aimed at persons involved in the establishment or running of a pension scheme or in providing services to such persons and should be read, in particular, by:

•pension scheme trustees;

•those who provide services to pension schemes or their trustees; and

•employers or affinity groups who provide pension schemes for their employees or members.

They are intended to help such persons understand:

•whether they will be carrying on a regulated activity and so need to be an authorised or exempt person under section 19 of the Financial Services and Markets Act 2000; and

•whether their communications are financial promotions and, if so, whether they will be exempt from the restriction in section 21 of that Act.

The Q&As are primarily concerned with identifying the regulated activities (such as dealing or arranging deals in investments, managing investments or advising on investments) that may be carried on by persons (including trustees) who are involved with occupational pension schemes and personal pension schemes . They are also concerned, but only in relation to personal pension schemes and stakeholder pension schemes, with identifying when the regulated activity of operating such a scheme will be carried on (see Q26).

The Q&As complement the general guidance on regulated activities in Chapter 2 of our Perimeter Guidance Manual ("PERG"), the general guidance on insurance mediation activities in Chapter 5 of PERG (PERG 5), the guidance about the scope of the Markets in Financial Instruments Directive in Chapter 13 of PERG (PERG 13) and the relevant legislation. In addition, Chapter 12 of PERG (PERG 12) has further guidance about the regulated activities relating to the operation and sale of personal pension schemes that came into force on 6 April 2007.

The Q&As that follow are set out in sections:

•general issues (PERG 10.2);

•issues for pension scheme trustees (PERG 10.3);

•issues for pension scheme service providers other than trustees (PERG 10.4);

•the application of EU Directives (PERG 10.4A); and

•issues for employers or affinity groups (PERG 10.5);

and are complemented by:

•Annex 1 : Flow chart showing the steps to be considered in deciding whether authorisation is needed;

•Annex 2: Flow chart showing the additional steps to be considered by trustees of occupational pension schemes and other persons in deciding whether authorisation is needed for managing the assets of such a scheme;

•Annex 3: Table summarising the regulatory position of pension scheme trustees and service providers;

•Annex 4: Table summarising the regulatory position of employers and affinity groups; and

•Annex 5: Table summarising the regulatory position concerning financial promotions by trustees, employers and affinity groups.

01/11/2007

PERG 10.2

General issues

06/05/2006

Q2. I propose to provide services to a pension scheme - in what circumstances will I need to be authorised by the FSA or be an exempt person?

You will need to be an authorised or exempt person if you will:

•be carrying on regulated activities;

•be doing so by way of business; and

•be doing so in the United Kingdom.

Q3. How will I know if my proposed activities are regulated?

Regulated activities are specified in the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 ("the Regulated Activities Order"). They include:

• dealing (broadly, entering into a transaction as principal or agent to buy or sell certain investments);

• arranging (broadly, bringing about an investment transaction between other parties or making arrangements to assist other persons to enter into such transactions);

• managing investments (broadly, discretionary management of assets that include or may include certain investments);

• assisting in the administration and performance of a contract of insurance (broadly, notifying and providing evidence in support of or negotiating claims on behalf of policyholders);

• safeguarding and administering investments, being assets that include or may include certain investments (otherwise known as custody services);

• advising on investments (broadly, advising an investor on the merits of his buying or selling certain particular investments);

• establishing, operating or winding up a stakeholder pension scheme ;

• establishing, operating or winding up a personal pension scheme.

But some activities are specifically excluded from the FSA's regulatory scope.

Q4. What kind of investments do these regulated activities relate to?

Securities, such as shares, debt securities, warrants,unit trustsor rights under a personal pension scheme or a stakeholder pension scheme and contractually based investments such as options, futures and cash-settled instruments (contracts for differences) or long-term insurance policies with an investment element (such as unit-linked insurance or annuities). Some regulated activities, such as arranging and advising on investments, also relate to all contracts of insurance.

Q5. What exclusions are available?

There are various exclusions - some relate to a single activity and others relate to several. Further guidance on exclusions is given in the remaining questions.

Q6. How do I know if I am carrying on activities by way of business?

Whether a particular person will be carrying on a regulated activity by way of business (and so needs authorisation or exemption) will invariably depend on that person's individual circumstances. A number of factors need to be taken into account in determining whether the by-way-of-business test is met. These include:

•the degree of continuity;

•the existence of a commercial element;

•the scale of the activity;

•the proportion which the activity bears compared to other activities carried on by the same person which are not regulated; and

•the nature of the particular regulated activity that is carried on.

Corporate pension scheme trustees and other persons who provide professional services to pension schemes are likely to be carrying on their activities by way of business. Unpaid individuals who act as trustees are not likely to be. Neither are in-house trustee companies set up by an employer to operate its occupational pension scheme ("OPS") or the employer if it acts as the trustee itself. In this respect, however, article 4 of the Financial Services and Markets Act 2000 (Carrying on Regulated Activities by Way of Business) Order 2001 ("the Business Order") amends this test for trustees and other persons who manage the assets of an OPS. The effect of the amendment is that a trustee will need to be authorised if he is managing the investments of an OPS, whether or not he would normally be regarded as doing so by way of business. This is unless certain conditions are met (as explained in questions 7 to 22).

In addition, article 3(4) of the Business Order provides that any person who carries on an insurance mediation activity by way of business must be remunerated for doing so. Guidance on the application of the by-way-of-business test to insurance mediation activities is in Chapter 5.4 of PERG.

06/04/2007

PERG 10.3

Pension Scheme Trustees

06/05/2006

Q7. I am a trustee of an occupational pension scheme ("OPS") - will I need to be authorised if I also manage the investments held under my scheme?

Only if you are involved in the day-to-day management of the assets and your scheme is not a small self-administered scheme.

Occupational pension scheme trustees are subject to special treatment when they manage investments held under their scheme. This means that they may need to be authorised even though they are not carrying on their managing activities by way of business in the normal sense (they may be unpaid individuals for example).

That aside, and broadly speaking, you will not need to be authorised if:

•you delegate day-to-day decision-making about securities or contractually based investments to an authorised, exempt or overseas person (typically a fund manager); or

•the only day-to-day decisions you take relate to pooled investment products and are only taken after you have obtained and considered advice from a regulated person; or

•your scheme is fully insured and you do not take or need to delegate any day-to-day decisions; or

•your scheme is a small self-administered scheme.

Q8. What decisions can I make, as a trustee of an OPS (other than a small-self administered scheme), if I am not authorised?

You can make:

(1)strategic decisions, such as decisions:

•about the adoption or revision of a statement of investment principles as required by relevant pensions legislation; or

•about the formulation of a general asset allocation policy; or

•about prescribing the method and frequency for rebalancing asset classes, and the permitted ranges of divergence, following the setting of the general asset allocation policy; or

•about the proportion of the assets that should constitute investments of particular kinds; or

•affecting the balance between income and growth; or

•about the appointment of fund managers; or

•as to which pooled investment products to make available for members to choose from under a money purchase scheme;

(2)decisions that are needed to be taken in exceptional circumstances, such as:

•in a take-over situation; or

•where the person managing the scheme's assets has a conflict of interest; or

•where the decision is sensitive (such as one relating to investments in the same market sector as the employer or in the employer's own securities); or

•where the decision raises sensitive policy considerations (such as investments in certain territories or markets or in ethical or green areas); or

•where the trustees are required to make decisions:

-about investments acquired purely as a result of a demutualisation by an insurer or building society in which the scheme holds investments or deposits; or

-following a change in fund managers which results in the scheme holding investments which the new fund manager is unable or unwilling to take on;

(3)day-to-day decisions about investment in pooled investment products, namely:

• collective investment schemes such as unit trusts, limited partnerships, hedge funds or open-ended investment companies;

•shares or debt securities issued by an investment company such as an investment trust or a venture capital trust;

•contracts of insurance such as annuities or unit-linked investment policies;
(This is subject to the decisions being made only after you have taken and considered advice from an authorised, exempt or overseas person or an exempt professional firm (that is, a firm of solicitors, accountants or actuaries who can carry on incidental regulated activities without authorisation).);

and

(4)decisions of any kind about investing in assets that are not securities or contractually based investments - such as real property, cash or precious metals.

Q9. As an unauthorised OPS trustee, what decisions am I unable to make?

You will be unable to make most day-to-day decisions. Generally speaking, these will be:

•decisions to buy, sell or hold particular securities or contractually based investments such as a fund manager would be expected to make in his everyday management of a client's portfolio (other than day-to-day decisions about investment in pooled investment vehicles taken after obtaining advice as per Q8(3)); or

•decisions made as a result of regular or frequent interventions outside scheduled review meetings in the decision-making of external fund managers; or

•recommendations made to fund managers, on a regular basis, with a force amounting to direction relating to individual securities or contractually based investments.

Q10. As an OPS trustee, will I be making day-to-day decisions by implementing strategic decisions on a regular basis?

No. For example, you will not be making day-to-day decisions merely because the application of the method for rebalancing asset classes and permitted ranges of divergence result in mechanical changes being made regularly to the asset allocation policy. This is because the decisions are made at the time the method and frequency are set and not when those decisions result in a change to the policy.

Similarly, there may be occasions when you may determine that, in the absence of instructions from a member, his contributions will automatically be placed in a particular fund. Provided this follows a pre-determined procedure that is rigidly applied and not subject to frequent alteration, it may be regarded as the routine application of a strategic decision and not as a day-to-day decision in its own right.

Q11. As an OPS trustee, I need, from time to time, to sell investments to raise cash to meet obligations to scheme members. Is this likely to mean that I am making day-to-day decisions?

No, unless you are making regular decisions as to which particular investments to dispose of to release the necessary cash. This would not include situations where, in realising assets, you are merely applying pre-agreed strategic policy decisions with no element of discretion. In that situation, the decision is made at the time that the policy is set and is strategic.

Q12. Does the fact that, as an OPS trustee, I only infrequently make decisions about investments mean that the decisions I do make will not be regarded as day-to-day decisions?

No. The mere fact that a decision may be taken only infrequently does not, of itself, prevent that decision being a day-to-day decision. It is the nature of the decision that is important, not its frequency. For example, if you were responsible for the investment of scheme assets in a portfolio of Government stocks and debt securities, the fact that you might only occasionally need to make decisions about buying new, or selling existing, investments would not prevent those decisions being day-to-day decisions. Similarly, the fact that you may be the trustee of a small scheme where decisions about the investment of scheme assets arise only infrequently does not, of itself, prevent those decisions being day-to-day decisions.

Q13. As an OPS trustee, will I be making day-to-day decisions if I decide on the purchase of annuities to be held under the scheme?

Not in most circumstances. Typically, you may choose to select what you consider to be the most suitable annuity provider on each occasion that a decision has to be made. If this is the case, provided that you are not purchasing annuities on a frequent basis, it is unlikely that the decisions you make would be day-to-day decisions (on the basis that you are making strategic decisions about which provider to use rather than decisions about investment of the scheme assets). Less typically, your choice of annuity provider might be determined at the outset so that, each time an annuity has to be purchased, that chosen provider is used. If this occurs, you may be regarded as having made a strategic decision with regard to the most appropriate provider and then as carrying out that strategic decision on each occasion that an annuity is purchased.

But, even if your decision to purchase an annuity is a day-to-day decision, you can still make it. This is provided you meet the conditions for making decisions that involve taking and considering advice about investment in pooled investment vehicles (see Q8(3)).

Q14. As an OPS trustee, if I make decisions about the purchase of annuities on the winding-up of the scheme, am I making day-to-day decisions?

No. Decisions taken about annuities in such exceptional circumstances would not be regarded as day-to-day decisions. This also applies to decisions about annuities taken in the context of ensuring provision of benefits for a member's ex-spouse.

Q15. As an OPS trustee, I make investments on the instructions of members of the scheme. Does this mean that I have to be authorised as I have effectively delegated day-to-day decision-making to persons who are not authorised, exempt or overseas persons? What about the member - is he then managing the assets of an OPS so as to need authorisation?

No, on both points. You will not be regarded as managing investments (so that issues about delegation of day-to-day decision-making do not arise) provided the investment is to be purchased solely for the benefit of the member and you, in practice, invariably seek to match the scheme's obligations to the member by purchasing those investments. This includes where the member instructs you to purchase a particular annuity. But the position may be different should you choose not to match the obligations that the scheme incurs through the members' instructions by purchasing the relevant investments. If you then make decisions about what alternative investments to make, you are likely to be managing investments and the decisions you make may be day-to-day decisions.

The member would be regarded as managing assets that belong beneficially to him rather than assets that belong to another. So, he would not be regarded as managing investments either.

Q16. Am I going to be managing investments by exercising voting rights conferred by investments that I hold as trustee under my OPS? If so, will this be viewed as my taking a day-to-day decision?

No, you will not be managing investments unless the exercise of the rights would result in your buying, selling, subscribing for or underwriting securities or contractually based investments. This will not usually be the case. For example, voting to support a take-over offer to be made by a company in which the scheme holds shares would not involve managing investments as it would not result in your acquiring or disposing of investments. Neither would voting on the re-appointment of company directors or auditors or on whether a company in whom the scheme holds shares should make a rights issue (although deciding to subscribe to the rights issue when it is made would amount to managing investments).

Deciding to accept an offer to buy company shares held by you under the scheme, in the context of a proposed take-over of that company, would involve managing investments. But the decision you make would be viewed as strategic and not a day-to-day decision.

Q17. When may a decision I make as an OPS trustee that results in my investing in a pooled investment vehicle other than an annuity be regarded as a strategic decision?

This will arise where the decision:

•represents the initial decision to invest the scheme wholly or to a substantial amount, and on an ongoing basis, in a particular vehicle such as a life policy or unit trust scheme (on the basis that an initial decision of this kind is of such importance to the scheme that it may be regarded as strategic); or

•may be seen to be a decision to appoint a discretionary fund manager.

Q18. When will a decision that I make as an OPS trustee be regarded as one to appoint a discretionary fund manager?

This will be the case when the decision:

•seeks to implement a strategic decision to invest part of the scheme assets in a particular area or asset class (such as venture capital or emerging markets);

•is based principally on the suitability of appointing the fund manager to manage that part of the scheme assets; and

•to use a pooled investment vehicle rather than a segregated portfolio is secondary to the decision to appoint the fund manager.

Where the circumstances surrounding the appointment of a fund manager suggest that the decision is day-to-day, you may still be able to make that decision. This is provided you meet the conditions for making decisions that involve taking and considering advice about investment in pooled investment vehicles (see Q8(3)).

Q19. As an unauthorised OPS trustee, I have made a decision to invest in an investment vehicle which allows me to switch between various sub-funds. Can I make decisions about switching between those sub-funds?

Yes. However, taking decisions of this kind other than to implement strategic decisions on asset allocation is likely to involve taking day-to-day decisions. So, you would need to meet the conditions for making decisions that involve taking and considering advice about investment in pooled investment vehicles (see Q8(3)).

Q20. I understand that, as an unauthorised trustee of a small self-administered scheme (a "SSAS") I can make day-to-day investment decisions. What types of scheme qualify as a SSAS?

There are two kinds of scheme that qualify as a SSAS. These are:

(1)an "insured SSAS" - that is an OPS:

•that has no more than 50 members; and

•where:

-the contributions made by or for each member are used in the acquisition of a contract of insurance or an annuity on the life of that member;

-the only decision to be made is the selection of the relevant contract; and

-each member has been given the opportunity to make that choice himself, whether or not he chooses to do so; and

(2)a "12 relevant member SSAS" - that is an OPS:

•with no more than 12 relevant members (broadly speaking, 'relevant members' are existing or former employees for whom contributions are being or have been made and for whom benefits under the scheme are or may become payable);

•that is established under an irrevocable trust;

•where all the relevant members are trustees of the scheme (except those who are unfit to act or incapable of acting as trustee); and

•where all day-to-day decisions relating to the management of the assets of the scheme which are securities or contractually based investments (other than decisions that satisfy the conditions involving taking and considering advice about investment in pooled investment vehicles - see Q8(3)) are required to be taken by:

-all or a majority of the relevant members who are trustees; or

-an authorised person or exempt person, in each case acting either alone or jointly with all or a majority of the relevant members.

Q21. My 12 relevant member SSAS requires that all day-to-day decisions are taken by the trustee beneficiaries. The SSAS has an independent trustee who is not a beneficiary or an authorised or exempt person. If the independent trustee takes a day-to-day decision in breach of the scheme's requirement, what effect does that have on him and on the relevant members?

The independent trustee's actions will not cause the trustee beneficiaries any regulatory difficulties, even though he has acted in breach of the requirements of the SSAS. This is because it is the existence of the requirement about day-to-day decision-making that is important and not whether it may be breached. The independent trustee may, as a result of having taken the decision, be regarded as managing the SSAS's investments. But whether or not this would be the case will depend on the particular circumstances in which the decision came to be made.

Q22. I am a trustee of a 12 relevant member SSAS but not a relevant member. My role requires me to monitor investments made by the scheme - won't I be drawn into making day-to-day decisions?

No. You should be able to perform your role in monitoring and, where necessary, objecting to particular transactions without needing authorisation. Merely operating a blocking vote where a certain proposed investment would, for whatever reason, be prohibited, would not be regarded as taking part in the decision to make, or to refrain from making, that investment. If you merely express a view as to whether or not a certain proposed investment would be permitted you would not, thereby, be making a decision to buy the investment. However, to reduce the risk of being drawn into making day-to-day decisions, you may wish to make a point of not participating in a vote except where the investment could not, in your view, be made without breaching the relevant requirements.

Q23. My company acts as the corporate trustee for a self-invested personal pension scheme ("SIPP"). Will it need to be authorised?

No, provided it is not establishing, operating or winding up the scheme and is able to satisfy various exclusions that apply to other regulated activities. Guidance on the regulated activities of establishing, operating and winding up a personal pension scheme is in Q24 to Q28 and in PERG 12 (Q3 to Q5).
So, your company's position will depend on a combination of the activities that it carries on and the availability of certain exclusions. These exclusions may also apply to trustees of pension schemes other than SIPPs, including trustees of stakeholder pension schemes, with the exception of that for managing investments (which will not apply to a trustee of an OPS).

(1)Your company is likely to be dealing in investments as principal in entering into investment transactions on behalf of the trust. However, in general terms, it would avoid this if either:

•it is a bare trustee acting on the instructions of the member or his agent and it does not hold itself out as someone who provides a dealing service (see article 66(1) of the Regulated Activities Order); or

•it does not hold itself out to the public as someone who carries on business as a market maker or dealer in securities and, if it buys or sells contractually based investments, it only does so with or through a regulated person (see articles 15 and 16 of the Regulated Activities Order).

But you will not be dealing in investments as agent merely because you commit co-trustees to a transaction by entering into it on behalf of the scheme.

(2)Your company should not be arranging because this activity does not apply where a person arranges transactions to which he is to be a party (see articles 25 and 26 of the Regulated Activities Order).

(3)Your company is likely to be managing investments if it has discretionary control over the assets held under the trust. But it will not be managing investments if:

•it is acting solely on instructions from the members or from a fund manager or other agent appointed to instruct it on their behalf; or

•it is not holding itself out as an investment manager and is not remunerated for managing investments in addition to what it is paid for acting as trustee (see article 66(3) of the Regulated Activities Order).

(4)As trustee, your company is likely to be responsible for safeguarding and administering investments held as scheme assets. If it makes use of a specialist custodian it will be arranging safeguarding and administration of assets. These are potentially regulated activities. But they will not be if:

•your company is not holding itself out as a custodian and is not remunerated for providing custody services in addition to what it is paid for acting as trustee (see article 66(4) of the Regulated Activities Order); or

•(as respects arranging for another person to provide custody services) it delegates custody to a suitably authorised or exempt person (see article 66(4A) of the Regulated Activities Order).

(5)Your company will not be advising on investments unless it advises a prospective member on the merits of his buying or selling interests in securities or relevant investments to be held under the trust. If it gives advice to its co-trustees about trust investments or to existing members about their interests under the trust, its advice will be excluded provided it is not remunerated for giving the advice in addition to what it is paid for acting as trustee (see article 66(6) of the Regulated Activities Order).

(6) There are no exclusions from the regulated activities of establishing, operating or winding up a stakeholder pension scheme or establishing, operating or winding up a personal pension scheme. Guidance to help you determine whether or not your company will be carrying on any of these activities is in Q24 to Q28 and in PERG 12 (Q3 to Q5).

Q24. My company acts as corporate trustee for both trust-based stakeholder and personal pension schemes . Does it need to be authorised?

This depends on the responsibilities that your company assumes as trustee. Establishing, operating or winding up a stakeholder pension schemeor a personal pension schemeare regulated activities in their own right. These are functions that may often be carried out by the trustees of a trust-based scheme other than where the trustees are mere bare trustees. This is apart from establishing a scheme which is a function that may often be carried out by a third party such as a product provider. See Q25 to Q28 and PERG 12 (Q3 to Q5) for further guidance on these activities.
Q25. What does establishing a stakeholder or personal pension scheme involve?

The establisher of a stakeholder or personal pension scheme is the person responsible for putting in place the arrangements founding the scheme. With a trust-based scheme, this will usually be the person who executes the trust as provider. In a scheme established by deed poll, it will usually be the person who enters into the deed poll. There will usually only be one person who establishes the scheme. Any professional firms that he may employ to act as his agent (such as solicitors) would not be establishing the scheme. The establisher may also be the operator but need not be. An employer will not be establishing a stakeholder pension scheme purely as a result of his having designated such a scheme to meet the statutory requirement to do so.
Q26. What does operating a stakeholder or personal pension scheme involve?

The 'operator' is the person responsible to the members for managing and administering the assets and income of, and the benefits payable under, the scheme in accordance with relevant pensions and tax legislation, the scheme's constitution and the regulatory system. In this respect, the responsibilities that are placed under Part 4 of the Finance Act 2004 on a pension scheme administrator (as defined in section 270(1) of that Act) will mean that he is likely to be the operator of the scheme. In trust-based schemes, the trustees may act as scheme administrator or there may be a separate person who acts in that capacity. Where there are separate trustees, it may be the case that they are operating the scheme jointly with the scheme administrator by virtue of the responsibilities they assume under the trust deed for the management and administration of the scheme assets. However, in situations where the trustees' role is merely to act as a bare trustee holding the scheme assets, it is the scheme administrator who is likely to be the sole operator of the scheme. The scheme may be established by an authorised person who acts as a provider of investment products or services to the scheme. This does not make that person the operator of the scheme if, as a matter of fact, he has appointed another person to be responsible to the members for carryingout all of the operator's functions as scheme administrator or as trustee, or both as the case may be.

Q27. What is my position as the operator of a stakeholder or personal pension scheme if I delegate day-to-day functions such as administration of the scheme or management of the scheme assets to another person?

A person who accepts responsibility, and remains responsible, for carrying on a regulated activity is carrying on that activity even though he may delegate or outsource the day-to-day carrying out of the functions to another person. So, if the operator of a scheme delegates some or all of his functions to another person, he will still be the regulated operator of the scheme. At the same time, none of the people to whom he delegates his activities will become an operator of the scheme. However, they may be carrying on other regulated activities in performing their delegated or outsourced tasks (such as arranging or managing investments), in which case they will be subject to regulation for those activities.

Q28. What does winding-up a stakeholder or personal pension scheme involve?

The person who winds-up sucha pension schemewill be the person who is responsible for putting in place the arrangements for bringing the scheme to an end in a way that complies with the relevant provisions of the instrument that established the scheme and any relevant rules under pensions or tax legislation. This will, more often than not, be the operator of the scheme.

Q29. I am one of several trustees of a pension scheme. Sometimes I arrange an investment transaction on behalf of all the trustees but another trustee actually signs the purchase agreement and becomes the registered owner of the trust asset - does this mean that I could be regarded as arranging deals in investments on behalf of my fellow trustee?

No. You will not be arranging in these circumstances. This is because the interest that you acquire as trustee in the investment means that you will be regarded as being a party to the transaction. Arrangements made by a person in relation to transactions of which he is to be a party as principal or agent are excluded from arranging.

Q30. [Deleted]

06/04/2007

PERG 10.4

Pension scheme service providers other than trustees

06/05/2006

Q31. I provide administration services to pension schemes. Will I require authorisation or exemption?

Yes, if your services include any of the following activities and you cannot make use of an exclusion.

(1)Receiving instructions from the trustees or members about the buying or selling of trust investments (being securities or relevant investments) and then instructing a broker or product provider to effect the transaction. This is because you are likely to be arranging. This will include arranging for investments such as units in a unit trust scheme or in a life policy managed fund to be realised or surrendered to raise cash.

(2)Entering into investment transactions concerning securities or relevant investments on behalf of the trustees. This is because you will be dealing in investments as agent.

(3) Assisting in the administration and performance of contracts of insurance. This will only be likely to apply if you handle claims under policies held by the scheme on behalf of the trustees or other policyholders. For example, if you were making a claim for benefits payable on the death of a member under the 'death in service' benefits provided by a pension scheme. To be carrying on this regulated activity you must be assisting the trustees in both the administration and performance. Whilst dealing with claims on the death of a scheme member is likely to involve assisting in the administration of the contract of insurance, it will only involve assisting in the performance if you assist the trustees, as policyholders, to satisfy a contractual obligation that they have under it. This will typically include assisting the trustees to notify the claim in the manner specified in the policy. Detailed guidance on this regulated activity is available in Chapter 5.7 of PERG.

(4)Arranging the appointment of a custodian on behalf of the trustees. This is because you will be arranging safeguarding and administration of assets. But you will not be doing so simply because you instruct a fund manager to buy investments which the fund manager will then safeguard and administer in accordance with pre-existing arrangements.

(5) Arranging for persons to join or to leave a stakeholder pension scheme or a personal pension scheme or to exercise certain rights under such a scheme. This is because the rights themselves will be a form of investment and so you will be arranging. This is explained in more detail in PERG 12 (Q15 to Q20).

(6) Acting as the scheme administrator (as defined in section 270(1) of the Finance Act 2004) for a stakeholder pension scheme or a personal pension scheme. This is because you are likely to be operating the scheme (see Q26).

(7) Advising the trustees on the merits of buying or selling particular securities or relevant investments or advising a member on the merits of joining or leaving, or of exercising certain rights under, a stakeholder pension scheme or a personal pension scheme. This is because you will be advising on investments (see Q38 and Q39).

Services that typically will not involve any regulated activities include:

•maintaining records;

•liaising with tax authorities;

•arranging actuarial advice;

•paying over contributions to a product provider or fund manager for investment in line with pre-agreed instructions; and

•paying out benefits.

Q32. What are the exclusions that might apply to me as a pensions administration service provider?

One or more of the following exclusions might be available to you depending on the nature and scope of the services you provide:

• dealing in investments as agent and arranging with or through an authorised person (articles 22 and 29 of the Regulated Activities Order);

• dealing in investments as agent, arranging and advising on investments as a necessary part of providing other non-regulated services (article 67 of the Regulated Activities Order); and

•services provided to a member of your group (article 69 of the Regulated Activities Order).

But none of these exclusions will apply to you if, in carrying on the relevant regulated activity, you are an investment firm and do not benefit from any of the exemptions under MiFID (see Chapter 13 of PERG, including Q42).

Q33. How would the exclusions for dealing or arranging with or through an authorised person in articles 22 and 29 apply to me as a pensions administration service provider?

The exclusions will apply to you if:

•you are an unauthorised person;

•you are dealing in investments as agent or arranging on behalf of the pension scheme trustee or member (your 'client');

•the transaction into which you are entering or which you are arranging is either with an authorised product provider such as a unit trust manager or is effected by an authorised intermediary such as a stockbroker;

•you do not advise your client on the merits of his entering into the transaction;

•you are not paid by anyone other than your client; and

•the transaction does not involve contracts of insurance.

So, the exclusions can apply to a transaction involving any investment other than rights under a contract of insurance. Given that many pension schemes invest wholly or partly in contracts of insurance, there may be limited occasions where articles 22 or 29 will exclude all dealing or arranging activity of this kind.

The requirement that you do not receive any payment other than from your client does not prevent you receiving payment from the authorised person but you must then treat the sums paid to you as belonging to your client. There is nothing to prevent you then using the sums to offset payments due to you from your client for services rendered to him. This is provided that you have your client's agreement to do so.

Q34. When will regulated activities form a necessary part of my pension administration services so that I can use the exclusion in article 67?

Broadly speaking, a regulated activity will form a necessary part of your pension administration service if you could not reasonably expect to be able to provide your non-regulated administration services to the scheme trustee or member without conducting the regulated activity. This may apply where you are simply arranging for the payment of regular contributions that the broker or product provider will apply in line with standing instructions. This would, for example, apply to you if you were to be providing payroll services.

There are further conditions that must be met for the exclusion to apply:

•you must not be remunerated for the regulated activity separately from the remuneration you get from providing pension administration services; and

•you must not be a person who is required to be regulated by the Insurance Mediation Directive.

So, the exclusion cannot apply to you if you are providing a service that involves assisting in the conclusion or the administration and performance of contracts of insurance. But it may apply where you are providing other services relating to contracts of insurance (for example, arranging post-conclusion transactions such as surrenders or switches) or to other investments such as shares or unit trusts.

Q35. I provide pension administration services to a corporate pension scheme trustee who is a member of the same group as me. Does this mean that the exclusion for services provided to other group members in article 69 will apply to me?

Yes, provided the services:

•may properly be regarded as being provided solely to the trustee (as will be the case where the trustee has delegated or outsourced the carrying out of regulated activities to you but remains responsible to the members for the performance of those activities) and not to the members; and

•do not relate to contracts of insurance.

If the services do relate to contracts of insurance, you are still unlikely to need authorisation because you will only be carrying out insurance mediation activities by way of business if you are remunerated for providing services to third parties. Members of your group are not considered to be third parties.

Q36. As an administration service provider, I have authority over the pension scheme trustees' bank account. Does this mean I have to be authorised?

No. Holding or controlling money belonging to a client is not, of itself, a regulated activity. It is only if you are holding or controlling the money in connection with performing a regulated activity that you will need to be authorised. This may arise, for example, if you are arranging investment transactions on behalf of the trustees and have authority to settle the transaction using funds in the trustees' bank account.

Q37. The trustees authorise me, as administration service provider, to determine how much money should be transferred for investment each month to ensure that the scheme has enough cash available to meet its obligations. Does this have regulatory implications for me?

No, unless it results in your concluding that there is a need to realise funds and instructing a broker or product provider to liquidate investments to do so. Should that happen, you are likely to be dealing in investments as agent or arranging subject to the possible availability of an exclusion such as that in article 29 of the Regulated Activities Order (see Q33). If you are able to exercise delegated powers to determine, on the trustees' behalf, which particular investments should be sold or surrendered, you are likely to be managing investments and need to be an authorised or exempt person.

Q38. My services to the pension trustees include advising them on investments and investment strategy. Is this likely to be regulated advice and mean that I must be authorised or exempt?

Yes, if the advice:

•relates to a particular security or relevant investment such as the ABC unit trust scheme or the XYZ unit-linked insurance policy - advice on investment strategy or the choice of fund managers or brokers is not regulated advice;

•is advice and not simply information - so, there must be a recommendation to buy, sell or hold on to the particular investments;

•relates to the merits (that is the pros or cons) of buying or selling the particular investment; and

•is given to a person who is acting as an investor or who would enter into transactions as agent for the investor - so, advice to trustees about scheme investments will be given to them in their capacity as investors.

Q39. I give advice to the members of a pension scheme. Is this likely to be regulated advice and mean that I must be authorised or exempt?

Itis likely to be if the advice concerns a personal pension scheme but probably not if it concerns an OPS that is not a stakeholder pension scheme. The same factors apply to advice given to a member as apply to advice given to trustees (see Q38). But a particular factor willbe whether the member is himself buying or selling a security or relevant investment (a "regulated investment").

It is usually the case that, where regulated investments are held under trust, the person for whose benefit the investments are held will acquire a beneficial interest in the investments. Such interests are regulated investments in their own right under article 89 of the Regulated Activities Order. Where an OPS that is not a stakeholder pension scheme is concerned, however, the interests obtained by members are specifically excluded from being regulated investments (see article 89(2) of the Regulated Activities Order). This means that a member of a money purchaseOPS does not acquire a regulated investment simply through having a beneficial interest in investments held under the trust for the purpose of providing his benefits. Similarly, an interest in investments that result from a member having madeadditional voluntary contributions and which are held under the trust for his benefit will not be a regulated investment. So, advice to the member on the merits of his making additional voluntary contributions under his OPSwill not be regulated advice.

The position with stakeholder pension schemesand personal pension schemes (including free-standing additional voluntary contributions schemes) is different. The rights under such a scheme (whether it is trust-based or contractual) are a specific type of regulated investment. So, advice on the merits of joining or leaving, or of exercising certain rights under, such a scheme will be regulated advice. This is the case with a stakeholder pension schemeeven if the scheme is also an OPS. More detailed guidance on the meaning of rights under a personal pension scheme and the circumstances in which advice about such rights is regulated is in PERG 12 (Q15 to Q20). That guidance will apply equally to rights under a stakeholder pension scheme.

Q40. I provide administration services to the providers of pension products such as insurers , unit trust managers or banks . Is my position any different to that of a person who provides administration services to pension scheme trustees?

Potentially, yes. This is because:

•you are unlikely to be assisting in the administration and performance of a contract of insurance because of the exclusion in article 39B of the Regulated Activities Order for persons who manage claims on behalf of a regulated insurer; and

•although you are likely to be carrying on dealing or arranging activities if you handle such things as arranging new policies or units, additional payments, surrenders, switches or assignments, some of the exclusions may not apply to you, for example:

-the exclusions in articles 22 and 29 of the Regulated Activities Order (see Q33) will not apply because you will be remunerated by the authorised person rather than by the trustee; and

-the exclusion in article 69 of the Regulated Activities Order (see Q35) will not apply because, as a group company of the insurer, you will not be providing services solely to it but also providing services directly to the trustees on behalf of the insurer.

Q41. Does the fact that I provide administration services to the providers of pension products such as insurers on an outsourced basis and act in their name affect my position?

No. The need for authorisation or exemption depends on the nature of the activities that you carry on. The mere fact that you may carry on the services under your authorised client's name does not, of itself, remove the need for you to be authorised or exempt in your own right if the services you perform involve regulated activities.

01/11/2007

PERG 10.4A

The application of EU Directives

06/10/2006

Q41A. Are pension scheme trustees and administration service providers likely to be subject to authorisation under the Markets in Financial Instruments Directive or subject to the Capital Adequacy Directive ?

This is possible, but in many instances it is likely that pension scheme trustees and service providers will either not be providing an investment service for the purposes of, or otherwise be exempt under article 2.1 of, the Markets in Financial Instruments Directive . The following table expands on this in broad terms.
As for the re-cast Capital Adequacy Directive , this will only apply to persons who are MiFID investment firms or BCD credit institutions .

Detailed guidance on the scope of MiFID and the re-cast Capital Adequacy Directiveis in PERG 13.

Activity

Potential MiFID investment activity or service?

Potential application of MiFID or of a MiFID article 2.1 exemption?

Dealing in scheme assets as trustee

Execution of orders on behalf of clients

MiFID will not apply provided the trustees are either not acting by way of business or otherwise are not holding themselves out as persons who provide a dealing service to third parties. This is because the trustees would not be regarded as providing an investment service to third parties on a professional basis
In any event, the trustee should be exempt under article 2.1(h) as manager ordepositary (or both) of a pension fund

Issuing rights under a stakeholder or personalpension scheme to members

None - the rights are not MiFID financial instruments

MiFID does not apply

Pension scheme service provider:

a. dealing in scheme assets as agent for the trustees

b. arranging deals in scheme assets as agent for the trustees

c. arranging for persons to join the scheme or to switch or dispose of, or to acquire further, rights under the scheme

a. Execution of orders on behalf of clients

b. Receiving and transmitting orders

c. None - the rights are not MiFID financial instruments and neither are any rights to or interests in financial instruments that the scheme member may acquire under the scheme

MiFID will potentially apply where the investments are MiFID financial instruments (such as shares, debt securities or units)

However, many pension schemes will be employee participation schemes, the administration of which is exempt under article 2.1(e)

Where the service provider is providing services exclusively for the benefit of a corporate trustee who is a member of its group, the exemption in article 2.1(b) should apply. And article 2.1(f) will provide for the exclusions in 2.1(b) and 2.1(e) to be combined where the service provider is both administering an employee participation scheme and providing services to a trustee who is a group member

Where the activity is receiving and transmitting orders and the service provider is authorised, the optionalintermediaries exemption in article 3 of MiFIDmay apply
If the service provider is acting as the operator of a stakeholder or personal pension scheme (for example, as the scheme administrator), he should be exempt under article 2.1(h) as manager of a pension fund

Managing the assets of the scheme

Investment management

MiFID will not apply to trustees provided they are either not acting by way of business or otherwise are not holding themselves out as, or additionally remunerated for, providing investment management services. This is because the trustees would not be regarded as providing an investment service to third parties on a professional basis
In any event, trustees should be exempt under article 2.1(h) as manager or depositary (or both) of a pension fund

If a service provider is acting as the operator of a stakeholder or personal pension scheme, he should also be exempt under article 2.1(h) as manager of a pension fund

But a service provider who is merely managing the assets of a pension fund without being the manager or depositary of the scheme will not be exempt under article 2.1(h). The manager and depositary are those persons charged with responsibility for managing the fund or safeguarding its assets and not persons to whom such functions may be delegated or outsourced

Safeguarding and administering the scheme assets

None

Safekeeping and administration of investments is aMiFID ancillaryservice

Establishing, operating or winding up a stakeholder or personalpension scheme

None

MiFID does not apply

a. Pension scheme trustee advising fellow trustees or members or prospective members

b. Pension scheme service provider advising trustees or members or prospective members

Investment advice

MiFID will potentially apply where the advice concerns MiFID financial instruments (such as shares, debt securities or units) and so may apply to advice given to the trustees about scheme assets. However, beneficial interests in financial instruments held under the trusts of a pension scheme will not themselves be financial instruments under MiFID. And rights under a personal pension or stakeholder pension scheme are also not financial instruments. So, advice given to scheme members or prospective members should not be investment advice under MiFID

MiFID will not apply to trustees who are advising their fellow trustees for the purposes of the trust provided they are not additionally remunerated for providing investment advisory services

Also, trustees will be exempt under article 2.1(h) in respect of anything they do in the capacity of manager or depositary of a pension fund (including advising their fellow trustees)

If a service provider is acting as the operator of a stakeholder or personal pension scheme, he should also be exempt under article 2.1(h) as manager of a pension fund if he gives advice to the trustees

Where the service provider is providing advice to a corporate trustee who is a member of its group, the exemption in article 2.1(b) may apply (and may be combined with the exemption for administration of an employee participation scheme under article 2.1(f) where relevant)

Q41B. [deleted]

Q41C. As a professional trustee of a pension scheme, am I affected by the implementation of the Insurance Mediation Directive?

No. A pension scheme trustee may perform tasks on behalf of the other trustees (such as signing proposal forms or giving dealing instructions to insurers or brokers or notifying claims on the death of a scheme member). But he will not be providing an insurance mediation service to them. This is because, under the policy, he will share equal rights and equal responsibility with his co-trustees and so may be regarded as acting solely in the capacity of policyholder rather than intermediary. Also, the pension scheme trustee will not be providing an insurance mediation service on behalf of the members as the members will not be policyholders.

Q41D. As a pension scheme administration service provider, am I affected by the implementation of the Insurance Mediation Directive?

You may be. Detailed guidance about the potential effect of the Insurance Mediation Directive on the normal activities of administration service providers is in Q31 to Q41 and the table in Annex 3.

01/11/2007

PERG 10.5

Employers and affinity groups (such as trade unions)

06/05/2006

Q42. Will I, as an employer, ever need to be regulated for providing pension benefits to my staff?

No, unless you are carrying on a regulated activity and, if so, satisfy the by-way-of-business test (see Q44).

Q43. When am I, as an employer, likely to be carrying on a regulated activity?

You are unlikely to be carrying on a regulated activity in the case of an OPS (other than one that is also a stakeholder pension scheme) unless you provide services that involve regulated activity to the trustees (such as giving them advice or arranging trust transactions). Any service that you might provide to your employees concerning their rights under the OPS will not be a regulated activity. But if you provide your staff with the opportunity to participate in a personal pension scheme or a stakeholder pension scheme, you are likely to be arranging. You may also be advising on investments if you provide your employees with advice on the merits of their joining the scheme (see Q39).
Q44. As an employer, I may offer my staff a stakeholder pension scheme or a personal pension scheme. If I do so, will I satisfy the by-way-of-business test?

Most probably not. To need authorisation you would need to be carrying on the arranging activity on commercial lines. This means that you would need to be expecting to obtain some form of commercial benefit from providing your staff, or a third party such as the intermediary who sets up the scheme for you, with services. This also applies if you were to be advising your employees on the merits of joining the scheme. However, giving advice also brings into play the restriction on making financial promotions (see Q47 to Q50).

As an employer, you are likely to be obtaining a commercial benefit from providing a pension scheme for your staff if you receive a direct benefit such as a commission or introduction fee. Or the commercial benefit may be indirect, for example, a reduction in premiums payable on another product such as key man or buildings insurance as an alternative to a direct fee.

But you would not gain a commercial benefit purely because:

•you negotiate special terms for your employees or for your own contributions or for both; or

•you hope to acquire or retain a more satisfied or happier or efficient workforce; or

•you recover the actual costs of arranging for your staff to be able to participate in the scheme.

In addition, if your scheme is an insurance-based scheme, such as a group personal pension scheme, your activity will potentially involve insurance mediation activity. If so, to satisfy the by-way-of-business test, you would also need to be remunerated.

The vast majority of employers or affinity groups do not set out to make a regular profit from arranging pension benefits for their staff or members and so will not satisfy the by-way-of-business test and will not need to be an authorised or exempt person.

Q45. As an employer, administration services that involve regulated activities are provided to my OPS in-house by my staff. Does this mean that I or my staff will need to be authorised or exempt?

No, on the basis that neither you nor they are likely to satisfy the by-way-of-business test. This is unless you are providing the services on a commercial basis (see Q44). This would arise if you provide the service in return for a reward that goes beyond the mere recovery of the costs you incur in doing so.

Q46. As an employer, I have designated a stakeholder pension scheme for my employees in accordance with the statutory requirement to do so. Does this mean that I am carrying on the regulated activity of establishing a stakeholder pension scheme?

No. The scheme has already been established by another person and you are merely choosing it as the stakeholder pension scheme which is to be offered by you to your employees.

Q47. As an employer, are there restrictions on my providing staff with details of pension schemes?

Yes, but in most circumstances you should be able to make use of an exemption.

If you make an invitation or inducement to your staff to join a personal pension scheme or a nominated stakeholder pension scheme, you are likely to be making a financial promotion. This is prohibited under section 21 of the Financial Services and Markets Act 2000 unless:

•you are an authorised person; or

•its contents are approved by an authorised person; or

•it falls within a relevant exemption.

It should be noted that the prohibition applies to financial promotions made in the course of business. It is our view that employers who promote their chosen pension schemes to their employees will be doing so in the course of business.

There are no restrictions on your promoting a non-stakeholder OPS to your employees. This is because neither rights under an OPS nor interests in any investments held under it (such as interests in additional voluntary contributions schemes) are treated as regulated investments.

Q48. What are the exemptions that are available to employers?

Where an employer is obliged by law to offer its employees a stakeholder pension scheme, any financial promotion made for that purpose will be exempt under article 29 of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 ("the Financial Promotion Order").

There is also a specific exemption for employers who make financial promotions to their staff in article 71 of the Financial Promotion Order. This applies, broadly speaking, where:

•the promotion is about a group personal pension scheme or a stakeholder pension scheme;

•the employer contributes to the pension scheme and discloses details of its contribution to the employee;

•the employer does not obtain any direct commercial benefit from promoting the scheme to its employees; and

•the employer informs the employee in any written promotion of his right to seek independent financial advice from a regulated person.

Q49. Are there any other exemptions available to employers or any that apply to affinity groups?

There are a few exemptions that may be relevant. For example:

•follow-up promotions, such as may be made after the employer has made a promotion under article 71 of the Financial Promotion Order - see article 14 of the Financial Promotion Order; and

•one-off promotions (that is, promotions that take account of the personal circumstances of the recipient) - see articles 28 and 28A of the Financial Promotion Order.

Q50. Can I find out more about the financial promotion restriction?

Yes. Chapter 8 of PERG has detailed guidance about the scope of the financial promotion restriction and the exemptions that are available.

06/04/2007

PERG 10 Annex 1

Flow chart showing the steps to be considered in deciding whether authorisation is needed.

06/05/2006

06/05/2006

PERG 10 Annex 2

Flow chart showing the additional steps to be considered by trustees of occupational pension schemes and other persons in deciding whether authorisation is needed for managing the assets of such a scheme

06/05/2006

06/05/2006

PERG 10 Annex 3

Table summarising regulatory position of pension scheme trustees and service providers

06/05/2006

Potential regulated activity

When will such regulated activities be carried on?

Dealing in investments as principal (article 14 of the Regulated Activities Order)

Pension scheme trustees will be entering into investment transactions as principal but should be able to rely on the exclusions in articles 15, 16 or 66(1) of the Regulated Activities Order (see Q23(1)).

Dealing in investments as agent (article 21 of the Regulated Activities Order)

Service providers who enter into investment transactions under delegated authority from pension scheme trustees or members are likely to be dealing in investments as agent (see Q31(2)).

Pension scheme trustees are not dealing in investments as agent simply because their actions result in co-trustees acquiring or disposing of interests in trust assets. This is because they will be acting as principals (see Q23(1)).

Article 22 of the Regulated Activities Order excludes from its scope, subject to certain conditions, an unauthorised person who deals in investments as agent with or through an authorised person. This exclusion is disapplied where the arrangements relate to a contract of insurance (such as a unit-linked policy, an annuity, term assurance or any general insurance contract). Service providers may be able to make limited use of this exclusion (see Q33).

Article 67 of the Regulated Activities Order provides an exclusion for persons whose profession or business does not otherwise consist of regulated activities and who deal in investments as agent as a necessary part of their profession or business without being separately remunerated for doing so. This exclusion does not apply, in broad terms, where a person is carrying on insurance mediation. Service providers may be able to make limited use of this exclusion - for instance, where providing payroll services (see Q34).

Article 69 of the Regulated Activities Order excludes persons who are dealing in investments other than contracts of insurance as agent for other members of their group. However, service providers who are carrying on insurance mediation activities solely for, and are remunerated solely by, another group member will not satisfy the by-way-of-business test (see Q35).

Arranging (bringing about) deals in investments and making arrangements with a view to transactions in investments (article 25 of the Regulated Activities Order)

Service providers who arrange transactions involving securities or relevant investments for pension scheme trustees or members are likely to be carrying on one or both of the arranging activities (see Q31(1)).

Pension scheme trustees are not arranging simply because their actions result in co-trustees acquiring or disposing of interests in trust assets. This is because they will be acting as principal (see Q29).

Service providers should be able to make good use of the exclusion in article 29 of the Regulated Activities Order for arranging deals with or through an authorised person. However, this exclusion does not apply where the arrangements relate to a contract of insurance (such as a unit-linked policy, an annuity, term assurance or any general insurance contract). This may affect the position of service providers where they are involved with such things as:
(1) arranging trust investments for the trustees;
(2) arranging for employees to participate in a personal pension scheme; or
(3) arranging for employees to participate in a stakeholder pension scheme.

Where such activities relate to a contract of insurance, the service provider is likely to need to be an authorised or exempt person provided he satisfies the by-way-of-business test (see Q33).

Article 67 of the Regulated Activities Order provides an exclusion for persons whose profession or business does not otherwise consist of regulated activities and who are arranging as a necessary part of their profession or business without being separately remunerated for doing so. This exclusion does not apply, in broad terms, where a person is carrying on insurance mediation. Service providers may be able to make limited use of this exclusion - for instance, where providing payroll services (see Q34).

Article 69 of the Regulated Activities Order provides an exclusion for persons who are arranging on behalf of other members of their group. This exclusion does not apply where the transaction involves a contract of insurance.

However, service providers who are carrying on insurance mediation activities solely for, and are remunerated solely by, another group member will not satisfy the by-way-of-business test (see Q35).

Managing investments (article 37 of the Regulated Activities Order)

Trustees of occupational pension schemes (whether or not they would otherwise be regarded as acting by way of business) will need authorisation or exemption for managing investments unless:

•the scheme is a small self-administered scheme that meets certain requirements; or

•they do not need to take any day-to-day decisions about investing the scheme's assets; or

•they delegate the taking of all day-to-day decisions to an authorised, exempt or overseas person; or

•the only day-to-day decisions that they take relate to pooled investment vehicles and they obtain and consider advice from an expert (see Q7 to Q22).

The flow chart in Annex B sets out the steps that an OPS trustee will need to go through to determine whether he will need authorisation or exemption for managing investments. This also applies to any other person who may be managing the assets of an OPS.

A personal pension scheme trustee will not need authorisation if he is unpaid. Other trustees who manage the investments of a personal pension scheme will not be managing investments provided they do not:

•hold themselves out as providing a service of managing investments; or

•receive additional remuneration for managing investments (see Q23(3)).

Assisting in the administration and performance of a contract of insurance (article 39A of the Regulated Activities Order)

Pension scheme trustees will not be regarded as carrying on this activity simply because they make claims on behalf of their co-trustees as well as on their own behalf. This is where the trustees are acting jointly and share the same rights and obligations as policyholders (see Q30).
Service providers are likely to carry on this activity if they notify a claim under the 'death in service' benefits under a scheme in conjunction with handling the claim on behalf of the pension scheme trustees. This is because such services involve assisting in both administration and performance. But they will not be carrying on this activity provided they do not assist the trustees to perform any contractual obligation that they may have under the relevant policy. For example, the trustees may notify the claim themselves in accordance with the policy leaving the service provider to deal with administration only. Redeeming units under a unit-linked contract of insurance with a view to funding benefits or assigning benefits for any reason will not involve making a claim or otherwise assisting in performance (see Q31(3)).

The exclusion in article 67 of the Regulated Activities Order extends to persons whose profession or business does not otherwise consist of carrying on a regulated activity and who are assisting in the administration and performance of a contract of insurance as a necessary part of their profession or business without being separately remunerated for doing so. The exclusion only applies where a person is not required to be regulated by the Insurance Mediation Directive. This means, in effect, that service providers will only be able to use the exclusion in connection with assisting in the administration and performance of a contract of insurance if they are merely providing information (see Q34).

Where a person is assisting in the administration and performance of a contract of insurance solely for, and is remunerated solely by, another group member, he will not satisfy the by-way-of-business test because he is not carrying on insurance mediation activities for a third party and so does not require to be authorised or exempt (see Q35).

Safeguarding and administering investments or arranging safeguarding and administration of assets (article 40 of the Regulated Activities Order).

Some pension scheme trustees will not be carrying on this activity by way of business. For example, individuals who act as unpaid trustees of an occupational pension scheme (see Q6).

Other trustees will not be carrying on this activity provided they do not:

•hold themselves out as providing a service of safeguarding and administering investments or arranging safeguarding and administration of investments; or

•receive additional remuneration for safeguarding and administering investments or arranging safeguarding and administration of investments.

In addition, trustees will not be arranging safeguarding and administration of investments where they arrange for this to be done by a regulated person or a person acting on his behalf (see Q23(4)).

Service providers would be arranging safeguarding and administration of investments if they arrange for the appointment of a custodian on behalf of the trustees. But they will not be arranging for another person to safeguard and administer simply by virtue of instructing a fund manager to buy investments which the fund manager will then safeguard and administer in accordance with pre-existing arrangements (see Q31(4)).

Establishing, operating or winding up a stakeholder pension scheme or establishing, operating or winding up a personal pension scheme(article 52 of the Regulated Activities Order)

The trustee of a trust-based stakeholder or personalpension scheme maybe its operator. This is where the trustee is not merely a bare trustee and isresponsible under the instruments establishing the scheme for complying with the management and administration requirements in respect of the assets and income of, and the benefits payable under, the scheme as imposed under relevant pensions and tax legislation. Persons who are not scheme trustees are only likely to be carrying on these activities if they are the scheme administrator (see Q26).

Advising on investments (article 53 of the Regulated Activities Order)

Trustees of pension schemes will not be advising on investments provided the advice is given only:

•to a fellow trustee for the purposes of the trust; or

•to a member about his interest in the trust fund,

and provided that the trustee:

•does not receive additional remuneration for advising on investments; and

•is not required to be regulated under the Insurance Mediation Directive (which should not be the case either because he does not provide mediation services to his co-trustees or because he is not remunerated specifically for giving advice) (see Q23(5) and Q30).

Service providers would be advising on investments if they provide advice to the trustees on the merits of the trust making particular investments (see Q39 and Q40).

Article 67 of the Regulated Activities Order provides an exclusion for persons whose profession or business does not otherwise consist of regulated activities and who are advising on investments as a necessary part of their profession or business without being separately remunerated for doing so. This exclusion does not apply, in broad terms, where a person is carrying on insurance mediation. Service providers may be able to make limited use of this exclusion - for instance, where providing actuarial advice to the trustees of an occupational pension scheme (see Q34).

06/04/2007

PERG 10 Annex 4

Table summarising regulatory position of employers and affinity groups.

06/05/2006

Activity carried on by employer or affinity group

Potential implications in terms of regulated activities and the need for authorisation

Establishing or setting up an occupational pension scheme or a group personal pension scheme or a stakeholder pension scheme.

Establishing an occupational pension scheme is not a regulated activity. Setting up a group personal pension scheme is likely to involve arranging (see Q43).

Establishing a stakeholder pension scheme is a regulated activity in its own right. But an employer who is designating a stakeholder pension scheme as required by law is not, as a result of that fact alone, establishing the scheme (see Q46).
In any event, the employer or affinity group will only need to be authorised or exempt if they are carrying on regulated activity by way of business which, in most instances, should not be the case (see Q6, Q44 and Q45).

Acting as trustee of a trust-based stakeholder pension scheme.

This is likely tobe a regulated activity asthe trustee is likely to beoperating the stakeholder pension scheme. But the employer or affinity group will only need to be authorised or exempt if, as trustee, they are acting by way of business which, in most instances, should not be the case (see Q6, Q44 and Q45).

Arranging for employees to participate in an occupational pension scheme or a group personal pension scheme or a stakeholder pension scheme.

Arranging for employees to participate in an occupational pension scheme (other than one that is also a stakeholder pension scheme) is not a regulated activity as the employees are not acquiring investments. Arranging for employees to participate in any form ofpersonal pension scheme or in a stakeholder pension schemeis likely to involve arranging. But the employer or affinity group will only need to be authorised or exempt if they are acting by way of business which, in most instances, should not be the case (see Q6, Q44 and Q45).

Advising employees on the merits of participating in an occupational pension scheme or a group personal pension scheme or a stakeholder pension scheme, including advising employees against joining a personal pension scheme or advising them to transfer from a personal pension scheme.

Advice on the merits of participating in an occupational pension scheme (other than one that is also a stakeholder pension scheme) is not a regulated activity as the employees are not acquiring investments. Advice on the merits of participating in a particulargroup personal pension scheme or stakeholder pension scheme will be a regulated activity because the rights that a person would acquire by becoming a member of the scheme are a form of investment (see Q39). Advice against joining or to transfer from a particularpersonal pension scheme will be a regulated activity for the same reasons. If the advice relates to personal pension schemes generally but not one in particular it will not be a regulated activity (see Q39 and Q40).

But the employer or affinity group will only need to be authorised or exempt if they are acting by way of business which, in most instances, should not be the case (see Q6, Q44 and Q45).

Assisting in the administration of an occupational pension scheme or a group personal pension scheme or a stakeholder pension scheme.

Any of these could involve regulated activity (see Q31). But the employer or affinity group will only need to be authorised or exempt if they are acting by way of business which, in most instances, should not be the case (see Q6, Q44 and Q45).

Providing in-house administration services to the trustee of the employer's OPS and safekeeping services for documents of title such as bearer certificates.

This may amount to safeguarding and administering investments if the employer undertakes both activities.

But the employer or affinity group will only need to be authorised or exempt if they are acting by way of business which, in most instances, should not be the case (see Q6, Q44 and Q45).

06/04/2007

PERG 10 Annex 5

Table summarising regulatory position concerning financial promotions by trustees, employers and affinity groups.

06/05/2006

Person communicating

Subject or purpose of communication

Need for approval or exemption available

Employer, affinity group or trustee

To provide information on any aspect or type of pension arrangements without seeking to persuade the recipient to take a particular course of action.

Approval or exemption not needed. Mere information will not be a financial promotion.

Employer, affinity group or trustee

To persuade employees or members to join an occupational pension scheme which is not a stakeholder pension scheme.

Approval or exemption not needed as interests arising under the trusts of an occupational pension scheme which is not a stakeholder pension scheme are not investments and so the communication will not be a financial promotion (see Q47).

Employer, affinity group or trustee

To persuade employees or members to join a stakeholder pension scheme or a group personal pension scheme.

Approval or exemption needed as rights under a stakeholder pension scheme and rights under a group personal pension scheme are themselvesinvestments.

Promotions about stakeholder pension schemes will be exempt where employers are making them in order to meet their statutory obligation to provide a stakeholder pension scheme for their employees.

Employers may be able to use the specific exemption for promotions made to employees if the conditions in the exemption are satisfied (see Q48).

Individuals who act as unpaid trustees will not be making promotions in the course of business, so approval or exemption will not be required.

Affinity groups may or may not be promoting in the course of business depending primarily on whether they are carrying on their main activities as a business.

Employer or affinity group

To persuade employees or members to make free-standing additional voluntary contributions (FSAVCs) or to take out any other type of personal pension scheme (other than a stakeholder pension scheme or a group personal pension scheme).

Approval or exemption willbe needed as rights under FSAVCs and other personal pension schemes are themselvesinvestments.

Employer, affinity group or trustee

To persuade employees or members to take out additional voluntary contributions (AVCs) or an annuity to be held under an occupational pension scheme which is not a stakeholder pension scheme.

Approval or exemption not needed as interests in AVCs or annuities arising under the trusts of an occupational pension scheme which is not a stakeholder pension scheme are not investments and so the communication will not be a financial promotion (see Q47).

Employer, affinity group or trustee

To persuade employees or members not to join, or not to leave the occupational pension scheme to join, a stakeholder pension scheme or a group personal pension scheme or not to switch funds by reference to which their benefits are calculated.

Approval or exemption not needed as persuading persons not to acquire, or not to dispose of, investments is not a financial promotion.

Employer, affinity group or trustee

To persuade members of a pension scheme to switch funds by reference to which their benefits are calculated.

Approval or exemption not needed when the scheme is an occupational pension scheme which is not a stakeholder pension scheme as the rights being switched are not investments and so the communication will not be a financial promotion (see Q47).

Where the switching rights occur under a stakeholder pension scheme or a group personal pension scheme, approval or exemption will be needed as the rights are investments.

Employers may be able to use the specific exemption for promotions made to employees where the promotion relates to switching rights under a group personal pension scheme or a stakeholder pension scheme and the other conditions in the exemption are satisfied (see Q48).

Trustees will be exempt as they are making the promotion to a member and it relates to the management or distribution of the trust fund.

Trustee

To persuade co-trustees to enter into an investment transaction.

Trustees will be exempt as they are making the promotion to a fellow trustee and it is made for the purposes of the trust fund.

06/04/2007

PERG 11

Guidance on property investment clubs and land investment schemes

PERG 11.1

Background

06/03/2006

Q1. What is the purpose of these questions and answers ("Q&As") and who should be reading them?

These Q&As are principally aimed at those involved in the running of property investment clubs or schemes involving the sale of plots of land with arrangements for obtaining planning permission in respect of them or for the disposal of the land as a whole. They are intended to help such persons understand whether they will be carrying on a regulated activity and need to be an authorised person or exempt person under section 19 of the Financial Services and Markets Act 2000. The Q&As may also be of assistance to investors in such schemes concerned about whether the scheme they are investing in should be run by an authorised or exempt person.

The Q&As that follow are set out in two sections:

•Guidance on property investment clubs (PERG 11.2)

•Guidance on land investment schemes (PERG 11.3)

06/03/2006

PERG 11.2

Guidance on property investment clubs

06/03/2006

Q2. What are property investment clubs?

In general, property investment clubs, (sometimes also known as buy-to-let schemes, buy-to-let syndicates or property investment syndicates) are schemes allowing members of the public to invest in property and which possess some or all of the following characteristics:

•a pooling of resources to allow investment in, or collective management of, real property;

•much or all of the property purchased being financed by money borrowed by the members of the scheme (a typical split being 15% equity and 85% debt), with the borrowing often being arranged by the property investment club itself for members;

•the offer of educational training on the property market;

•other help given to members by the property investment club, including help with the purchase, and the sale, of the property (sometimes involving forward purchase contracts);

•the properties concerned are often newly, or not yet, built; and

•discounts are often offered, or are purported to be offered, on the price of the property (usually from the developer in recognition of a bulk purchase by club members).

Q3. Does the FSA regulate property investment clubs?

The FSA regulates the operation and promotion of property investment clubs if, in substance, they amount to collective investment schemes.

If a scheme, in substance, is a collective investment scheme, it cannot escape the need for regulation by being dressed up as something else.

Q4. What is a collective investment scheme and will my property investment club be one?

Broadly speaking, a collective investment scheme is any arrangement:

•the purpose or effect of which is to enable those taking part (either by owning the property, or part of it, or otherwise) to participate in or receive profits or income arising from the acquisition, holding, management or disposal of the property;

•where persons taking part do not have day-to-day control over the management of the property; and

•where either the contributions and profits or income are pooled, or the property is managed as a whole by or on behalf of the operator of the scheme, or both.

Whether your property investment club is a collective investment scheme or not will depend on its individual structure and the facts surrounding it. If your club meets each of the above conditions and is not exempt, then its operation and promotion should come under FSA regulation. This is regardless of whether that was intended by the person operating or promoting the club.

Q5. Can a body corporate be used rather than a collective investment scheme?

Yes, if all your rights in a scheme derive from ownership of securities issued by a body corporate, the scheme will not be a collective investment scheme. This is unless the body corporate is an open-ended investment company or a limited liability partnership. PERG 9 has guidance on the meaning of open-ended investment company.

Q6. What is the purpose of the 'day-to-day control' test and the nature of day-to-day control?

The purpose of the 'day-to-day control' test is to try to draw an important distinction about the nature of the investment that each investor is making. If the substance is that each investor is investing in a property whose management will be under his control, the arrangements should not be regarded as a collective investment scheme. On the other hand, if the substance is that each investor is getting rights under a scheme that provides for someone else to manage the property, the arrangements would be regarded as a collective investment scheme.

Day-to-day control is not defined and so must be given its ordinary meaning. In our view, this means you have the power, from day-to-day, to decide how the property is managed. You can delegate actual management so long as you still have day-to-day control over it.

Q7. The participants in my property investment club do not get involved in every single management decision, but appoint agents to take decisions for them in accordance with criteria agreed between them. Have the participants lost day-to-day control?

We do not consider that day-to-day control means that each participant would themselves need to be involved in each and every decision taken, so long as they retain day-to-day control over the management. For example, delegating rent collection, cleaning and management services in relation to a property, by appointing agents to carry out these tasks would not necessarily mean that the participants lose day-to-day control, so long as the participants retain day-to-day control over the management of the agency contracts.

Q8. Must each participant individually have day-to-day control for my property investment club not to be a collective investment scheme?

Yes, though this does not prevent two or more individuals having day-to-day control together. (This may happen, for example, where business partners buy several flats in a block and manage them jointly.) But the more distant any individual participant is from controlling the management of the property himself, the less likely it is that the individual participants can be said to have control which is 'day-to-day'.

Q9. I run a property investment club where the participants have a right to be consulted on management decisions or at least give directions. Do they have day-to-day control?

Not by virtue of those rights alone. Simply having the right to be consulted or give directions is not enough to give a participant day-to-day control.

Also, if all management decisions are taken by the operator (or a person appointed by him) using generic mandates (for example, a power of attorney) from participants, then it is unlikely to be the case that the participants have day-to-day control. It is more likely in this case that the scheme is effectively one where management is devolved entirely to the operator, with participants only retaining a notional control over the decision-making of the operator - in essence amounting to a right to be consulted or give directions, rather than day-to-day control.

Q10. I have promoted or set up a property investment club such that the documents that each participant signs explicitly say that they have day-to-day control over the management of the property - does that mean it is not a collective investment scheme?

No. In our view, regardless of what rights or powers the documentation purports to give its participants, it is important to look at what happens in fact. It is the substance rather than the form that counts. So, if the participants are stated to have day-to-day control, simply as an attempt to avoid the property investment club amounting to a collective investment scheme, but they do not, in fact, have such day-to-day control, then the club may still amount to a collective investment scheme. In that case, its operation and promotion would be regulated by the FSA.

Q11. I run a property investment club where all of the major participants have day-to-day control over the management of the property but, by choice, one or two of the smaller participants do not. Does this mean that the club could still be a collective investment scheme?

Yes, if the other elements are present. In order for the arrangements not to be a collective investment scheme, all individual participants, regardless of their contribution or stated preferences, must have day-to-day control. So, if one participant does not have day-to-day control then the whole scheme could amount to a collective investment scheme.

Q12. I run a scheme where each person owns individual properties or parts of properties in the property investment club. Each person owns property either directly, or indirectly (for example, through a limited company or a limited liability partnership of which he is the owner or through a limited partnership). Is this scheme likely to be a collective investment scheme?

No, unless the properties belonging to each person, company, limited liability partnership or limited partnership are managed as a whole by or on behalf of the operator of the scheme. So, the mere fact that the operator is managing a number of properties and achieves economies of scale in his management charges or in things such as insurance cover would not mean that the properties are being managed as a whole. Neither would the fact that the operator may be able to offer reductions in sale price because of bulk discounts negotiated with developers. This is provided the operator is managing each property on an individual basis.

As an example, if a managing agent manages a block of flats on the basis that the only profit or income each individual flat owner obtains is what arises from the management of his property, there is no management as a whole. However, if the managing agent managed the flats in such a way that each individual flat owner received an income from total lettings, regardless of whether that person's flat was let or not, the properties are managed as a whole and the arrangements are likely to be a collective investment scheme.

Q13. Does it make a difference if people participate through a corporate vehicle?

No. But it should be noted that a limited liability partnership or limited partnership, through which a person indirectly owns the property concerned, may amount to a collective investment scheme itself. This is if the partnership has more than one investor participant and subject to the considerations set out in this guidance.

Q14. I run a property investment club where the participants own their own individual properties which are rented out but the rental income is pooled and I decide on which property should be rented at any time and to whom. Is this likely to be a collective investment scheme?

Yes. This is because:

•the property in respect of which the arrangements are made is the property belonging to each of the participants;

•you are managing that property as a whole; and

•the participants do not have day-to-day control over the management of that property.

Q15. If my property investment club is not a collective investment scheme because participants acquire shares in a body corporate, does that mean that I do not need to be authorised?

Not necessarily. Depending on the circumstances, you may be involved in making arrangements for the participants to buy, sell or subscribe for their shares which is itself a regulated activity and may only be carried on by an authorised or exempt person.

Q16. Does the FSA regulate the mortgages that are used to finance property investment clubs?

No. The FSA only regulates the provision of mortgages on property where the borrower intends to use at least 40% of it as a dwelling for him or a close relative. This is typically not the case with properties purchased through property investment clubs.

Q17. What are the consequences of a property investment club being regulated by the FSA?

If a property investment club were considered to be a collective investment scheme, and therefore its operation and promotion regulated by the FSA, then any person operating the scheme in the United Kingdom or advising investors on the merits of participating or arranging for them to do so, must be an authorised or exempt person. If such a person was not authorised or exempt, he would be liable to commit a criminal offence. It is only the activities of such persons that would be regulated by the FSA.The property investment club itself would not be regulated by the FSA as a product in the way that authorised unit trusts or authorised open-ended investment companies (which are collective investment schemes) are. Also, agreements entered into by an unauthorised person in the course of their operating, advising on or arranging for persons to participate in a collective investment scheme are potentially unenforceable against the other party and the other party may be entitled to compensation from the unauthorised person.

Q18. Are there restrictions on the promotion of my property investment club?

Yes, if it is a collective investment scheme or involves investors acquiring securities issued by a body corporate - otherwise not. If your property investment club is a collective investment scheme, you would not be able to promote it to the general public and, unless exempt, any promotional material would need to comply with FSA rules. PERG 8 has guidance about the restrictions on all kinds of financial promotion.

Q19. Does the FSA or Treasury intend to regulate all property investment clubs?

We understand that, as at 6 March 2006, there is no current intention to change existing regulatory boundaries.

06/03/2006

PERG 11.3

Guidance on land investment schemes involving planning permission arrangements

06/03/2006

Q20. I run a business arranging for the sale of individual plots of development land to investors who are also required to use my services in obtaining planning permission for or disposing of the land as a whole (or both). Might I need to be authorised?

Yes, this is likely to be the case. This will be because the role you have in obtaining planning permission or in negotiating and effecting the sale of the land (or both) may mean that you are operating a collective investment scheme (see Q4). The purpose or effect of the arrangements would appear to be to enable investors, as owners of parts of the land, to receive profits arising from your services in obtaining planning permission or arranging disposal in respect of the land as a whole. If the planning or disposal process is such that individual investors do not have day-to-day control over it, the arrangements are likely to amount to a collective investment scheme, and to operate it you would need to be authorised or exempt. The restrictions on financial promotions referred to in Q18 would also need to be considered.

Q21. I run a business which arranges for individual plots of land to be sold to potential investors and, whilst I refer to the possibility of obtaining planning permission as a way of increasing the value of the land, I don't, nor does anyone connected to me, have a role in pursuing any such permission nor any other control over the land as a whole. Do I need to be authorised?

No. If all of the participants have control over the obtaining of planning permission relevant to their individual plots of land the arrangements will not be a collective investment scheme. Arranging for investment in plots of land by itself is not a regulated activity as plots of land are not of themselves specified investments.

06/03/2006

PERG 12

Guidance for persons running or advising on personal pension schemes

PERG 12.1

Background

06/10/2006

Q1. What is the purpose of these questions and answers ('Q&As') and who should be reading them?

These Q&As are aimed at, and should be read by, persons involved in the running of a personal pension scheme and those who give advice about or provide services to such schemes. They are intended to help such persons understand whether they will be carrying on a regulated activity and need authorisation or exemption under section 19 of the Financial Services and Markets Act 2000 following the changes to pension legislation that took effect on 6 April 2007. The Q&As complement the general guidance on regulated activities which is in Chapter 2 of our Perimeter Guidance manual ('PERG') and the general guidance about pensions-related activities which is in Chapter 10 of PERG.

The Q&As are set out under four sections:

• establishing, operating or winding up a personal pension scheme (PERG 12.2);

•rights under a personal pension scheme (PERG 12.3);

•the application of EU Directives (PERG 12.4); and

• financial promotion issues (PERG 12.5).

06/04/2007

PERG 12.2

Establishing, operating or winding up a personal pension scheme

06/10/2006

Q2. What is a personal pension scheme for the purposes of this regulated activity?

The term is defined in the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 (the Regulated Activities Order) as any scheme other than an occupational pension scheme (OPS) or a stakeholder pension scheme that is to provide benefits for people:

(1)on retirement; or

(2)on reaching a particular age; or

(3)on termination of service in an employment.

Although the definition does not expressly say so, it is, in the FSA'sview, clear from the context in which the term is applied, that such a scheme will be one the sole or principal purpose of which is to provide benefits to members of the scheme upon their reaching a pensionable age. This will typically include pension schemesthat areintended to be registered with The Pensions Regulator and to be eligible for tax relief relating to pension schemes. It will also include other types of pension schemes such as qualifying recognised overseas pension schemes (QROPSs) that are not occupational pension schemes.

This will include self-invested personal pension schemes ('SIPPs') as well as personal pensions provided to consumers by product companies such as insurers, unit trust managers or deposit takers (including free-standing voluntary contribution schemes).

To determine whether a pension scheme is a personal pension scheme it is first necessary to determine whether it is an OPS. An OPS is defined in the Regulated Activities Order by reference to an OPS as defined in section 1 of the Pensions Schemes Act 1993 but without including paragraph (b) of that section. This means that a pension scheme is an OPS if, broadly speaking, it is a pension scheme:

•that is established:

-for the purpose of providing benefits to, or in respect of, people with service in employments of a description; or

-for that purpose and also for the purpose of providing benefits to, or in respect of, other people,

by persons who are, or who include, employees of that kind or their employers, or persons representing the interests of either, at the time the scheme is established; or

•that is prescribed or is of a prescribed description (such as a scheme that is prescribed under the Pension Schemes (Categories) Regulations 2005 (SI 2005/2401)).

The effect of omitting paragraph (b) from the Pensions Schemes Act definition of an OPS is that a pension scheme that would otherwise be an OPS but for the fact that its main administration takes place in another EEA State will be an OPS for the purposes of the Regulated Activities Order and this guidance.

Q3. What is involved in establishing a personal pension scheme?

The establisher of a personal pension scheme is the person responsible for putting in place the arrangements founding the scheme. With a trust-based scheme, this will usually be the person who executes the trust as provider. In a scheme established by deed poll, it will be the person who enters into the deed poll. There will usually only be one person who establishes the scheme. Any professional firms that they may employ to act as their agent (such as solicitors) would not be establishing the scheme. The establisher may also be the operator but need not be. An employer will not be establishing a personal pension scheme (such as a group personal pension scheme) purely as a result of them having chosen such a scheme to offer to their employees.

The activity of establishing a personal pension scheme ceases once the scheme is established. This means that persons who have established schemes prior to 6 April 2007 will not require authorisation for establishing a personal pension scheme unless they intend to establish a new scheme after that date.

Q4. What is involved in operating a personal pension scheme?

The 'operator' is the person responsible to the members for managing and administering the assets and income of, and the benefits payable under, the scheme in accordance with relevant pensions and tax legislation, the scheme's constitution and the regulatory system. In this respect, the responsibilities that are placed under Part 4 of the Finance Act 2004 on a pension scheme administrator (as defined in section 270(1) of that Act) will mean that he is likely to be the operator of the scheme. In trust-based schemes, the trustees may act as scheme administrator or there may be a separate person who acts in that capacity. Where there are separate trustees, it may be the case that they are operating the scheme jointly with the scheme administrator by virtue of the responsibilities they assume under the trust deed for the management and administration of the scheme assets. However, in situations where the trustees' role is merely to act as a bare trustee holding the scheme assets, it is the scheme administrator who is likely to be the sole operator of the scheme. The scheme may be established by an authorised person who acts as a provider of investment products or services to the scheme. This does not make that person the operator of the scheme if, as a matter of fact, he has appointed another person to be responsible to the members for carrying out all the operator's functions as scheme administrator or as trustee, or both as the case may be. But a person to whom activities may be outsourced by the operator will not, thereby, become an operator of the scheme (see further guidance in Q6).

The fact that a member of a SIPP has the right to direct which investments are to be held for his benefit does not mean that he is to be regarded as operating the scheme as a result of exercising that right.

Q5. What is involved in winding up a personal pension scheme?

The person who winds-up a personal pension scheme will be the person who is responsible for putting in place the arrangements for bringing the scheme to an end in a way that complies with the relevant provisions of the instrument that established the scheme and any relevant rules under pensions or tax legislation. This will, more often than not, be the operator of the scheme.

Q6. What is my position as an operator of a personal pension scheme if I delegate day-to-day functions such as administration of the scheme or the management or custody of the scheme assets to another person?

As explained in Q4, the operator of a personal pension scheme is the person who is responsible to the members of the scheme for ensuring that the scheme is operated in accordance with relevant pensions and tax legislation, the scheme's constitution and the regulatory system. Provided he remains responsible to the members for such matters, he will remain the operator even though he may delegate or out-source the day-to-day carrying out of his functions as operator to another person. That other person will not become an operator of the scheme purely as a result of carrying out such functions on behalf of the operator. However, he may be carrying on other regulated activities in performing his delegated or out-sourced tasks (such as arranging or managing investments) in which case he will be subject to regulation for those activities.

Chapter 10.4 of PERG has general guidance about the circumstances in which persons who administer pension schemes on behalf of the operator or trustees may be carrying on a regulated activity including an insurance mediation activity.

Q7. As the operator of a personal pension scheme, is my position affected by whether the underlying property of the scheme is comprised of physical assets such as commercial property rather than investments such as shares or life policies?

No. It is the establishment, operation and winding up of the scheme that is regulated under the new activity - regardless of the type of assets the scheme will hold.

Q8. Will I need to be authorised for managing the assets of a personal pension scheme which is invested solely in physical assets such as commercial property on behalf of the operator?

No. Such assets will not become designated investments. However, the operator of the scheme will remain responsible for the management and administration of the assets as these are part of the regulated activity of operating the scheme.

Q9. Will I satisfy the 'by-way-of-business' test that is necessary for authorisation to be required?

The application of the by-way-of-business test to any particular person will always depend on that person's individual circumstances. A number of factors need to be taken into account in determining whether the test is met. These include:

•the degree of continuity;

•the existence of a commercial element;

•the scale of the activity;

•the proportion which the activity bears to other activities carried on by the same person but which are not regulated; and

•the nature of the particular regulated activity that is carried on.

In very broad terms, it is likely that any corporate body (including corporate trustees) that operates a personal pension scheme would be carrying on that activity by way of business. Chapter 10.5 of PERG has specific guidance about the limited circumstances in which employers may be likely to satisfy the by-way-of-business test when advising on or arranging pension benefits for their employees.

Q10. Can there be more than one person who operates a personal pension scheme?

Yes. For example, the person establishing a scheme may appoint a trustee and an administrator to operate the scheme jointly (see Q4). In this case, both the trustee and the administrator will need to be authorised. Or there could be two or more trustees who are jointly responsible for operating the scheme, in which case each will need to be authorised if they are doing so by way of business.

Q11. I am a trustee operating a self-invested personal pension scheme ('SIPP'). Can I rely on the various exclusions available to trustees for other regulated activities such as dealing in investments, managing investments and safeguarding and administering investments?

Yes, provided you are able to satisfy the conditions applicable to the exclusions. No changes were made to any of the exclusions as a result of the changes in regulatory scope that took effect on 6 April 2007. Guidance on the exclusions is given in Chapter 10 (Q23) of PERG.

Q12. Do the same principles apply to establishing, operating or winding up a stakeholder pension scheme?

Yes. In principle, the answers given to other questions apply equally to stakeholder pension schemes. Establishing, operating and winding up a stakeholder pension scheme are already regulated activities. Guidance on these activities is given in Chapter 10 (Q24 to Q28) of PERG.

Q13. Does the regulated activity of establishing, operating or winding-up a personal pension scheme have any effect on occupational pension schemes?

No. But the establishment, operation and winding up of occupational pension schemes that are stakeholder pension schemes are regulated activities in their own right.

Q14. I intend to operate a personal pension scheme under which members will acquire benefits derived from the management of a pool of assets. Will the scheme become a collective investment scheme?

No. Personal pension schemes (along with stakeholder pension schemes) are specifically exempted from being collective investment schemes. However, where a personal pension scheme invests in a pooled investment vehicle of some kind, that vehicle may itself be a collective investment scheme unless another exemption applies to it.

06/08/2009

PERG 12.3

Rights under a personal pension scheme

06/10/2006

Q15. I am a financial intermediary dealing with pensions. Am I affected by the fact that rights under a personal pension scheme are a specified investment?

Yes. The specified investment of rights under a personal pension scheme is a security. This means that the following regulated activities apply in relation to such rights:

• dealing;

• arranging;

• managing investments;

• safeguarding and administering investments; and

• advising on investments.

Q16. What are the rights under a personal pension scheme that are specified investments and securities?

These are all the rights that membership of the scheme confers on a member. This may vary (for example, where the scheme is a SIPP) but is likely to include some or all of the following rights:

•to make payments to the scheme;

•to withdraw sums from the scheme in certain circumstances;

•to transfer value to another pension scheme;

•to receive benefits arising from the capital value of or income derived from particular assets or from the performance of a unitised fund;

•to place certain types of property (for example, commercial property) in the scheme;

•to instruct the operator which assets to buy or sell for the purposes of the scheme;

•to instruct the operator to switch funds from one managed or unitised fund to another;

•to appoint a person to manage the assets or to give instructions to the operator about which assets to buy or sell on behalf of the member; and

•to instruct the operator to borrow money to purchase assets (for example, to take out a mortgage on a commercial property).

Q17. Regulated activities such as dealing and arranging deals in, and advising on, investments relate to transactions involving the buying or selling of certain specified investments including securities. When will rights under a personal pension scheme be bought or sold so as to trigger these regulated activities?

The terms 'bought' and 'sold' are given a wide meaning and include any acquisition or disposal for valuable consideration. The term disposal is also given a wide meaning and, in relation to an investment comprising rights under a contract, includes surrendering, assigning or converting such rights. Taking these facts into account, the circumstances in which rights under a personal pension scheme may be bought or sold include:

•when the member first joins the scheme and acquires all the rights that the scheme provides to its members (since he has bought those rights);

•when the member makes regular or occasional additional payments to the scheme (since he has bought further rights being rights to an increased entitlement to benefits);

•when income withdrawals are made or benefits are transferred to another scheme or benefits are released to permit the purchase of an annuity (since the rights giving entitlement to benefits represented by the sums moved out of the scheme are surrendered and so sold);

•where the member or his agent instructs the operator to buy assets of any kind either from existing cash holdings or from the proceeds of selling existing assets (since, in switching the assets, the member is converting his rights from an entitlement to benefits from the performance of certain assets to an entitlement to benefits from the performance of other assets - the former rights are sold and the latter are bought); and

•where the member exercises his right to switch between managed or unitised funds (since, in switching funds, the member is converting his rights from an entitlement to benefits from the performance of one fund to an entitlement to benefits from the performance of another fund - again, the former rights are sold and the latter are bought).

The operator of a personal pension scheme will also be selling rights when he grants rights to a member.

Q18. The members of the personal pension scheme that I operate acquire rights to or interests in specified investments such as units or life policies. Such rights or interests are usually specified investments in their own right and arranging or advising on them is a regulated activity. Does the fact that rights under the personal pension scheme are themselves a specified investment affect this?

In certain circumstances this may be the case, but, in practice, the effect will be largely academic. Where the rights or interests would form part of the rights under a personal pension scheme, they will fall under that category of specified investment and will not be a specified investment in their own right. But where, for example, advice is being given on the merits of acquiring rights to or interests in specified investments for the purpose of their being held under a personal pension scheme but not any one particular scheme, the rights or interests will remain specified investments in their own right. This is because there are no rights under a personal pension scheme at that stage.

This will only affect the rights that the member obtains. It does not alter the nature of any asset that is held by or on behalf of the operator for the purpose of providing benefits to the scheme member. So, any person who arranges for the scheme operator (or trustee as the case may be) to acquire assets is likely to be carrying on the regulated activity of arranging where those assets are securities or relevant investments but not where they involve other property such as real estate. This contrasts with a person who is arranging for scheme members to acquire rights under the scheme which will be a regulated activity regardless of the nature of the underlying property.

Q19. For advice to be regulated, it needs to relate to the merits of buying or selling a particular investment. When do rights under a personal pension scheme become 'particular' rights and so particular investments?

It is the rights under a personal pension scheme that must be a particular investment. This means that the rights must arise under a particular personal pension scheme. So, provided the rights on which advice is given relate to rights conferred, or to be conferred, by a particular scheme, they will be particular rights and advice on the merits of buying or selling them is likely to be regulated. This is the case, whatever the nature of the rights or of the underlying assets or prospective underlying assets. Conversely, if there is no particular personal pension scheme, there cannot be any particular rights.

As for advice to a prospective member on the merits of buying particular assets at a stage where there are no particular rights under a personal pension scheme, such advice is likely to be regulated where the assets are securities or relevant investments (as being advice on the merits of buying rights to or interests in those investments). But such advice will not be regulated where the assets are not investments of that kind (such as commercial property).

A person may be asked to advise a client on the merits of his acquiring a commercial property for holding it under a SIPP in circumstances where the client has an existing SIPP of which the adviser may or may not be aware. Provided the adviser has not been asked to, and it is reasonable for him to believe that he would not be expected to, advise his client on the merits of his holding the property under the particular SIPP, the advice may remain generic as respects rights under a personal pension scheme and so would not be subject to regulation.

Q20. Can you provide examples of when the regulated activities of advising on and arranging deals in investments are likely to arise in typical situations involving rights under a personal pension scheme?

Yes. The following table indicates whether certain typical scenarios are likely to involve regulated advising or arranging activities.

Scenario - advice given to a member or prospective member of a personal pension scheme on the merits of...

Is the advice likely to be regulated (subject to any exclusion applying)?

Is arranging the transaction to which the advice relates likely to be regulated (subject to any exclusion applying)?

his joining a personal pension scheme (PPS) either generally or of a particular kind (such as a self-invested personal pension scheme (SIPP))

No - this would be generic advice

N/A

his joining a particular PPS that is already established

Yes - the rights are particular rights as the PPS already exists and offers specific rights

Yes - rights are being bought

establishing a PPS (typically a SIPP) intended solely for the prospective member's benefit

Yes - because the advice will concern establishing a particular scheme which will offer the investor particular rights (such as the right to make payments and direct investment)

Yes - rights are being bought

acquiring, for the purpose of holding under a PPS (typically a SIPP), but not any particular PPS, physical property of a particular description (such as commercial property) or particular physical property

No - there are no particular rights under a PPS at that stage, so the advice is generic as respects the acquiring of such rights

acquiring, for the purpose of holding under a PPS (typically a SIPP), but not any particular PPS, securities or relevant investments of a particular description or particular investments of that kind

Yes, where the advice relates to acquiring particular investments of that kind - whilst the rights under the PPS may remain generic, the advice relates to acquiring rights to or interests in particular securities or relevant investments. Those rights or interests are themselves a particular investment
No, where the advice only relates to acquiring a particular type of investment - both the rights under the PPS and the investment remain generic

Yes - rights to or interests in specified investments are being bought

acquiring a particular property for the purpose of holding it in a particular SIPP but where the advice to be given is limited to the tax or legal consequences of doing so

No. Although the advice relates to the merits of buying particular rights, provided the advice may reasonably be regarded as a necessary part of the service of providing tax or legal advice it should be excluded from the scope of regulation (see Q21)

No, provided the arranging is undertaken as a necessary part of providing tax or legal services. This may be more likely to arise in practice where, for example, a legal adviser goes on to arrange the conveyancing of the property as a necessary part of legal services. There may be limited circumstances in which it would be necessary for a tax adviser to go on to arrange for the client to acquire the rights under the PPS having given tax advice on the merits of doing so.

making additional payments into a particular PPS, either for investment in line with pre-existing arrangements or in accordance with instructions to be given to the operator, or of not making such additional payments

Yes - the advice relates to the merits of acquiring further particular rights

Yes - rights are to be bought

appointing a fund manager to manage the PPS assets on behalf of the member(s) or changing an existing fund manager

No - the advice is about the merits of exercising rights but not for the purpose of buying or selling particular investments - and no rights are being bought or sold

No, where the assets do not include securities or relevant investments
Possibly, where the assets do include investments of that kind (because the arrangements are made with a view to the fund manager buying and selling, and possibly safeguarding and administering, investments)

changing the investment objectives with which the fund manager appointed to manage the PPS assets on behalf of the member(s) is instructed to comply

No - the advice is about the merits of exercising rights but not for the purpose of buying or selling particular specified investments - and no rights are bring bought or sold

placing particular assets or assets of a particular description, into a particular PPS, or of instructing the operator to purchase such assets, either:

•by means of funds to be made available by selling existing assets or of existing cash holdings within the PPS; or

•from new funds to be provided by the member

Yes - the advice relates to either:

•disposing of particular rights and acquiring new particular rights; or

•acquiring new particular rights

Yes - rights are being bought or sold or both

instructing the operator to dispose of particular assets or assets of a particular description, to raise funds for purchasing other assets of any kind or to form a cash holding

Yes - the advice relates to disposing of particular rights as well as acquiring new particular rights

Yes - rights are being bought and sold

instructing the operator to realise an investment in a managed or unitised fund and re-invest the sums in another such fund

Yes - the advice relates to disposing of particular rights and acquiring new particular rights

Yes - rights are being bought and sold

withdrawing cash sums (income withdrawal)

Yes - the advice relates to disposing of particular rights

Yes - rights are being sold

transferring existing assets of any kind or their cash value to another PPS

Yes - the advice relates to disposing of particular rights
There may also be regulated advice on the merits of acquiring rights under the new PPS

Yes - rights are being sold and rights in the new PPS are being bought

instructing the operator/trustee to obtain a mortgage to purchase a particular commercial property to be held under the PPS

Yes - the advice relates to acquiring new rights under the PPS in the form of the borrowed money or the property to be acquired with it
But the advice given to the member on the mortgage itself is not regulated as the mortgage would not be a regulated mortgage contract (because, under tax rules, a member of a PPS cannot hold property under the scheme if he intends to make personal use of it).

Yes - rights are being bought
Arranging for a personal pension scheme trustee to take out a mortgage will not be regulated as it will not be a regulated mortgage contract

Q21. What exclusions may be available for advising on investments in connection with acquiring or disposing of rights under a personal pension scheme?

The usual exclusions for advising on investments will potentially be available. In particular, article 67 of the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 (the Regulated Activities Order):

•may permit firms such as solicitors or licensed conveyancers to advise on the implications of transferring title to real property to the operator of a particular personal pension scheme;

•may permit tax advisers or solicitors to advise their clients on the tax or legal consequences of holding property of any description, or of acquiring or exercising rights, under a particular personal pension scheme; and

•may permit firms such as surveyors or estate agents to advise on the merits of acquiring commercial property which is intended to be held under a particular personal pension scheme.

This is, in each case, so long as it may reasonably be regarded as necessary for them to provide the advice in order to provide their professional services and they are not remunerated for advising on investments separately from any remuneration they receive for providing their professional services.

If the rights relate to a contract of insurance, the adviser can still make use of the exclusion so long as he is not carrying on an activity that requires him to be regulated under the Insurance Mediation Directive. And that is only likely to be the case if the advice relates to the merits of his client directly acquiring rights under a contract of insurance (for example, because he is also a trustee of the scheme). Advice about acquiring a beneficial interest in a contract of insurance held under trust will not be subject to regulation under the Directive.

Q22. What exclusions may be available for arranging deals in investments in connection with acquiring or disposing of rights under a personal pension scheme?

The usual exclusions for arranging will potentially be available. The following exclusions may be particularly relevant.

Article 29 of the Regulated Activities Order will apply where the arranging is done with or through an authorised person and, broadly speaking, the arranger:

•is an unauthorised person;

•does not advise on the merits of the member or prospective member entering into the transaction; and

•is not rewarded other than by their client (the member).

This exclusion should mean that many firms providing professional services to members of the scheme (such as estate agents, surveyors, property developers and experts on valuing or appraising the particular type of asset that is to be acquired for the personal pension scheme) would be able to arrange for the property to be held under the scheme without needing authorisation or exemption. This is because the operator of the scheme will be an authorised person and the firm is likely to be paid by its client and not by the scheme operator.

Article 29 does not apply where the arrangements relate to a contract of insurance. But this will only affect the availability of the exclusion as it applies to personal pension schemes where either:

•the member is himself directly acquiring rights under the contract of insurance (for example, because the member is also a trustee of the scheme); or

•the rights which the member is acquiring (or disposing of) relate directly to rights under a contract of insurance that is or is to be held by or on behalf of the operator for the purpose of providing benefits to that member.

Article 33 of the Regulated Activities Order will allow persons such as estate agents, surveyors or property developers (whether or not they are authorised) to refer clients to an authorised or exempt person for independent advice on the merits of their placing a commercial property in a particular personal pension scheme. Article 33 may also apply where a person arranges for an independent fund manager to be appointed to manage the assets of a personal pension scheme or for members or potential members to obtain independent advice in relation to their rights under the scheme. As with article 29, the article 33 exclusion does not apply where the introductions relate to a contract of insurance.

Article 67 of the Regulated Activities Order may permit firms such as solicitors and licensed conveyancers to arrange for the title to property to be transferred to the operator of the personal pension scheme. The exclusion could also apply to firms such as surveyors or estate agents arranging the transfer of title to commercial property. This is so long as it is necessary for them to arrange the transaction in order to provide their professional services and they are not separately remunerated for doing it.

Q23. I am an exempt professional firm. Will I be able to advise on, and arrange deals in, rights under personal pension schemes without needing FSA authorisation?

Rights under a personal pension scheme will be securities. This means that, subject to your being able to satisfy the general requirements of Part XX of the FSMA:

•you will be limited in your ability to give advice without authorisation; but

•you will be able to arrange deals in such rights without authorisation.

The limitation on your being able to give advice, as an exempt professional firm, to a member of a personal pension scheme will be, in broad terms, that:

•the advice must not consist of a recommendation to acquire or dispose of rights (unless it endorses a corresponding recommendation that has been given to the member by a suitably authorised or exempt person); and

•if, in addition, the advice relates to a contract of insurance, you must be a firm that is included in the FSA Register of Exempt Professional Firms.

06/10/2006

PERG 12.4

Application of EU Directives

06/10/2006

Q24. Do the changes in the scope of regulated activities concerning pension schemes that took effect on 6 April 2007 have any implications for pension scheme trustees or service providers under the Investment Services Directive (or, in future, the Markets in Financial Instruments Directive) or the Insurance Mediation Directive?

In general terms, if a pension scheme trustee or service provider did not need to be authorised under the Investment Services Directive prior to 6 April 2007 he should not need to be authorised for carrying on the same activities after that date. This is because rights under a personal pension scheme are not a financial instrument under the Directive and establishing, operating or winding up a personal pension scheme is not an investment service under the Directive. This will also be the case under the Markets in Financial Instruments Directive when it replaces the Investment Services Directive later in 2007. But this is subject to the fact that investment advice will become an investment service for the first time. Guidance on the application of the Investment Services Directive to the activities of pension scheme trustees and service providers generally is in Chapter 10.4A of PERG. Draft guidance on the changes in regulatory scope that will be caused by the implementation of the Markets in Financial Instruments Directive was issued as Annex 5 to Consultation Paper 06/9 (Organisation systems and controls) and will form Chapter 13 to PERG.

Similarly, a pension scheme trustee or service provider who was not subject to regulation under the Insurance Mediation Directive prior to 6 April 2007 will not become subject to regulation purely as result of the changes in regulatory scope that took effect on 6 April 2007. Detailed guidance on the application of that Directive to pension scheme trustees and service providers is in Chapters 10.4 and 10.4A of PERG.

06/04/2007

PERG 12.5

Financial promotion issues

06/10/2006

Q25. Will the financial promotion restriction in section 21 of the Financial Services and Markets Act 2000 apply to promotions that invite or induce persons to become members of a personal pension scheme?

Yes, because they will be inviting or inducing persons to buy an investment in the form of the rights under the scheme that they would acquire by becoming a member.

Q26. Will the financial promotion restriction apply to a promotion of commercial property that is held out as being suitable for holding under a SIPP (but not any particular SIPP)?

Yes, if the promotion is an inducement to acquire the right to receive benefits derived from the performance of that property when it is held under a personal pension scheme. However, provided the promotion does not identify any particular scheme or scheme provider or person who can arrange or advise on the placing of the property into the scheme, the promotion should be exempt as a generic promotion under article 17 of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (the Financial Promotion Order).

Q27. Will any of the other exemptions in the Financial Promotion Order apply to promotions of a personal pension scheme?

Yes. All the usual exemptions that apply to the promotion of securities generally will apply. This includes the exemption for promotions made by an employer to their employees about a group personal pension scheme to which they are to contribute (article 72 of the Financial Promotion Order).

Q28. Can I find out more about the financial promotion restriction?

Yes. Chapter 8 of PERG has detailed guidance about the scope of the financial promotion restriction and the exemptions that are available.

06/10/2006

PERG 13

Guidance on the scope of the Markets in Financial Instruments Directive and the recast Capital Adequacy Directive

PERG 13.1

Introduction

01/11/2007

PERG 13.1

The purpose of this chapter is to help UK firms consider:

• whether they fall within the scope of the Markets in Financial Instruments Directive 2004/39/EC ('MiFID') and therefore are subject to its requirements;

• how their existing permissions correspond to related MiFID concepts;

• whether the recast Capital Adequacy Directive ('recast CAD') applies to them; and

• if so, which category of investment firm they are for the purposes of the FSA transposition of the recast CAD.

Background
MiFID replaces the Investment Services Directive (ISD). It expands the kinds of business which must be regulated in the UK to include, in particular, activities relating to a wider range of commodity and other non-financial derivatives. As a result of MiFID, the categories of firm which can exercise passporting rights and the categories of business for which the passport is available are wider than under the ISD. In particular, whereas investment advice was a non-core service under ISD, it is an investment service in its own right under MiFID and so can be provided on a cross-border basis as a standalone business.

MiFID is supplemented by "Level 2 measures", Commission Regulation (EC) No 1287/2006 (MiFID Regulation) and Commission Directive 2006/73/EC (MiFID Implementing Directive). These implementing measures amplify and supplement certain of the concepts and requirements specified in MiFID.

MiFID scope
The scope aspects of MiFID are primarily addressed through the Regulated Activities Order ('RAO') and PERG 2 focuses on the scope of regulated activities under the RAO and includes materials on the effect that MiFID has on the RAO. This chapter focuses more on the underlying MiFID investment services and activities, as well as the exemptions.

Where a firm's regular occupation or business is providing one or more investment services to third parties or performing investment activities in relation to MiFID financial instruments on a professional basis, it is a firm to which MiFID applies unless it is exempt.

Broadly, the exemptions from MiFID are likely to be relevant to insurers, group treasurers, professional firms to which Part XX of the Act applies, many authorised professional firms, professional investors who invest only for themselves, pension schemes, depositaries and operators of collective investment schemes or other collective investment undertakings (such as investment trusts), journalists, and commodity producers and traders. The exemptions are subject to conditions and limitations described in more detail below (see PERG 13.5).

The Treasury's implementation of the article 3 MiFID exemption is likely to be relevant to many financial advisers (see Q50) including some corporate finance advisers. It may also be relevant to some venture capital firms. The Treasury legislation enables firms falling within the scope of the exemption to elect to be subject to the requirements of MiFID and thereby acquire passport rights (see Q52).

In each case, it will be for firms and individuals to consider their own circumstances and consider whether they fall within the relevant exemptions. A firm which takes the benefit of one or more of the exemptions in article 2 or 3 MiFID may nevertheless require authorisation under the Act (see PERG 2).

In addition to investment firms, MiFID is also relevant to credit institutions providing investment services or performing investment activities (see Q5) and UCITS management companies to which article 5.4 UCITS Directive applies (in other words UCITS investment firms)

This guidance is concerned with the scope of MiFID and does not address the question of whether an investment firm that falls within the scope of MiFID is providing a MiFID investment service as opposed to an investment activity.

Recast Capital Adequacy Directive (recast CAD)
Investment firms subject to MiFID, including those who fall within the article 3 MiFID exemption but opt not to take advantage of it, and UCITS investment firms are subject to the requirements of the recast CAD. There are special provisions for certain commodities firms as well as firms whose MiFID investment services are limited to giving investment advice or receiving and transmitting client orders or both and who are not permitted to hold client money or securities.

Under the UK implementation of the recast CAD, the level of capital an investment firm subject to MiFID requires is determined by the type of investment services and activities it provides or performs, its scope of permission and any limitations or requirements attaching to that permission (see PERG 13.6). A firm relying on an article 2 or 3 MiFID exemption is not subject to the recast CAD.

How does this document work?
This document is made up of Q and As divided into the following sections:

• General (PERG 13.2);

• Investment services and activities (PERG 13.3);

• Financial instruments (PERG 13.4);

• Exemptions from MiFID (PERG 13.5);

• The recast CAD (PERG 13.6); and

• Flow charts, tables and lists (PERG 13 Annex 1, PERG 13 Annex 2, PERG 13 Annex 3, PERG 13 Annex 4).

We have also included guidance in the form of flow charts to help firms decide whether MiFID and the recast CAD apply to them as well as permission maps indicating which regulated activities and specified investments correspond to MiFID investment services, activities and MiFID financial instruments (see PERG 13 Annex 1, PERG 13 Annex 2, PERG 13 Annex 3, PERG 13 Annex 4).

Article and recital references are to MiFID (Level 1 measures) unless otherwise stated. References to categories of MiFID investment services and activities and MiFID financial instruments adopt the structure of Annex 1 MiFID: for example, A1 refers to "reception and transmission of orders in relation to one or more financial instruments" and C1 relates to "transferable securities".

01/11/2007

PERG 13.2

General

01/11/2007

PERG 13.2

Q1. Why does it matter whether or not we fall within the scope of MiFID?

Depending on whether or not you fall within the scope of MiFID, you may be subject to:

• domestic legislation implementing MiFID (for example, FSArules);

• directly applicable legislation made by the European Commission (the MiFID Regulation); and

• domestic legislation implementing the recast CAD (see PERG 13.6).

The question is also relevant to whether you can exercise passporting rights in relation to investment services or activities - only firms to which MiFID applies can do so.

Q2. Is there anything else we should be reading?

The Q and As complement, and should be read in conjunction with, the relevant legislation and the general guidance on regulated activities, which is in chapter 2 of our Perimeter Guidance manual ('PERG'). The Q and As relating to the recast CAD should be read in conjunction with the relevant parts of our General Prudential sourcebook ('GENPRU') and the Prudential sourcebook for banks, building societies and investment firms ('BIPRU').

More generally, you should be aware that the recast CAD forms part of the Capital Requirements Directive ('CRD'), which also amends the Banking Consolidation Directive ('BCD').

Q3. How much can we rely on these Q and As?

The answers given in these Q and As represent the FSA'sviews but the interpretation of financial services legislation is ultimately a matter for the courts. How the scope of MiFID and the recast CAD affect the regulatory position of any particular person will depend on his individual circumstances. If you have doubts about your position after reading these Q and As, you may wish to seek legal advice. The Q and As are not a substitute for reading the relevant provisions in MiFID, the recast CAD, the MiFID implementing measures and The Treasury's implementing legislation, including the statutory instruments listed in Annex 4 ('Principal Statutory Instruments relating to MiFID scope issues').

Moreover, although MiFID and the recast CAD set out most of the key provisions and definitions relating to scope, some provisions may be subject to further legislation by the European Commission. In addition to FSAguidance, MiFID's scope provisions may also be the subject of guidance or communications by the European Commission or the Committee of European SecuritiesRegulators ('CESR'). Similarly, recast CAD provisions may be the subject of guidance or communications by the European Commission or the Committee of European Banking Supervisors ('CEBS').

Q4. We provide investment services to our clients - does MiFID apply to us?

Yes if you are:

• an "investment firm" and the exemptions in MiFID do not apply to you; or

• a "tied agent" as defined by MiFID.

If you are a non-EEA firm, for example the UK branch of a US firm, MiFID does not apply to you. However, if MiFID would have applied to you if you had been incorporated or formed in the EEA, you will be a third country investment firm under the FSA's rules. As a result, certain MiFID based requirements will apply to you.

See the flow charts in Annex 1 for further information and PERG 13.5 for guidance relating to exemptions. See Q7 and 8 for guidance on whether you are an investment firm and Q11 for guidance relating to tied agents.

Q5. We are a credit institution. How does MiFID apply to us?

If you are an EEA credit institution, article 1.2 MiFID provides that selected MiFID provisions apply to you, including organisational and conduct of business requirements, when you are providing investment services to your clients or performing investment activities. In our view, MiFID will apply when you are providing ancillary services in conjunction with investment services. Where you provide ancillary services on a standalone basis, MiFID will not apply in relation to those services. Article 1.2 MiFID is reflected in paragraph (2) of the Handbook definition of "MiFID investment firm".

Q6. We are a UCITS management company that, in addition to managing unit trusts and investment companies, provides portfolio management services to third parties. How does MiFID apply to us?

If you are the management companyof a UCITS scheme with a permission to manage investments including MiFID financial instruments pursuant to article 5.3 UCITS Directive, certain MiFID provisions apply to you when you provide investment services to third parties (see article 5.4 UCITS Directive). These include initial capital endowment, organisational and conduct of business requirements. You are a UCITS investment firm for the purposes of the FSA Handbook. Article 5.4 UCITS Directive is reflected in paragraph (3) of the Handbook definition of "MiFID investment firm".

Q6A. We are an AIFM that, in addition to managing AIFs, provides portfolio management services to third parties. How does MiFID apply to us?

If you are the AIFM of an AIF with a Part 4A permission to manage investments including MiFID financial instruments pursuant to article 6.4 of AIFMD, certain MiFID provisions apply to you when you provide investment services to third parties (see article 6.6 of AIFMD). These include initial capital endowment, organisational and conduct of business requirements. You are an AIFM investment firm for the purposes of the Handbook. Article 6.6 of AIFMD is reflected in paragraph (3) of the Handbook definition of "MiFID investment firm".

Q7. We provide investment services to our clients. How do we know whether we are an investment firm for the purposes of article 4.1(1) MiFID?

If your regular occupation or business includes the provision of investment services in relation to MiFID financial instruments to others on a professional basis, you are an investment firm and require authorisation unless you benefit from an exemption or are a tied agent (see Q11).

Where you are a firm with more than one business, you can still be an investment firm. We expect that the vast majority of firms which were subject to the requirements of the ISD are subject to MiFID requirements where they continue to provide the same investment services. We also expect some firms that were not subject to the ISD (for example, certain commodity dealers) to be investment firms for the purposes of MiFID and subject to MiFID based requirements. What amounts to a "professional basis" depends on the individual circumstances and in our view relevant factors will include the existence or otherwise of a commercial element and the scale of the relevant activity.

Q8. We do not provide investment services to others but we do buy and sell financial instruments (for example, shares and derivatives) on a regular basis. Are we an investment firm for the purposes of MiFID?

Yes, if you are trading in MiFID financial instruments for your own account as a regular occupation or business on a "professional basis". You can be an investment firm even if you are not providing investment services to others; this is a change from the position under the ISD, arising from the fact that you are also an investment firm under MiFID where you perform investment activities on a professional basis.

Even if you are an investment firm you may still be able to rely on one or more exemptions in article 2 MiFID, in which case MiFID will not apply (see PERG 13.5 and in particular article 2.1(d) (see Q40 and Q41)), 2.1(i) (see Q44 and Q45) and 2.1(k) (see Q46).

Q9. We are a credit institution that does not provide investment services to customers but we do have a treasury function. Are we subject to MiFID?

Not necessarily. Although you may be dealing on own account in relation to MiFID financial instruments, you may be able to rely upon the exemption in article 2.1(d) MiFID (see Q40). In our view, credit institutions can rely on exemptions in article 2 where they meet the conditions of the exemptions.

Q10. Is there any change to the "by way of business" test in domestic legislation?

There is no change to article 3 of the Financial Services and Markets Act 2000 (Carrying on Regulated Activities By Way of Business) Order 2001 as part of MiFID implementation by the Treasury, so the domestic test for whether you are carrying on 'regulated activities by way of business' and require authorisation remains unchanged.

Q11. How will we know whether we are a tied agent (article 4.1(25))?

A tied agent under MiFID is a similar concept to an appointed representative under the Act. A tied agent does not require authorisation for the purposes of MiFID, just as an appointed representative does not require authorisation under the Act. In our view, you will only be a tied agent if your principal is an investment firm (including a credit institution) to which MiFID applies. So, if you act for a principal that is subject to an exemption in either article 2 or 3 MiFID (as implemented by The Treasury - see Q48 and Q49), you are not a tied agent for the purposes of MiFID although you may be an appointed representative for domestic purposes. You will still not require authorisation under MiFID, either because you are not performing investment services and activities or, if you are, because you fall within an exemption in article 2 or 3 MiFID.

Assuming your principal is an investment firm to which MiFID applies, if you are registered as an appointed representative on the FSARegister and carry on the activities of arranging (bringing about) deals in investments or advising on investments, in either case in relation to MiFID financial instruments, you are likely to be a tied agent for the purposes of article 4.1(25).

It is possible for a UK representative to be a tied agent of an incoming EEA firm, in which case if the representative is established in the UK it will also be a branch of its principal. However, it is not possible for a tied agent to provide investment services on behalf of more than one investment firm to which MiFID applies.

Further material on appointed representatives and tied agents is contained in chapter 12 of our Supervision Manual ('SUP').

01/11/2007

PERG 13.3

Investment Services and Activities

01/11/2007

PERG 13.3

Q12. Where do we find a list of MiFID services and activities?

In Section A of Annex 1 to MiFID. There are eight investment services and activities in Section A (A1 to A8), four of which are further defined in article 4 MiFID. Those activities that are further defined are:

• investment advice (article 4.1(4) MiFID);

• execution of orders on behalf of clients (article 4.1(5) MiFID);

• dealing on own account (article 4.1(6) MiFID); and

• portfolio management (article 4.1(9) MiFID).

A further provision relating to investment advice is contained in article 52 of the MiFID implementing Directive.

Q13. When might we be receiving and transmitting orders in relation to one or more financial instruments? (A1 and recital 20)

Under the general definition of this service, you only provide the service if you are both receiving and transmitting orders. For example, this would be the case if you transmit subscription or redemption orders received from a client to the operator of a collective investment undertaking or transmit buy or sell orders to agency brokers.

This service though is also extended to include arrangements that bring together two or more investors, thereby bringing about a transaction between those investors. This meaning may be relevant, for example, to corporate finance firms. It could include, in our view, negotiating terms for the acquisition or disposal of investments on behalf of a corporate client with a potential buyer or seller, for example as part of a merger or acquisition. You may be providing this service even though, having brought the investors together, the actual offer or acceptance is not communicated through you.

The extended meaning of the service only applies if the firm brings together two or more investors and a person issuing new securities, including a collective investment undertaking, should not be considered to be an 'investor' for this purpose. This limitation does not apply though to the general definition of the service. Accordingly whilst an arrangement whereby a person, on behalf of a client, receives and transmits an order to an issuer will, in our view, amount to reception and transmission, one in which it simply brings together an issuer with a potential source of funding for investment in a company, will not.

If you are party to a transaction as agent for your client or commit your client to it, you may be doing more than receiving and transmitting orders and will need to consider whether you are providing the investment service of executing orders on behalf of clients.
Q14. We are introducers who merely put clients in touch with other investment firms - are we receiving and transmitting orders?

No. If all you do is introduce others to investment firms so that they can provide investment services to those clients, this in itself does not bring about a transaction and so will not amount to receiving and transmitting orders. But if you are a person who does more than merely introduce, for example an introducing broker, you are likely to be receiving orders on behalf of your clients and transmitting these to clearing firms and therefore may fall within the scope of MiFID.

Q15. When might we be executing orders on behalf of clients? (A2, article 4.1(5) and recital 21)

When you are acting to conclude agreements to buy or sell one or more MiFID financial instruments on behalf of clients. You will be providing this investment service if you participate in the execution of an order on behalf of a client, as opposed simply to arranging the relevant deal. In our view, you can execute orders on behalf of clients either when dealing in investments as agent (by entering into an agreement in the name of your client or in your own name, but on behalf of your client) or, in some cases, by dealing in investments as principal (for example by back-to-back or riskless principal trading).

Q16. What is dealing on own account? (A3 and article 4.1(6))

Dealing on own account is trading against proprietary capital resulting in the conclusion of transactions in one or more MiFID financial instruments. In most cases, if you were a firm who was dealing for own account under the ISD, the FSAwould expect you to be dealing on own account for the purposes of MiFID if you continue to perform the same activities.

Dealing on own account involves position-taking which includes proprietary trading and positions arising from market-making. It can also include positions arising from client servicing, for example where a firm acts as a systematic internaliser or executes an order by taking a market or 'unmatched principal' position on its books.

Dealing on own account may be relevant to firms with a dealing in investments as principal permission in relation to MiFID financial instruments, but only where they trade financial instruments on a regular basis for their own account, as part of their MiFID business. We do not think that this activity is likely to be relevant in cases where a person acquires a long term stake in a company for strategic purposes or for most venture capital or private equity activity. Where a person invests in a venture capital fund with a view to selling its interests in the medium to long term only, in our view he is not dealing on own account for the purposes of MiFID.

In our view, where you are a firm which meets all of the conditions of article 5.2 of the recast CAD (see Q61), you will not be dealing on own account.

Q17. What is portfolio management under MiFID? (A4 and article 4.1(9))

Portfolio management is managing portfolios in accordance with mandates given by clientson a discretionary client-by-client basis where such portfolios include one or more MiFID financial instruments. If there is only a single financial instrument in a portfolio, you may be carrying on portfolio management even if the rest of the portfolio consists of other types of assets, such as real estate. Portfolio management includes acting as a third party manager of the assets of a collective investment scheme, where discretion has been delegated to the manager by the operator of the scheme. In the case of management of a collective investment undertaking, however, an exemption may be available to the operator (see Q43). The advisory agent who keeps clients' portfolios under review and provides advice to enable the client to make investment decisions (but does not exercise discretion to take investment decisions himself) is not carrying on portfolio management but may be providing other investment services such as investment advice under MiFID.

Q18. What is investment advice under MiFID? (A5 and article 4.1(4))

Investment advice means providing personal recommendations to a client, either at his request or on your own initiative, in respect of one or more transactions relating to MiFID financial instruments.

Q19. What is a 'personal recommendation' for the purposes of MiFID (article 52 of the MiFID implementing Directive)?

A personal recommendation is one given to a person:

• in his capacity as an investor, or potential investor, or as agent for either which is:

o presented as suitable for him or based on a consideration of his personal circumstances; and

o constitutes a recommendation to him to do one or more of the following:
- buy, sell, subscribe for, exchange, redeem, hold or underwrite a particular financial instrument;
- exercise, or not to exercise, any right conferred by a particular financial instrument to buy, sell, subscribe for, exchange, or redeem a financial instrument.

This is similar to the UK regulated activity of advising on investments but is narrower in scope insofar as it requires the recommendation to be of a personal nature. A personal recommendation does not include advice given to an issuer to issue securities, as the latter is not an "investor" for the purposes of MiFID or article 53 of the RAO.

Q20. Can you give us some other practical examples of what are not personal recommendations under MiFID?

A recommendation is not a personal recommendation if it is issued exclusively through distribution channels or to the public (article 52 of the MiFID implementing Directive) and a 'distribution channel' is one through which information is, or is likely to become, publicly available because a large number of people have access to it. Advice about financial instruments in a newspaper, journal, magazine, publication, internet communication or radio or television broadcast should not amount to a personal recommendation for the purposes of MiFID (recital 79 to the MiFID implementing Directive).

Merely providing information to clients should not itself normally amount to investment advice. Practical examples include:

• advising clients on how to fill in an application form;

• disseminating company news or announcements;

• merely explaining the risks and benefits of a particular financial instrument; and

• producing league tables showing the performance of financial instruments against published benchmarks.

However, you should bear in mind that, where a person provides only selective information to a client, for example, when comparing one MiFID financial instrument against another, or when a client has indicated those benefits that he seeks in a product, this could, depending on the circumstances, amount to an implied recommendation and hence investment advice for the purposes of MiFID.

If you provide an investment research service to your clients or otherwise provide recommendations intended for distribution channels or the public generally, this is not MiFID investment advice (A5) although it may be an ancillary service (B5) for the purposes of MiFID and may also amount to the regulated activity of advising on investments for which you are likely to require authorisation.

Q21. Is generic advice investment advice for the purposes of MiFID (recitals 79 and 81 MiFID implementing Directive )?

No. Investment advice is limited to advice on particular MiFID financial instruments, for example "I recommend that you buy XYZ Company shares". If you only provide generic advice on MiFID financial instruments and do not provide advice on particular MiFID financial instruments, you are not a firm to which MiFID applies and do not require authorisation.

If you are an investment firm to which MiFID applies, however, the generic advice that you provide may be subject to MiFID-based requirements. For example, if you recommend to a client that it should invest in equities rather than bonds and this advice is not in fact suitable, you are likely, depending on the circumstances of the case, to contravene MiFID requirements to:

• act honestly, fairly and professionally in accordance with the best interests of your clients; and

• provide information to clients that is fair, clear and not misleading.

Q22. What is underwriting of financial instruments and/or placing of financial instruments on a firm commitment basis? (A6)

A6 comprises two elements:

• the 'underwriting of financial instruments'; and/or

• the 'placing of financial instruments on a firm commitment basis'.

Underwriting is a commitment to take up financial instruments where others do not acquire them. In our view, placing is the service of finding investors for securities on behalf of a seller and may involve a commitment to take up those securities where others do not acquire them. We associate underwriting and placing of financial instruments with situations where a company or other business vehicle wishes to raise capital for commercial purposes, and in particular with primary market activity.

In our view, the 'firm commitment' aspect of the placing service relates to the person arranging the placing, as opposed to the person who has agreed to purchase any instruments as part of the placing. Accordingly, placing on a firm commitment basis occurs where a firm undertakes to arrange the placing of MiFID financial instruments and to purchase some or all the instruments that it may not succeed in placing with third parties. In other words, the placing element of A6 requires the same person to arrange the placing and provide a firm commitment that some or all of the instruments will be purchased.

Where a person distributes units in a UCITS fund to investors, in our view this does not amount to placing although it is likely to involve the reception and transmission of orders.

Q23. When might placing of financial instruments without a firm commitment basis arise (A7)?

Where the person arranging the placing does not undertake to purchase those MiFID financial instruments he fails to place with third parties.

Q24. What is a multilateral trading facility? (A8, article 4.1(15) and recital 6)

The concept of a multilateral trading facility (MTF) draws on standards, issued by CESR, on which the FSA's previous alternative trading system regime was based. It includes multilateral trading systems (for example, trading platforms) operated either by investment firms or by market operators which bring together multiple buyers and sellers of financial instruments.

As was the case with the alternative trading systems regime, in our view a multilateral trading facility does not include bilateral systems where an investment firm enters into every trade on own account (as opposed to acting as a riskless counterparty interposed between the buyer and the seller).

For there to be an MTF, the buying and selling of MiFID financial instruments in these systems must be governed by non-discretionary rules in a way that results in contracts. As the rules must be non-discretionary, once orders and quotes are received within the system an MTF operator must have no discretion in determining how they interact. The MTF operator instead must establish rules governing how the system operates and the characteristics of the quotes and orders (for example, their price and time of receipt in the system) that determine the resulting trades.

In our view, a firm can be an MTF operator whether or not it performs any other MiFID investment service or activity listed in A1 to A7.

Q25. What about ancillary services (Annex 1, section B)? Do we need to be authorised if we wish to provide these services?

Yes, but only when providing these services is a regulated activity, for example, if you provide custody services which fall within the regulated activity of safeguarding and administering investments. You are not an investment firm within the scope of MiFID, however, if you only perform ancillary services (regardless of whether these are regulated activities requiring authorisation under the Act).

Q26. We are an investment firm - can we apply for passporting rights that include ancillary services?

Yes, but only if:

• you carry on the ancillary services together with one or more investment services and activities; and

• where the ancillary service is also a regulated activity, you have a permission enabling you to carry on those activities.

You will not be able to apply for passporting rights in respect of ancillary services only. In our view, this does not restrict the ability of credit institutions to exercise passporting rights under the BCD which correspond to ancillary services under MiFID (for example, the activity of safekeeping and administration of securities in Annex 1 paragraph 12 of the BCD ).

01/11/2007

PERG 13.4

Financial Instruments

01/11/2007

PERG 13.4

Q27. Where do we find a list of MiFID financial instruments?

In Section C of Annex 1 to MiFID. There are ten categories of financial instruments in Section C (C1 to C10). Transferable securities (C1) and money market instruments (C2) are defined in article 4. Further provisions relating to certain derivatives under C7 and C10 are contained in articles 38 and 39 of the MiFID Regulation.

Q28. What are transferable securities? (C1 and article 4.1(18))

Transferable securities refer to classes of securities negotiable on the capital markets but excluding instruments of payment. We consider that instruments are negotiable on the capital markets when they are capable of being traded on the capital markets.

Transferable securities include (to the extent they meet this test):

• shares in companies (whether listed or unlisted, admitted to trading or otherwise), comparable interests in partnerships and other entities and equivalent securities;

• bonds and other forms of securitised debt;

• depositary receipts in respect of the instruments above;

• securities giving the right to acquire or sell transferable securities (for example, warrants, options, futures and convertible bonds); and

• securitised cash-settled derivatives, including certain futures, options, swaps and other contracts for differences relating to transferable securities, currencies, interest rates or yields, commodities or other indices or measures.

Examples of instruments which, in our view, do not amount to transferable securities include securities that are only capable of being sold to the issuer (as is the case with some industrial and provident society interests) and OTC derivatives concluded by a confirmation under an ISDA master agreement.

Q29. What are units in collective investment undertakings (C3)?

This category of financial instrument includes units in regulated and unregulated collective investment schemes. In our view, in accordance with article 1.2(a) and 2.1(o) of the Prospectus Directive, shares in closed-ended corporate schemes, such as shares in investment trust companies, are also units in collective investment undertakings for this purpose (as well as being. transferable securities).

Q30. Which types of financial derivative fall within MiFID scope (C4, C8 and C9)?

The scope of financial derivatives under MiFID is wider than under the ISD and includes the following:

• derivative instruments relating to securities, currencies, interest rates or yields, or other derivative instruments, financial indices or measures, that may be settled physically or in cash (C4);

• derivative instruments for the transfer of credit risk (C8); and

• financial contracts for differences (C9).

The scope of C4, C8 and C9 does not extend to spot transactions, transactions which are not derivatives (such as forwards entered into for commercial purposes) and sports spread bets. In our view, neither C4 nor C9 comprise forward foreign exchange instruments unless they are caught by the scope of the Regulated Activities Order (see PERG 2.6.22B G). A non-deliverable currency forward which is not a "future" for the purposes of the Regulated Activities Order because it is made for commercial purposes will likewise fall outside the scope of MiFID.

Q31. What are derivative instruments for the transfer of credit risk (C8)?

Derivative instruments that are designed for the purposes of transferring credit risk from one person to another. They include, for example, credit default products, synthetic collateralised debt obligations, total rate of return swaps, downgrade options and credit spread products

Q32. Which types of commodity derivative fall within MiFID scope?

Broadly speaking, the following commodity derivatives fall within the scope of MiFID:

• a derivative relating to a commodity derivative, for example, an option on a commodity future (C4);

• cash-settled commodity derivatives (including physically settled derivatives that provide for settlement in cash at the option of one of the parties other than in the event of default or termination) (C5);

• physically settled commodity derivatives traded on a regulated market or MTF (C6); and

• other commodity derivatives capable of physical settlement and not for commercial purpose, that is standardised contracts subject to clearing house or margin arrangements so long as they fall into one of the following categories (C7):

o instruments traded on a non-EEA trading facility that performs an analogous function to a regulated market or MTF;

o instruments expressly stated to be traded on or subject to the rules of a regulated market, MTF or a non-EEA trading facility that performs an analogous function; or

o back-to-back contracts with clients or counterparties equivalent to contracts traded on a regulated market, MTF or such a non-EEA trading facility.

Q33. What is a commodity for the purposes of MiFID?

"Commodity" means any goods of a fungible nature that is capable of being delivered, including metals and their ores and alloys, agricultural products and energy such as electricity (article 2.1 of the MiFID Regulation). The fact that energy products, such as gas or electricity, may be "delivered" by way of a notification to an energy network (such as notifications under the Network Code or the Balancing and Settlement Code) does not prevent them being "capable of being delivered" for these purposes. If a good is freely replaceable by another of a similar nature or kind for the purposes of the relevant contract (or is normally regarded as such in the market), the two goods will be fungible in nature for these purposes. Gold bars are a classic example of fungible goods. In our view, the concept of commodity does not include services or other items that are not goods, such as currencies or rights in real estate, or that are entirely intangible (recital 26 of the MiFID Regulation).

Q34. Are there any other derivatives subject to MiFID regulation?
There is a miscellaneous category of derivatives in C10, which is supplemented by articles 38 and 39 of the MiFID Regulation. These relate to:

• climatic variables;

• freight rates;

• emission allowances;

• inflation rates or other official economic statistics;

• telecommunications bandwidth;

• commodity storage capacity;

• transmission or transportation capacity relating to commodities, whether cable, pipeline or other means;

• an allowance, credit, permit, right or similar asset which is directly linked to the supply, distribution or consumption of energy derived from renewable resources;

• a geological, environment or other physical variable;

• any other asset or right of a fungible nature, other than a right to receive a service, that is capable of being transferred; or

• an index or measure related to the price or volume of transactions in any asset, right, service or obligation.

C10 derivatives must also meet at least one of the following criteria:

• the contract is settled in cash or may be settled in cash at the option of one or more of the parties, otherwise than by reason of default or other termination event; or

• the contract is traded in a regulated market or an MTF; or

• the contract is standardised, subject to clearing house or margin arrangements and falls into one or more of the categories described under the fourth bullet point in Q32 above.

01/11/2007

PERG 13.5

Exemptions from MiFID

01/11/2007

PERG 13.5

Q35. Where do we find a list of MiFID exemptions?

In articles 2 and 3 of MiFID.

Q36. We are an insurer. Does MiFID apply to us?

No. Insurers are exempt from MiFID (article 2.1(a)).

Q37. We are a non-financial services group company providing investment services to other companies in the same group. Are we exempt under the group exemption in article 2.1(b)?

Yes, if you provide these services exclusively for your parent company, your subsidiaries and those of your parent company. This means that providing investment services for the benefit of group companies must be the only investment service that you undertake. The exemption is narrower than the corresponding exclusion in article 69 of the Regulated Activities Order (groups and joint enterprises) insofar, for example, as it does not apply to investment services supplied to a joint venture participant (see PERG 2.9.10 G).

Q38. We also buy and sell financial instruments for ourselves. Are we still able to use the group exemption?

Yes. The group exemption applies to investment services and not investment activities. So, as long as your own account dealing does not involve you providing an investment service (to which MiFID applies) to non-group entities, you can still rely on the group exemption in respect of the services you provide solely to other group companies.

So far as your own account dealing is concerned, you may be able to rely upon the exemption in article 2.1(i) (see Q44 and Q45) if you meet the relevant conditions. The ability to combine reliance on article 2.1(b) and article 2.1(i) could be relevant to companies performing group treasury functions.

Q39. We provide investment services as a complement to our main professional activity. Are we exempt?

Yes, you will be exempt under article 2.1(c) MiFID if you provide these services in an incidental manner in the course of your professional activity, and that activity is regulated by legal or regulatory provisions or a code of ethics that do not exclude the provision of investment services. The meaning of 'incidental' is potentially subject to further Commission legislation pursuant to article 2.3 MiFID.

This exemption is relevant, for example, to firms belonging to designated professional bodies, such as accountants, actuaries and solicitors, to whom Part XX of the Act applies. It could also apply to authorised professional firms which provide investment services in an incidental manner in the course of their professional activity. In our view, the criteria set out in PROF 2.1.14 G in relation to section 327(4) of the Act are also relevant to considering whether a firm can rely on the exemption in article 2.1(c) MiFID, as they were in relation to the corresponding ISD exemption.

If an authorised professional firm has the standard requirement on its permission that it "...must not carry on the specified regulated activities otherwise than in an incidental manner in the course of the provision by it of professional services (that is, services which do not consist of regulated activities)", our assumption is that it is exempt from MiFID if it complies with this requirement.

If you are an authorised professional firm not falling within article 2.1(c) MiFID, you may also wish to consider whether you are exempt or otherwise from MiFID requirements by virtue of the domestic implementation of the article 3 exemption (see Q48 and Q49).

The article 2.1(c) MiFID exemption may also apply to journalists, broadcasters and publishers (where they are subject to regulation or a code of ethics), although in most cases the FSAwould not expect these persons to fall within the MiFID definition of investment firm (see Q7 and Q8).

Q40. We regularly buy and sell financial instruments ourselves but never as a service to third parties. Are there any exemptions which might apply to us?

Yes, you could fall within the article 2.1(d) MiFID exemption but not if you:

• are a market maker (please see Q41 below); or

• deal on own account outside a regulated market or an MTF on an organised, frequent and systematic basis by providing a system accessible to third parties in order to engage in dealings with them. A system for these purposes might include a trading platform, website or other mechanism that functions on the basis of a set of rules.

You cannot rely, however, on the article 2.1(d) MiFID exemption if you provide any investment services or activities other than dealing on own account. If buying and selling MiFID financial instruments is not your main business, or, as the case may be, the main business of your group, you might though wish to consider further the exemption in article 2.1(i) MiFID (see Q44 and Q45).

Q41. What is a market maker?

A market maker is "a person who holds himself out on the financial markets on a continuous basis as being willing to deal on own account by buying and selling financial instruments against his proprietary capital at prices defined by him" (article 4.1(8) MiFID). This is likely to be the case if you are recognised or registered as a market maker on an investment exchange. However, in our view anyone who satisfies the definition will be a market maker for the purposes of MiFID, even if they are not under an obligation to make quotes, for example retail service providers who make a market in shares traded on the Stock Exchange Electronic Trading Service ('SETS') but without doing so as registered market makers under the rules of the London Stock Exchange.

Q42. Is there an exemption, as there was under the ISD, relating to employee share schemes and company pension schemes?

Yes, there is an exemption in article 2(1)(e) MiFID for persons providing investment services consisting exclusively in the administration of employee-participation schemes, for example employee share schemes and company pension schemes. In our view, whilst administration for these purposes could extend to services comprising reception and transmission or execution of orders on behalf of clients or placing, it would not include personal recommendations in relation to, or managing, the assets of employee share schemes or company pension schemes.

This exemption can also be combined with the "group exemption" in article 2.1(b) MiFID, by virtue of article 2.1(f) MiFID. In our view, it may also be combined with the exemption in article 2.1(i) MiFID if a firm is dealing on own account in financial instruments as an ancillary activity to its main business, or, as the case may be, the main business of its group.

Q43. Are we right in thinking that MiFID does not apply to collective investment undertakings and their operators?

Yes. Generally speaking, collective investment undertakings are specifically exempt, as are their depositaries and managers. So far as collective investment schemes are concerned, the "manager" corresponds, in essence, to the operatorof a schemea nd not to a person who is managing the assets of the scheme (unless that person is also the operator). In our view, the manager of a collective investment undertaking only benefits from the exemption in respect of any investment services or activities it may carry on in that capacity. To the extent that it also provides investment services or performs investment activities in a different capacity, for example, if it provides investment advice to, or manages the assets of, an individual third party, these services and activities fall outside the scope of the article 2.1(h) exemption.

In the case of UCITS management companies, some MiFID provisions will apply to those who provide portfolio management services, investment advice or safekeeping and administration services in relation to units to third parties, by virtue of article 5.4 of the UCITS Directive (see Q6).

Q44. Who can rely on the exemption in article 2.1(i)?

You may be able to rely on the exemption if:

• you deal on own account in MiFID financial instruments; or

• provide investment services in commodity derivatives or C10 derivative contracts to clients of your main business (or if you are part of a group, the group's main business); or

• both.

However, the exemption will only apply if what you do is ancillary to your main business and that main business is neither the provision of investment services nor banking services. If you are part of a group, what you do must be ancillary to the main business of your group whose main business is neither the provision of investment services nor banking services.

In our view, a firm which is part of a group whose main business is not investment or banking services and which provides, for example, as a stand-alone business, investment services in commodity derivatives or C10 contracts for its own clients (who are not clients of the group's main business), is likely to fall outside the scope of the article 2.1(i) exemption.

When considering what is a firm's or group's 'main business', in our view various factors are likely to be relevant including turnover, profit, capital employed, numbers of employees and time spent by employees. These factors should then be considered in the round in deciding whether any one operation or business line amounts to a firm's or group's main business. In our view, a similar approach can be applied when determining a firm's 'main business' for the purposes of article 2.1(k) (see Q46).

Q45. What is an ancillary activity for these purposes?

The meaning of 'ancillary' is potentially subject to further European Commission legislation pursuant to article 2.3 MiFID. For an activity to be 'ancillary' for these purposes, in our view, it must at least be both directly related and subordinate to the main business of the group. Where, for example, a commodity producer buys or sells commodity derivatives for the purposes of limiting an identifiable risk of its main business, for instance in circumstances where the risk management exclusion in article 19 of the Regulated Activities Order would apply, in our view this would qualify as ancillary for the purposes of this exemption. On the other hand, where a commodity producer deals on own account for speculative purposes, it is unlikely that this would be ancillary to the main business in the case of article 2.1(i) MiFID. This activity may fall, however, within the article 2.1(k) MiFID exemption (see Q46).

Q46. Our main business is producing commodities and we buy and sell commodity derivatives. We are a member of a non-financial services group. Are we exempt from MiFID?

Yes. You will be exempt under article 2.1(k) MiFID because you are a person:

• whose main business consists of dealing on own account in commodities and/or commodity derivatives, and

• who is not part of a group whose main business is the provision of other investment services or banking services.

The question of what is your main business for the purposes of the first bullet point above is determined on an entity basis and not on a group basis (which is different from the approach taken in article 2.1(i) MiFID). You should also note that the article 2.1(k) MiFID exemption refers to commodities and/or commodity derivatives but not C10 derivatives.

Recital 22 of the MiFID Regulation indicates that the exemptions in article 2.1(i) and (k) MiFID could be expected to exclude significant numbers of commercial producers and consumers of energy and other commodities, including energy suppliers and commodity merchants.

Q47. We traded on an investment exchange as a local firm and were exempt from the ISD. Are we exempt under MiFID?

Yes. If you fell within the exemption in article 2.2(j) ISD for local firms and continue to perform the same services and activities, you should generally fall within the exemption in article 2.1(l) MiFID. If you provide personal recommendations in relation to MiFID financial instruments, however, you will not be able to rely upon the exemption in article 2.1(l) MiFID.

Q48. Article 3 is an optional exemption. Will the exemption apply to UK firms?

Yes, the optional exemption has been exercised by The Treasury.

Q49. Which firms might fall within this exemption?

The exemption applies to persons who meet all the following conditions:

• they do not hold clients' funds or securities;

• they do not provide any investment service other than reception and transmission of orders or investment advice, or both, in relation to transferable securities and units in collective investment undertakings;

• they transmit orders only to one or more of the following:

o other MiFID investment firms;

o credit institutions authorised under the BCD;

o branches of third country investment firms or credit institutions complying with rules considered by the FSAto be at least as stringent as those laid down in MiFID, the BCD or the CAD;

o collective investment undertakings or their managers authorised under the law of an EEA State to market units to the public;

o EU incorporated investment companies the securities of which are listed or dealt in on a regulated market, for example investment trust companies.

If you are a UK firm that meets these qualifying conditions, you will be exempt from regulations made by the European Commission under MiFID.

Where you provide personal recommendations or receive and transmit orders in relation to derivatives which are MiFID financial instruments but not transferable securities, you will fall outside the scope of this exemption. In our view, this would be the case, for example, if you provided either or both of these investment services in relation to OTC derivatives concluded by a confirmation under an ISDA master agreement (see PERG 13 Annex 2 Table 2).

Q50. We are (or previously were) an IFA and have a permission which covers (i) arranging (bringing about) deals in investments; (ii) making arrangements with a view to transactions; and (iii) advising on investments, in each case in relation to securities but not derivatives. We are not permitted to hold client money or investments and do not have dealing or managing permissions in relation to MiFID financial instruments. Are we exempt?

The FSA expects so, assuming you do not:

• carry on activities outside your permission; or

• transmit orders to persons other than those listed in Q49 (for example, you will fall outside the exemption if you transmit orders directly to collective investment schemes whose units cannot be marketed to the public in any EEA State either because they are unregulated schemes or non-EEA authorised collective investment schemes); or

• place MiFID financial instruments without a firm commitment basis (see Q22 and Q23).

We would generally not expect IFAs to be placing MiFID financial instruments without a firm commitment basis as we associate placing of financial instruments with situations where a company or other business vehicle wishes to raise capital for commercial purposes, and in particular with primary market activity.

Q51. What happens if we breach any of the qualifying conditions (see Q49)? Do we then lose the exemption?

You are required to notify us of a breach (see SUP 15.3.11 R). We will then consider whether you should continue to benefit from the exemption and what, if any, supervisory or occasionally enforcement action is appropriate in the circumstances.

Q52. If we fall within the exemption does this prevent us from acquiring passporting rights under MiFID?

No. Firms which would otherwise be exempt can apply to opt into MiFID regulation with a view to acquiring passport rights (although they would then become subject to the requirements of MiFID, including certain enhanced prudential requirements - see Q58 and Q59).

Q53. What is the practical effect of exercising the optional exemption for those firms falling within its scope?

You are not a firm to which MiFID applies and so are not a MiFID investment firm for the purposes of the FSA Handbook. As such you are not subject to the requirements of the recast CAD as transposed in the FSA Handbook and cannot exercise passporting rights.

01/11/2007

PERG 13.5A

Child trust funds and MiFID

06/05/2008

PERG 13.5A

Q53A. Is a child trust fund (a CTF) a financial instrument?

No. A CTF account itself is not a financial instrument. The funds contributed to a CTF may be invested in financial instruments. However, in the FSA'sview, the link between the underlying investment and the rights and interests acquired by the CTF account holder is too remote for the account holder to be considered as having acquired the underlying investment itself. So, the provision of services to a CTF account holder (such as in relation to the establishment of the account and the making of further contributions) will not be an investment service.

Q53B. Will the operator of a CTF be carrying on investment services or activities?

Possibly, but it is likely that he will be exempt from the scope of MiFID. Where the CTF is invested wholly or partly in financial instruments, the operator may be providing an investment service when he executes the transaction or arranges to transfer funds to a new financial instrument (such as a security or collective investment scheme unit). However, in the FSA'sopinion, the exemption in article 2(1) (c) of MiFID (see Q39) should be available to CTF operators such that these activities will effectively be outside the scope of MiFID.

The key question in applying this exemption is whether the investment services are incidental to the other activities involved in operating a CTF when viewed on a global basis. In the FSA'sview, this is likely to be the case as most CTFs do not involve active trading, such as day trading, by the account holder and, as a result, involve little or no ongoing investment service within the scope of MiFID.

An issue arises as to whether a focus on deal-based charges as the main source of remuneration (instead of charges related to the administration of the CTF itself) might indicate that trading is not incidental. In this respect, the FSAwould expect firms designing an account in this way to follow the principle of treating their customers fairly. For example, firms may want to explain to potential account holders the possible impact of frequent switching if this incurs costs and erodes capital. More generally, where active trading is likely to have a detrimental effect on capital value, it may well be that this would be viewed as more than an incidental activity such that the exemption would not apply.

It is necessary to balance investment services against all the activities that are not investment services that have taken place or will take place in the CTF accounts that the firm operates over their full term. The FSAwould not expect firms to have to investigate each CTF on a trade-by-trade basis. The exemption may still apply even if particular accounts experience higher levels of dealing activity.

Q53C. Is a person who provides services relating to investments that underlie the CTF within the scope of MiFID?

Possibly. Firms which provide investment services to the CTF operator in relation to financial instruments held within the CTF account (such as executing trades) will be within the scope of MiFID unless an exemption applies to them.

Q53D. Does the same analysis apply to other types of schemes where financial instruments may be held for the benefit of investors such as an ISA or a pension scheme?

This depends on the nature of the scheme in question. CTFs have very particular product features. Other types of schemes such as ISA accounts may simply be tax efficient ways to hold the beneficial interest in financial instruments which may, at the behest of the account holder, be transferred into his direct ownership. So, the beneficial interest that an investor acquires in a share, bond or collective investment scheme unit held under an ISA will be a financial instrument for the purposes of MiFID. And the operation of an ISA will essentially be an investment service such that the exemption in article 2.1(c) of MiFID will not be relevant. Pension schemes, on the other hand, bear a closer similarity to CTFs in that they will have particular product features and the underlying investments are held for the purpose of providing or determining the value of the member's cash benefits. Generally speaking, a member of a pension scheme can only transfer the value of his benefits and not transfer the underlying investments into his direct ownership. For this reason, as explained in PERG 10.4A, the FSAdoes not consider that a member of a pension scheme acquires a financial instrument purely as a result of having a financial instrument held for his benefit under the trusts of an occupational or personal pension scheme.

06/05/2008

PERG 13.6

The recast Capital Adequacy Directive

01/11/2007

PERG 13.6

Q54. What is the purpose of this section?

This section is designed to help UK investment firms consider:

• whether the recast CAD, as implemented in the UK, applies to them;

• if so, which category of firm they are for the purposes of the FSA'sbase capital resources requirements made under the recast CAD, for example whether they are a BIPRU 50K firm, a BIPRU 125K firm, a BIPRU 730K firm, a UCITS investment firm, an exempt CAD firm or a firm falling within the transitional regime for certain commodity brokers and dealers; and

• how the recast CAD otherwise impacts on their business, by explaining when a firm will be a limited licence firm, a limited activity firm or a full scope BIPRU investment firm.

This section is intended to provide a general summary of these issues and not a detailed or exhaustive explanation of the recast CAD as implemented in the UK.

Q55. Are we subject to the recast CAD?

Only investment firms subject to the requirements of MiFID are subject to the requirements of the recast CAD. This includes UCITS investment firms (see Q6 and Q63).

Despite being subject to the requirements of MiFID, broadly speaking, if you are one of the following investment firms our implementation of the recast CAD will only apply to you in a limited way:

• a firm whose main business consists exclusively of providing investment services or activities in relation to commodity derivatives or C10 derivatives, or both, and to whom the ISD would not have applied. If you fall into this category, you will fall within a transitional regime under which you will not be subject to the capital requirements of the recast CAD but will be subject to other requirements (see Q57); or

• a firm that is only authorised to provide investment advice or receive and transmit orders, or both, without holding client money or securities. If you fall into this category, you will be an exempt CAD firm and only subject to base capital requirements under the recast CAD (see Q58 and Q59 below).

If you are an investment firm to which an exemption in either article 2 or article 3 MiFID applies (see PERG 13.5 and PERG 13 Annex 1 flow chart 2), you are not subject to the recast CAD. However, if you potentially fall within the article 3 exemption, but decide to opt into MiFID regulation, for instance to acquire passporting rights (see Q52), you are subject to the recast CAD. If you do so, you are an exempt CAD firm (see Q58 and Q59).

There is also a special exemption under the recast CAD for locals that do not fall within the exemption for local firms under MiFID (see Q47). However, we do not think that UK regulated firms that were subject to the regulatory regime for locals prior to MiFID implementation are likely to fall within the exemption under the recast CAD. This is because they are likely to fall within article 2.1(l) MiFID.

Q56. We are an investment firm to which MiFID applies and do not fall into one of the limited categories described above. How does the recast CAD apply to us?

You are a CAD investment firm. Broadly speaking, you should go through an initial two-stage process in considering how the recast CAD will apply to you:

• consider what kind of base capital requirements apply to you; and

• consider whether you are a limited licence firm, a limited activity firm or a full scope BIPRU investment firm to determine how other capital requirements of the recast CAD apply to you.

You are either a BIPRU 50K firm (subject to a base capital requirement of euro 50,000) (see Q60), a BIPRU 125K firm IFPRU 125K firm (subject to a base capital requirement of euro 125,000) (see Q61), a BIPRU 730K firm (subject to a base capital requirement of euro 730,000) (see Q62) or a UCITS investment firm (see Q63). Your base capital requirement depends essentially on the scope of your permission and any limitations or requirements placed upon it.

If you are a CAD investment firm, in essence the scope of your permission and any limitations or requirements placed upon it also dictate whether you are a limited licence firm, a limited activity firm or a full scope BIPRU investment firm . Broadly speaking, the benefit of being a limited licence firm or a limited activity firm (see Q64 and Q65) is that you are exempt from minimum own funds requirements to hold capital to cover operational risk, although you are subject to the requirements to hold own funds calculated by reference to credit risk, market risk and fixed overheads (see GENPRU 2.1.45 R).
If you are a full scope BIPRU investment firm , you are subject to the full range of recast CAD risk requirements (see Q66). See, generally, GENPRU 2.1.45 R in relation to the calculation of capital resources requirements for limited licence firms, limited activity firms and full scope BIPRU investment firms.

The question of whether you are a limited licence firm or a limited activity firm may also be relevant to capital treatment at a group level. This is outside the scope of this guidance which focuses only on the application of the recast CAD at the level of the individual firm, although you may find the decision tree at BIPRU 8 Annex 5 helpful in considering these issues.

Q57. How do we know if we are a firm to which the transitional regime for certain commodity brokers and dealers applies?

You are a firm to which the transitional regime applies if:

• you are a firm to which the ISD did not or would not have applied on 31 December 2006; and

• your main business consists exclusively of the provision of investment services or activities in relation to financial instruments set out in C5, 6, 7, 9 and 10 of Annex 1 of MiFID. See BIPRU TP 15 .

This exemption is only relevant if you are a firm to which MiFID applies, that is, you do not fall within the exemptions in articles 2 or 3 of MiFID (see Q55). Although you are exempt from the capital requirements of the recast CAD, you are subject to risk management and other systems and control requirements in the form of SYSC (see BIPRU TP 15.11G). You may also be subject to the requirements of chapter 3 of IPRU(INV).

In our view, your main business for the purposes of this exemption is the main business to which MiFID applies.

Q58. How do we know whether we are an exempt CAD firm and what does this mean in practice?

This category may be relevant to you if you have permission to advise on investments or arrange deals in investments in relation to MiFID financial instruments but fall outside the article 3 MiFID exemption (for example, because you choose to opt out of the exemption or because you transmit orders to persons not listed in the exemption or provide services in relation to derivatives that are not transferable securities). You can be an exempt CAD firm if you:

• are not authorised to hold client money in relation to MiFID business;

• do not have a safeguarding and administering investments (without arranging) permission in relation to MiFID financial instruments; and

• have a requirement on your permission so that the only MiFID investment services and activities you can perform are reception and transmission of orders or investment advice or both.

Where you hold client money for purposes unconnected with providing investment advice or receiving and transmitting orders in relation to MiFID financial instruments, in our view you can still be an exempt CAD firm. This might include, for instance, when you hold money or securities for clients to whom you only provide services that do not constitute investment services and therefore fall outside the scope of MiFID.

The conditions relating to the article 3 MiFID exemption look similar to those for an exempt CAD firm. There are important differences, however, between the two:

• the article 3 MiFID exemption (see Q49) extends only to services provided in relation to transferable securities and units in collective investment undertakings, whereas no such restriction applies to exempt CAD firms; and

• the article 3 MiFID exemption requires orders to be transmitted to certain persons only (see Q49 and Q50), whereas no such restriction arises in the case of exempt CAD firms.

If you are an exempt CAD firm , you are subject to base capital requirements which comprise the following broad options:

• base capital of euro 50,000; or

• professional indemnity insurance of euro 1,000,000 for any one claim and euro 1,500,000 in aggregate; or

• a combination of base capital and professional indemnity insurance resulting in an equivalent level of coverage to the options above.

For the rules transposing these requirements and supporting guidance, see the Interim Prudential Sourcebook for Investment Businesses (Exempt CAD Firms) Instrument 2007and in particular sections 13.1 and 13.1A and chapter 9. You will be subject to the relevant ongoing requirements in the Interim Prudential Sourcebook for Investment Businesses relating to personal investment firms and securities and futures firms, as appropriate (see IPRU(INV) 13.1A.13R and IPRU(INV) 9.2.9R).
If you are an exempt CAD firm which has opted into MiFID legislation (see Q52), you will need to consider whether you are subject to the audit requirements of companies legislation (see Part VII of the Companies Act 1985 and Part 16 of the Companies Act 2006). You can benefit from the auditing exemption for small companies in companies legislation if you fulfil the conditions of regulation 4C(3) of the Financial Services and Markets Act 2000 (Markets in Financial Instruments Regulations) 2007. In other words, if you continue to meet the conditions of the article 3 MiFID exemption (notwithstanding that you are an exempt CAD firm), you can benefit from the auditing exemption for small companies, as provided for in companies legislation. For further details, see The Markets in Financial Instruments Directive (Consequential Amendments) Regulations 2007 (SI 2007/2932) . The same regulations also contain a transitional regime which has the effect of exempting exempt CAD firms from statutory audit requirements in relation to a financial year beginning before 1 November 2007 and ending on or after that date, where the exempt CAD firm was not an ISD investment firm.

Q59. If we are subject to the Insurance Mediation Directive, does this make any difference to the requirements which apply?

Yes. If the only investment services that you are authorised to provide are investment advice or receiving and transmitting orders or both, without holding client money or securities, you can still be an exempt CAD firm. However, you are subject to different base capital requirements. Broadly speaking, article 8 recast CAD requires you to have professional indemnity insurance of euro 1,000,000 for any one claim and euro 1,500,000 in aggregate (this is the IMD requirement), plus coverage in one of the following forms:

• base capital of euro 25,000; or

• professional indemnity insurance of euro 500,000 for any one claim and euro 750,000 in aggregate; or

• a combination of base capital and professional indemnity insurance resulting in an equivalent level of coverage to the options above.

For the rules transposing these requirements and supporting guidance, see the final paragraph of the answer to Q58.

As mentioned in Q58, when you hold client money or securities for purposes unconnected with providing investment advice or receiving and transmitting orders in relation to MiFID financial instruments, in our view you can still be an exempt CAD firm. This might include, for instance, when you hold client money for those to whom you provide insurance mediation services.

You should also bear in mind that if you are a firm to whom article 2 or article 3 MiFID applies (see PERG 13.5), you are not subject to the recast CAD.

Q60. Are we a BIPRU 50K firm?

This category may be relevant to you if you are not an exempt CAD firm and have one or more of the following permissions in relation to MiFID financial instruments:

• arranging (bringing about) deals in investments;

• dealing in investments as agent; or

• managing investments,

provided that you are not authorised to:

• hold client money in relation to MiFID business or safeguard and administer (without arranging) MiFID financial investments; or

• deal on own account in, or underwrite on a firm commitment basis, issues of MiFID financial instruments (if you have a dealing in investments as principal permission in relation to MiFID financial instruments, you need a limitation or requirement on your permission to this effect).

Q61. Are we a BIPRU 125K firm?

This category may be relevant to you if you would have been a BIPRU 50K firm but for the fact that you are entitled to hold client money in relation to MiFID business or hold MiFID financial instruments.

You may also be a BIPRU 125K firm if you meet the conditions of article 5.2 recast CAD. Broadly speaking, this applies to investment firms which execute investors' orders and hold financial instruments for their own account provided that:

• such positions arise only as a result of the firm's failure to match investors' orders precisely;

• the total market value of all such positions is subject to a ceiling of 15% of the firm's initial capital;

• the firm meets the requirements laid down in articles 18, 20 and 28 recast CAD (including own funds requirements in respect of position risk, settlement and counterparty credit risk and large exposures); and

• such positions are incidental and provisional in nature and strictly limited to the time required to carry out the transaction in question.

If you meet the conditions of article 5.2 recast CAD and are not authorised to hold client money in relation to MiFID business or safeguard and administer (without arranging) MiFID financial instruments, you will be a BIPRU 50K firm.

Q62. Are we a BIPRU 730K firm?

If you are a CAD investment firm and you are neither a BIPRU 50K firm nor a BIPRU 125K firm nor a UCITS investment firm (see Q63), you will be a BIPRU 730K firm.

Q63. We are a UCITS investment firm. How will the recast CAD apply to us?
UCTIS investment firms ( UCITS management companies that are authorised to perform the additional services of portfolio management, investment advice and safeguarding and administration of units) are subject to the recast CAD in parallel with the capital requirements in the UCITS Directive.

If you are a UCITS investment firm, your base capital requirement is contained in GENPRU 2.1.48 R (which refers to UPRU 2.1.2 R (1)) and in summary is:

• a minimum base capital requirement of euro 125,000; and

• an additional amount of own funds equal to 0.02% of the amount by which the value of the portfolios under management exceeds euro 250,000,000 (subject to an overall maximum base capital requirement of euro 10,000,000).

In our view, a UCITS investment firm should be a limited licence firm, as the UCITS Directive prevents it from dealing on own account outside its scheme management activities. As a result, where a UCITS investment firm has a dealing in investments as principal permission, this should be limited to box management activities where MiFID financial instruments are concerned. In our view, a UCITS investment firm which has this limitation and complies with it will not be dealing on own account for the purposes of the MiFID and the recast CAD.

Q64. Are we a limited licence firm?

A limited licence firm is one that is not authorised to:

• deal on own account (see Q16); and

• underwrite and/or place financial instruments on a firm commitment basis (see Q22).

You can be a limited licence firm if you are either:

• a BIPRU 50K firm (see Q60); or

• a BIPRU 125K firm (see Q61).

Generally, you cannot be a limited licence firm if you are a BIPRU 730K firm. However, you may be a limited licence firm if you operate a multilateral trading facility (and therefore are a BIPRU 730K firm) and do not have a dealing in investments as principal permission enabling you to deal on own account or to underwrite or place financial instruments on a firm commitment basis.

For calculation of the variable capital requirement for a BIPRU limited licence firm (including a UCITS investment firm), see GENPRU 2.1.45 R.

Q65. Are we a limited activity firm?

A limited activity firm is a BIPRU 730K firm that deals on own account only for the purpose of:

• fulfilling or executing a client order; or

• gaining entrance to a clearing and settlement system or a recognised exchange when acting in an agency capacity or executing a client order.

If you wish to be a limited activity firm, you should apply for a limitation on your dealing in investments as principal permission reflecting these conditions.

There is also a category for certain firms which, among other things, do not hold client money or securities and have no external customers. We do not think that any UK regulated firms are likely to fall within this third category of limited activity firm.

Q66. What is the effect of being a CAD investment firm which is neither a limited licence firm nor a limited activity firm?

You will be a full scope BIPRU investment firm, subject to the full range of recast CAD risk requirements.

01/11/2007

PERG 13.7

The territorial application of MiFID

01/11/2007

PERG 13.7

Q67. What is the territorial application of MiFID?

If a firm is established in one Member State, and carries on all its investment business in that state, that state has responsibility for the entire financial services regulation of the firm

If, however, the firm provides investment services or activities in another Member State, or establishes a branch in another Member State, the questions arise 'Whose rules apply?' and 'Which regulator has responsibility for enforcing them?'.

The general principle is that prudential regulation is the responsibility of the Home State but conduct of business regulation is the responsibility of the Host State.

A Host State may also impose requirements relating to matters that fall outside of the scope of the directive - for example, market abuse, anti-money laundering controls and the conditions for cold calling.

Q68. What is 'prudential regulation' and 'conduct of business regulation' in this context?

Prudential regulation relates primarily to the capital adequacy of a firm and its systems and controls. In general terms, this means every aspect of a firm's activities relating to financial services except those areas where the firm is concerned with a client. So provisions, for example, relating to communicating with clients, client agreements, best execution and order handling are seen as 'conduct of business' requirements and are not prudential.

Q69. What does this mean for my firm?

MiFID is about the regulation of markets in financial instruments ? it is not about setting capital standards. It does, however, contain provisions about systems and controls and conduct of business. It also contains other market specific provisions which allocate the responsibilities between the home and host Member States.

If a firm establishes a branch in another Member State, the competent authority of the State where the branch is located has responsibility for the services and activities provided by the branch within that territory. As article 32(7) of MiFID provides, that authority has responsibility for ensuring compliance with the rules referred to in column 1 of the table below. The location of those rules is set out in column 3.

Subject matter

Location

Conduct of business obligations to clients

COBS generally but see Notes 1 and 2

Best execution

COBS 11.2 (Best execution)

Client order handling

COBS 11 (Dealing and managing)

Market integrity, transaction reporting and maintaining records

SUP 17 (Transaction reporting)

Making public firm quotes (transparency)

MAR 6 (Systematic internalisers)

Post-trade disclosure

MAR 7 (Disclosure of information on certain trades undertaken outside a regulated market or MTF)

Notes:
1. Further guidance on the territorial scope of COBS is given in COBS 1 Annex 1, Part 3 and in SUP 13A Annex 2.
2. The MiFID conduct of business rules in article 19 are implemented in:
(a) COBS 2.1 (Acting honestly, fairly and professionally)
(b) COBS 2.2 (Information disclosure before providing services)
(c) COBS 4.2 (Fair, clear and not misleading communications)
(d) COBS 4.3 (Financial promotions to be identifiable as such)
(e) COBS 8.1 (Client agreements: designated investment business)
(f) COBS 9.2 (Assessing suitability)
(g) COBS 10.2 (Assessing appropriateness: the obligations)
(h) COBS 10.3 (Warning the client)
(i) COBS 10.4 (Assessing appropriateness: when it need not be done) , and
(j) COBS 16 (Reporting information to clients).

Q70. How are the high level standards, like the Principles, affected by MiFID?

The position is summarised in the table below.

Subject matter

References

Summary

The Principles

PRIN 3.1.6 R
(Who?)

A firm is not subject to the Principles to the extent that it would be contrary to MiFID (and the other Single Market Directives).

PRIN 4.1.2 G
(Where?)

The territorial scope of some Principles has been extended and others narrowed according to the type of firm.

Systems and controls

SYSC 1 Annex 1.2.15R to 1.2.18R

A UK MiFID investment firm is a common platform firm. It is subject to the common platform requirements in SYSC 4 to SYSC 10 and is not subject to the requirements in SYSC 2 and SYSC 3. The common platform requirements generally apply in relation to activities conducted from an establishment in the United Kingdom or another EEA State. However, this is subject to some modification, for example in relation to requirements on record keeping and financial crime. Most of the common platform requirements also apply in a prudential context to the activities of a UK MiFID investment firm from an establishment outside the EEA.

An EEA MiFID investment firm is not a common platform firm and is therefore not subject to the common platform requirements. However, it is subject to the common platform record keeping requirements. Some provisions in SYSC 9 will apply to the UK establishment of an EEA MiFID investment firm but only in respect of matters that are not reserved to the Home State regulator. This is particularly relevant to the provisions on systems and controls concerning financial crime and money laundering in SYSC 6.3 .

Approved persons

SUP 10.1 , APER 1.1.4 G and APER 2.1.1A P

The territorial scope of some of the controlled functions under the approved persons regime and of the application of the Statements of Principle is modified as a result of MiFID.

The threshold conditions

COND 1.1.4 G
(Where?)

The guidance indicates that the threshold conditions apply in relation to all the regulated activities of a firm wherever they are carried on except, for example, in relation to incoming EEA firms in certain cases. MiFID has not affected this.

Q71. What is the position in relation to record keeping in branches?
The effect of article 13(9) of MiFID is also to shift the default position (of regulation by the Home State) to regulation by the Host State for the record-keeping requirements imposed on a branch (see SYSC 1 Annex 1.2.17R).

Q72. Will a branch need to report to the competent authority of the Member State where it is located?

For some purposes, yes. Article 61 of MiFID gives a Host Member State the power to require reports for statistical purposes and to require branches to provide information necessary for monitoring compliance with the standards of the Host Member State (see SUP 16.7 (Financial reports)). These standards are the ones referred to in Article 32(7) as set out in Q69.

01/04/2009

PERG 13 Annex 1

Annex 1

01/11/2007

Flow chart 1- Does MiFID apply to us?

Flow chart 2- Am I exempt under article 2 MiFID?

01/11/2007

PERG 13 Annex 2

Annex 2

01/11/2007

Table 1 - MiFID Investment services and activities and the Part IV permission regime

MiFID Investment Services and Activities

Part IV permission

Comments

A1- Reception and transmission of orders in relation to one or more financial instruments

Arranging (bringing about) deals in investments (article 25(1) RAO).

This was an ISD service.

Generally speaking, only firms with permission to carry on the activity of arranging (bringing about) deals in investments in relation to securities and contractually based investments which are financial instruments can provide the service of reception and transmission. This is because a service must bring about the transaction if it is to amount to reception and transmission of orders.

The activity of arranging (bringing about) deals in investments is wider than A1, so a firm carrying on this regulated activity will not always be receiving and transmitting orders.

See Q13 and Q14 for further guidance.

A2- Execution of orders on behalf of clients

Dealing in investments as agent (article 21 RAO)

Dealing in investments as principal (article 14 RAO)

This was an ISD service.

Usually, where a firm executes orders on behalf of clients it will need permission to carry on the activity of dealing in investments as agent. Where a firm executes client orders on a true back-to-back basis or by dealing on own account, it also needs permission to carry on the activity of dealing in investments as principal.

See Q15 for further guidance.

A3- Dealing on own account

Dealing in investments as principal (article 14 RAO)

Dealing on own account falls within the ISD, but only where a service is provided. Under MiFID, dealing on own account is caught even if no service is provided. Where a firm is dealing on own account, it needs permission to carry on the activity of dealing in investments as principal.

See Q16 for further guidance.

A4- Portfolio management

Managing investments (article 37 RAO)

Dealing in investments as principal (article 14 RAO)

Dealing in investments as agent (article 21 RAO)

Arranging (bringing about) deals in investments (article 25(1) RAO)

Making arrangement with a view to transactions in investments (article 25(2))

This was an ISD service.

A firm performing the portfolio management service needs a permission to carry on the activity of managing investments.

Firms may also need permission to perform other regulated activities to enable them to give effect to decisions they make as part of their portfolio management (see adjacent column).

See Q6, Q17 and Q43 for further guidance.

A5- Investment advice

Advising on investments (article 53 RAO)

This was an ISD non-core service.

A firm providing investment advice will need permission to carry on the activity of advising on investments.

See Q18 and Q19 for further guidance.

A6- Underwriting of financial instruments and/or placing of financial instruments on a firm commitment basis

Dealing in investments as principal (article 14 RAO)

Dealing in investments as agent (article 21 RAO)

This corresponds broadly to the service of underwriting and/or placing described in Section A4 of the Annex to ISD.

Where a firm underwrites an issue of financial instruments and holds them on its books before they are sold or offered to third parties, it needs permission to carry on the activity of dealing in investments as principal.

Where an underwriting firm sells the relevant instruments as agent for the issuer and then purchases any remaining instruments as principal, it needs permission to carry on the activity of dealing in investments as agent in relation to its selling activity and of dealing in investments as principal in relation to its purchase of the remaining instruments.

See Q22 for further guidance.

A7- Placing of financial instruments without a firm commitment basis

Dealing in investments as agent (article 21 RAO)

Arranging (bringing about) deals in investments (article 25(1) RAO)

This corresponds in part to the service in Section A4 of the Annex to ISD outlined in the commentary to A6.

Where a firm arranges the placement of financial instruments with another entity, it needs permission to carry on the activity of arranging (bringing about) deals in investments.

Where a firm sells the relevant instruments on behalf of the issuer, it also needs permission to carry on the activity of dealing in investments as agent.

See Q22 for further guidance.

A8- Operation of Multilateral Trading Facilities

Operating a multilateral trading facility (article 25D RAO)

This service replaces the ATS operators regime.

Firms performing this service will need permission to carry on the regulated activity of operating a multilateral trading facility. Broadly speaking, any authorised person who operated an alternative trading system prior to 1 November 2007 was automatically granted permission to operate a multilateral trading facility, unless it notified the FSA to the contrary by 1 October 2007.

Firms will not require permission to carry on any other regulated activities if all they do is operate a multilateral trading facility. If they carry on additional regulated activities, they should ensure that their permission properly reflects this.

See Q24 for further guidance.

Table 2: MiFID financial instruments and the Part IV permission regime

MiFID financial instrument

Part IV permission category

Commentary

C1- Transferable securities

share (article 76)

debenture (article 77)

government and public security (article 78)

warrant (article 79)

certificate representing certain securities (article 80)

unit (article 81)

option (excluding a commodity option and option on a commodity future)

future (excluding a commodity future and a rolling spot forex contract)

contract for differences (excluding a spread bet and a rolling spot forex contract)

spread bet

Transferable securities are securities negotiable on the capital market excluding instruments of payment and include:

(a) shares in companies;
(b) bonds;
(c) depositary receipts;
(d) warrants; and
(e) miscellaneous securitised derivatives.

Transferable securities comprise various categories of derivatives in the permission regime: for example, options (excluding commodity options and options on commodity futures); futures (excluding commodity futures and rolling spot forex contracts); contracts for differences (excluding spread bets and rolling spot forex contracts).

The permission investment categories above, however, are wider than the MiFID definition of transferable securities, as they comprise both securitised and non-securitised instruments. Firms with permissions containing these investment categories will fall outside the article 3 MiFID exemption as transposed in domestic legislation, where they provide investment services in relation to financial instruments which are non-securitised investments (for example, OTC derivatives concluded by a confirmation under an ISDA master agreement).

For further guidance on the article 3 exemption see Q49; for further guidance on transferable securities see Q28.

C2- Money market instruments

debenture (article 77)

government and public security (article 78)

certificate representing certain securities (article 80)

The definition in article 4.1(19) MiFID refers to classes of instruments normally dealt in on the money markets.

C3- Units in a collective investment undertaking

unit (article 81)

shares (article 76)

C3 includes units in regulated and unregulated collective investment schemes. This category also includes closed-ended corporate schemes, such as investment trust companies (hence the reference to shares in the adjacent column).

For further guidance, see Q29.

C4- Options, futures, swaps, forward rate agreements and any other derivative contracts relating to securities, currencies, interest rates or yields, or other derivatives instruments, financial indices or financial measures which may be settled physically or in cash

option (excluding a commodity option and an option on a commodity future)

commodity option and option on a commodity future

future (excluding a commodity future and a rolling spot forex contract)

rolling spot forex contract

contract for differences (excluding a spread bet and a rolling spot forex contract)

spread bet

C4 includes the financial instruments in sections B3-6 of the Annex to the ISD and in our view derivatives relating to commodity derivatives, for example options on commodity futures.

For further guidance, see Q30 and Q32.

Note that for the purposes of the permission regime, commodity options and options on commodity futures are treated as a single permission category. (see PERG 2 Annex 2 G Table 2).

C5- Options, futures, swaps, forward rate agreements and any other derivative contracts relating to commodities that must be settled in cash or may be settled in cash at the option of one of the parties (otherwise than by reason of a default or other termination event)

commodity option and option on a commodity future

commodity future

contract for differences (excluding a spread bet and rolling spot forex contract)

C5 instruments are generally contracts for differences. Where a C5 instrument provides for the possibility of physical settlement, it may also be either a commodity future or commodity option, depending on its structure.

For further guidance see Q32 and Q33.

C6- Options, futures, swaps, and any other derivative contracts relating to commodities that can be physically settled provided that they are traded on a regulated market and/or an MTF

commodity option and option on a commodity future

commodity future

contract for differences (excluding spread bet and rolling spot forex contract)

C6 instruments will generally be either commodity futures or commodity options, depending on their structure. Those instruments with a cash settlement option may also be contracts for differences.

For further guidance see Q32 and Q33.

C7- Options, futures, swaps, forwards and any other derivative contracts relating to commodities, that can be physically settled not otherwise mentioned in C.6 and not being for commercial purposes, which have the characteristics of other derivative financial instruments, having regard to whether, inter alia, they are cleared and settled through recognised clearing houses or are subject to regular margin calls

commodity option and option on a commodity future

commodity future

contract for differences (excluding spread bet and rolling spot forex contract)

C7 is supplemented by Level 2 measures (see article 38 of the MiFID Regulation).

For further guidance see Q32 and Q33.

C8- Derivative instruments for the transfer of credit risk

option (excluding a commodity option and an option on a commodity future)

contract for differences (excluding spread bet and rolling spot forex contract)

spread bet

rolling spot forex contract

C8 derivatives are financial instruments designed to transfer credit risk, often referred to as credit derivatives.

For further guidance see Q31.

C9- Financial contracts for differences

contract for differences (excluding spread bet and rolling spot forex contract)

spread bet

rolling spot forex contract

In our view, C9 derivatives could include those contracts for differences with a financial underlying, for example the FTSE index.

C10- Options, futures, swaps, forward rate agreements and any other derivative contracts relating to climatic variables, freight rates, emission allowances or inflation rates or other official economic statistics that must be settled in cash or may be settled in cash at the option of one of the parties (otherwise than by reason of a default or other termination event), as well as any other derivative contracts relating to assets, rights, obligations, indices and measures not otherwise mentioned in this Section, which have the characteristics of other derivative financial instruments, having regard to whether, inter alia, they are traded on a regulated market or an MTF, are cleared and settled through recognised clearing houses or are subject to regular margin calls.

option (excluding commodity option and option on a commodity future)

future (excluding a commodity future and a rolling spot forex contract)

contract for differences (excluding spread bet and rolling spot forex contract)

spread bet

C10 is supplemented by Level 2 measures (see articles 38 and 39 of the MiFID Regulation) and comprises miscellaneous derivatives.

For further guidance see Q34.

Note:
In our view, the categories of financial instrument in C1 to C10 are not mutually exclusive, so a financial instrument may fall within more than one category. For example, an interest in an investment trust company falls within C1 and C3.

01/11/2007

PERG 13 Annex 3

Annex 3

01/11/2007

Flow chart 1 - Are you subject to the recast CAD?

Flow chart 2 - CAD investment firms (excluding UCITS investment firms )

Are we a BIPRU 50K firm , a BIPRU 125k firm or a BIPRU 730K firm

Note
It is possible, in principle, thata CAD investment firm may only provide the investment service of investment advice and hold client funds or securities, in which case the starting point is generally that it isa BIPRU 730K firm. In practice, if such a firm wishes to benefit from a lower capital treatment (for example euro 125,000), it may wish to add an arranging (bringing about) deals in investments element to its permission to enable it to receive and transmit orders in relation to MiFID instruments.

01/11/2007

PERG 13 Annex 4

Principal Statutory Instruments relating to MiFID scope issues

01/11/2007

1. The Financial Services and Markets Act 2000 (Regulated Activities) (Amendment No. 3) Order 2006 [SI 2006 No. 3384]
2. The Financial Services and Markets Act 2000 (Markets in Financial Instruments) Regulations 2007 [SI 2007 No 126]
3. The Financial Services and Markets Act 2000 (Markets in Financial Instruments) (Modification of Powers) Regulations 2006 [SI 2006 No 2975]
4. The Financial Services and Markets Act 2000 (Appointed Representatives) (Amendment) Regulations 2006 [SI 2006 No 3414]
5.The Financial Services and Markets Act 2000 (Exemption) (Amendment) Order 2007 [SI 2007 No 125]

01/11/2007

PERG 14

Guidance on home reversion and home purchase activities

PERG 14.1

Background

06/11/2006

Q1. What is the purpose of these questions and answers ("Q&As") and who should be reading them?

These Q&As are aimed at persons involved in the provision or promotion of financial arrangements involving the acquisition or disposal of land for the purpose of enabling an individual:

•to purchase a property; or

•to raise funds from the equity in a property that he already owns,

other than by means of a traditional mortgage.

They are intended to help such persons understand whether they will, as a result of the Regulation of Financial Services (Land Transactions) Act 2005 and secondary legislation made following that Act:

•be carrying on a regulated activity and need authorisation or exemption under section 19 of the Financial Services and Markets Act 2000; or

•be subject to the restriction on financial promotions in section 21 of the Financial Services and Markets Act 2000.

The Q&As complement the general guidance on regulated activities, which is in Chapter 2 of our Perimeter Guidance Manual (PERG 2), the general guidance on regulated mortgage activities in Chapter 4 (PERG 4), the general guidance on financial promotions in Chapter 8 (PERG 8) and the relevant legislation.

The Q&As that follow are set out in sections:

•general issues (PERG 14.2);

•activities relating to home reversion plans (PERG 14.3);

•activities relating to home purchase plans (PERG 14.4);

•the 'by way of business' test (PERG 14.5);

•carrying on a regulated activity in the United Kingdom (PERG 14.6);

•exemptions (PERG 14.7);and

•financial promotions (PERG 14.8).

06/04/2007

PERG 14.2

General issues

06/11/2006

Q2. What is the purpose of the Regulation of Financial Services (Land Transactions) Act 2005?

This Act makes clear that the potential regulatory scope of the Financial Services and Markets Act 2000 enables the FSAto regulate activities that are similar to those that are already regulated when carried on in relation to traditional mortgages but which involve the provider acquiring land rather than simply providing finance for its purchase by the homeowner. This typically includes:

•schemes (often termed 'equity release schemes') where a provider buys an interest in a homeowner's property and allows the homeowner to continue to reside in the property ('home reversion plans'); and

•certain types of Islamic financing arrangements designed to enable the purchase of a home in a way that is acceptable under Islamic law, such as Ijara or diminishing Musharaka ('home purchase plans').

Q3. I propose to carry on activities in relation to home finance arrangements of the kind mentioned in Q2. In what circumstances will I need to be authorised by the FSA or be an exempt person?

You will need to be an authorised or exempt person if you will:

•be carrying on regulated activities;

•be doing so by way of business;

•be doing so on or after 6 April 2007; and

•be doing so in the United Kingdom.

Q4. How will I know if my proposed home finance activities are regulated?

Regulated activities are specified in the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 ('the Regulated Activities Order'). This was amended, following the enactment of the Regulation of Financial Services (Land Transactions) Act 2005, to extend its scope to cover certain home finance activities. These amendments were made in the Financial Services and Markets Act 2000 (Regulated Activities) (Amendment) (No2) Order 2006 (SI 2006/2383) which came into effect on 6 April 2007. Regulated home finance activities are:

• entering into a home reversion plan or entering into a home purchase plan as the provider of the plan or, in the case of home reversion plansonly, as a person to whom rights or obligations acquired by the provider are transferred or who, during the currency of the plan, acquires all or part of the interest in land bought by the provider;

• administering a home reversion plan or administering a home purchase plan ;

• arranging (bringing about) a home reversion plan or arranging (bringing about) a home purchase plan ;

• making arrangements with a view to home reversion plans or making arrangements with a view to home purchase plans ;

• advising on a home reversion plan or advising on a home purchase plan ; and

•agreeing to do any of the above.

But some activities are specifically excluded from regulatory scope.

06/04/2007

PERG 14.3

Activities relating to home reversion plans

06/11/2006

Q5. What is a home reversion plan?

Broadly speaking, this is an arrangement under which, at the time it is entered into, a person (the 'reversion purchaser') buys all or part of an interest in land (other than timeshare accommodation) in the UK from a homeowner (being an individual or a trustee whose beneficiary is an individual) (the 'reversion occupier') on the basis that the individual or a related person is entitled under the arrangement, and intends, to use at least 40% of the land as a dwelling until:

•the end of a fixed period of at least twenty years; or

•the individual dies; or

•the individual enters a care home.

It should be noted that an arrangement will be a home reversion plan if the intention is for the land to be used as a dwelling until any one of the above eventualities arises. It is not necessary for the arrangement to provide for all three eventualities, merely one or more of them.

This means that an arrangement is not a home reversion plan if:

•the occupier is not an individual; or

•the land is to be used for the purpose of letting as a dwelling to someone other than a related person of the individual (or beneficiary under the trust) who owns it; or

•the land is used primarily for business purposes; or

•the land is overseas.

A related person, in relation to an individual, means:

•that person's spouse or civil partner; or

•a person (whether or not of the same sex) whose relationship with that person has the characteristics of a husband and wife relationship; or

•that person's:

-parent or grandparent;

-child or grandchild; or

-sibling.

Q6. Will a mortgage-to-rent scheme be a home reversion plan?
No. This is most unlikely as mortgage-to-rent schemes do not usually provide for the homeowner (having sold his property to the scheme provider), or a related person as the case may be, to occupy the property until he dies or enters a care home or for a fixed period of at least twenty years

Q7. Can an arrangement that was established before 6 April 2007 be a home reversion plan?

Yes. An arrangement may still be a home reversion plan even though it was established before 6 April 2007. However, regulated activities carried on in relation to a home reversion plan established before 6 April 2007 will only be subject to regulation:

•when carried on on or after 6 April 2007; and

•in certain circumstances (see Q21 for a summary).

Q8. When will I be carrying on the activity of entering into a home reversion plan?

This will occur when you enter into the plan at the outset as the reversion purchaser. It can also occur at a later stage if all or part of the rights or obligations of the reversion purchaser are transferred to you or if you acquire all or part of the interest in land bought by the reversion purchaser (where you become a 'reversion transferee'). This is so, whether you are acquiring the rights or obligations from the reversion purchaser or from an existing reversion transferee. This includes acquiring the rights or obligations or the interest in land purely as an investment. However, investors will only be regulated if they satisfy the 'by way of business test' (see Q38). We refer to reversion purchasers and reversion transferees collectively in this guidance as 'reversion providers'.

So, if you are a reversion transferee under a plan that was established before 6 April 2007, you will only be subject to regulation for carrying on the regulated activity of entering into the plan if you do so on or after 6 April 2007.

Q9. What exclusions may be available to me if I am entering into home reversion plans?

The main exclusions are those:

•for trustees who enter into a plan where the reversion occupier is an individual who is a beneficiary under the trust, or a related person (article 66(6B) of the Regulated Activities Order); and

•for overseas persons who satisfy certain conditions (see Q39).

Q10. When will I be carrying on the activity of administering a home reversion plan?

This will arise if you carry out any one or more of the following functions for a reversion provider or a reversion occupier in relation to a plan that was originally established on or after 6 April 2007:

•taking necessary steps to make payments to the reversion occupier; or

•taking necessary steps to collect or recover payments due from the reversion occupier; or

•notifying the reversion occupier of changes in payments due under the plan, or of other matters of which the plan requires him to be notified.

One effect of this is that you will not become subject to regulation if you are administering a plan that was originally established before 6 April 2007 and a reversion transferee enters into the plan after that date. See Q21 for more detail about when activities are regulated if a plan was originally established before 6 April 2007.

It is irrelevant, for the purposes of determining if you are administering a home reversion plan, whether or not the plan was entered into by way of business. In this respect, the activity is different to the regulated activities of administering a regulated mortgage contract or administering a home purchase plan.

Q11. What exclusions may be available to me if I am administering home reversion plans?

Specific exclusions may apply if you are not an authorised person and:

•you arrange for an authorised person with the appropriate Part IV permission to administer the plan - this includes where you administer the plan for a period of up to one month following the termination of such an arrangement; or

•you administer the plan under an agreement with an authorised person who has Part IV permission to administer such a plan.

The other main exclusions are those:

•for trustees who administer a plan where the reversion occupier is an individual who is a beneficiary under the trust or a related person (article 66(6B) of the Regulated Activities Order); and

•for overseas persons who satisfy certain conditions (see Q39).

Q12. When will I be carrying on the activity of arranging home reversion plans?

There are three types of arranging activity that are regulated. These are making arrangements:

(1)for another person to enter into a plan as a reversion occupier or as a reversion provider;

(2)for another person, being a reversion occupier or a reversion provider, to vary the terms of a plan that was originally established on or after 6 April 2007, in such a way as to vary his obligations under that plan; and

(3)with a view to a person who participates in the arrangements entering into a plan as a reversion occupier or as a reversion provider.

But none of these arranging activities will apply to you if they relate to a plan to which, as a result of your arranging activities, you are or will become a party (article 28A of the Regulated Activities Order).

You will only be making arrangements under (1) or (2) if your actions are such as to bring about the entry into the plan or the variation as the case may be (article 26 of the Regulated Activities Order). This means that your involvement must be material to whether the transaction occurs. For example, assisting a person by completing the necessary application forms on their behalf or acting as their agent or attorney in negotiating entry will amount to bringing about the transaction.

Arranging activities under (3) will typically include making regular introductions of homeowners to reversion providers or of reversion transferees to reversion purchasers or vice versa or of any of these to a reversion intermediary.

Q13. I understand that any transaction that I have arranged before 6 April 2007 is not subject to regulation. But am I regulated if I arrange for a reversion transferee to enter into or vary a home reversion plan on or after 6 April 2007?

This depends on the type of arranging you are carrying on. If you are arranging variations, this will only be regulated if the plan was originally established on or after 6 April 2007. But, if you are arranging for a reversion transferee to enter into a plan and the arrangements are being made on or after 6 April 2007, you will be regulated for that arranging activity. See Q21 for more detail about when activities are regulated if a plan was originally established before 6 April 2007.

Q14. Will I be regulated for arranging for a reversion provider to dispose of his rights and obligations or his interest in land under a home reversion plan to a reversion transferee?

It is only arranging for a person to enter into or vary the terms of a plan that is subject to regulation. So, you will not be regulated for providing arranging services to the existing provider who wishes to dispose of his rights, obligations or interests but you are likely to be regulated if you are arranging for the transferee to enter into the plan by acquiring the rights, obligations or interests.

Q15. What exclusions may be available to me if I am arranging home reversion plans?

If you are an unauthorised person the following exclusions may be available to you:

•where you are arranging for a transaction to be entered into with or through an authorised person (article 29 of the Regulated Activities Order) (see Q16); and

•where you have arranged for an authorised person to administer the plan or are administering it yourself during the period of one month following the termination of your arrangement with the authorised person (article 29A(2) of the Regulated Activities Order).

Whether or not you are an unauthorised person, the other main exclusions that may apply include:

•introductions made with a view to the provision of regulated independent advice (article 33 of the Regulated Activities Order) (see Q17);

•introductions made to a regulated person who carries on home reversion plan activities (article 33A of the Regulated Activities Order) (see Q18);

•arrangements that are a necessary part of other services provided by a person in the course of carrying on a profession or business other than a regulated activity (article 67 of the Regulated Activities Order); and

• overseas persons (article 72 of the Regulated Activities Order) (see Q39).

Q16. When will the exclusion in article 29 of the Regulated Activities Order be available to me if I am arranging home reversion plans?

The exclusion will apply to you when, as an unauthorised person, you are arranging any of the following:

•for a homeowner (your client) to enter into a plan with an authorised reversion provider or through an authorised intermediary;

•for a reversion provider (your client) to enter into a plan with a homeowner or to transfer rights or obligations or an interest in land to a reversion transferee if either the reversion transferee is an authorised person or the transaction is to be effected through an authorised intermediary; or

•for a reversion transferee (your client) to acquire rights or obligations from an authorised reversion provider or through an authorised intermediary;

•for your client to vary the terms of a plan where the reversion provider is an authorised person or the variation is arranged through an authorised intermediary.

This is subject to your meeting certain conditions which are, broadly speaking, that:

•you must not advise your client on the merits of his entering into the transaction; and

•you must not be paid by anyone other than your client.

The requirement that you do not receive any payment other than from your client does not prevent you receiving payment from the authorised person but you must then treat the sums paid to you as belonging to your client. There is nothing to prevent you then using the sums to offset payments due to you from your client for services rendered to him. This is provided that you have your client's agreement to do so.

Q17. When will the exclusion in article 33 of the Regulated Activities Order be available to me if I am arranging home reversion plans?

Broadly speaking, the exclusion will apply where:

•your arranging activity is limited to making arrangements with a view to home reversion plans;

•you make introductions of homeowners, reversion purchasers or reversion transferees to an authorised person, an exempt person or an overseas person; and

•the introduction is made with a view to the provision of independent advice or the provision of independent discretionary services relating to home reversion plans.

Q18. When will the exclusion in article 33A of the Regulated Activities Order be available to me if I am arranging home reversion plans?

Broadly speaking, the exclusion will apply where:

•your arranging activity is limited to making arrangements with a view to home reversion plans;

•you make introductions of homeowners or of prospective reversion providers (your client) to an authorised person, an appointed representative or an overseas person;

•you do not receive any money paid by your client in relation to the transaction other than a sum that is due to you for your own account (for example, your fee for providing the introductory service); and

•you disclose to your client certain information about your relationship with the person to whom you are effecting introductions and about any reward you may receive for doing so.

Q19. When will I be carrying on the activity of advising on a home reversion plan?

This will arise if:

•you are giving advice to a person who is or who is contemplating becoming a reversion occupier, a reversion purchaser or a reversion transferee; and

•the advice relates to the merits of his entering into a home reversion plan in that capacity or varying the terms of a plan that he has already entered into.

Advice on the merits of varying the terms of a plan will only be regulated where the plan was originally established on or after 6 April 2007. However, advice given to a reversion transferee on the merits of his entering into a plan that was originally established before 6 April 2007 will be subject to regulation. See Q21 for more detail about when activities are regulated if a plan was originally established before 6 April 2007.

Advice given to a person on the merits of his transferring rights or obligations or interests in land under a plan to another person is not regulated.

Much of the detailed guidance on advising on regulated mortgage contracts in PERG 4.6 may be applied to the activity of advising on a home reversion plan.

Q20. What exclusions may be available to me if I am advising on home reversion plans?

The main exclusions that are available include:

•advice given in a periodical publication, broadcast or other form of regularly updated news or information service (article 54 of the Regulated Activities Order);

•advice that is a necessary part of other services provided by a person in the course of carrying on a profession or business other than a regulated activity (article 67 of the Regulated Activities Order); and

• overseas persons (article 72 of the Regulated Activities Order) (see Q39).

Detailed guidance on the exclusion in article 54 is in PERG 7.

Q21. I can see that the fact that the home reversion plan was originally established before 6 April 2007 can affect whether the services that I provide to parties to the plan after that date are regulated. Can you summarise the position in this respect please?

Yes. This all depends on the combination of the date of entry or variation and the capacity in which your customer enters or entered into the plan. The following table clarifies when your services will be regulated activities and when they will not.

Potential home reversion plan activity

Whether the activity is regulated if undertaken on or after 6 April 2007 when the plan was originally established before 6 April 2007

Entering into a plan as reversion purchaser (see Q8)

N/A - this activity will only take place when the plan is first established

Entering into a plan as reversion transferee (see Q8)

Yes

Administering a plan (see Q10)

Arranging (see Q12) for a person to enter into a plan as:

(a) a reversion purchaser or a reversion occupier

N/A - this activity will only take place when the plan is first established

(b) a reversion transferee

Yes

Arranging variations (see Q12) of a plan

Advising (see Q19) a person on entering into a plan in his capacity as:

(a) a reversion purchaser or a reversion occupier

N/A - this activity will only take place when the plan is first established

(b) a reversion transferee

Yes

Advising (see Q19) a person on varying the terms of a plan

Q22. Will changes involving the circumstances of the reversion occupier that may take place after the plan has been entered into (such as moving house, marriage or change of occupants) have any implications in terms of regulated activity?

This depends on the facts and is a question of degree that requires an assessment against the criteria that make up the definition of a home reversion plan. There are two main issues that would need to be considered. These are:

•is the change likely to cause a new plan to be entered into; and

•does the change involve a variation of the terms of the plan (if it was originally entered into on or after 6 April 2007) such as to vary the obligations of the provider or the occupier?

Broadly speaking, it would seem likely that, if the occupier were to move house, there would be a need for the existing plan to be terminated and a new plan to be entered into. Where this happens, the person who enters into the new plan as provider and anyone arranging or advising on the new plan will potentially need to be authorised or exempt. Changes such as may occur due to marriage or change of occupants, change of other relevant details or drawdown of funds under a staggered payment arrangement may necessitate a new plan or may involve a variation in the existing plan depending on the extent to which they alter the obligations of the provider or the occupier. Where such changes do involve a variation, anyone arranging or advising on the variation would potentially need to be authorised or exempt. But this applies only where the plan was originally entered into on or after 6 April 2007.

06/04/2007

PERG 14.4

Activities relating to home purchase plans

06/11/2006

Q23. What is a home purchase plan?

Broadly speaking, a home purchase plan is an arrangement under which, at the time it is entered into:

•a person (the 'home purchase provider') buys a qualifying interest, or an undivided share of a qualifying interest, in land (other than timeshare accommodation) in the United Kingdom;

•an individual or a trustee whose beneficiary is an individual (the 'home purchaser') is obliged to buy that interest over the course of or at the end of a specified period; and

•the individual or a related person is entitled to use at least 40% of the land as a dwelling during that fixed period and intends to do so.

Where an undivided share of a qualifying interest is bought, the interest must be held on trust for the home purchase provider and the individual or trustee as beneficial tenants in common.

This means that an arrangement is not a home purchase plan if:

•the home purchaser is not an individual or trustees;

•the land is used for the purpose of letting as a dwelling to someone other than a related person of the individual who is obliged to buy it;

•the land is used primarily for business purposes; or

•the land is overseas.

A related person, in relation to an individual, means:

•that person's spouse or civil partner; or

•a person (whether or not of the same sex) whose relationship with that person has the characteristics of a husband and wife relationship; or

•that person's:

-parent or grandparent;

-child or grandchild; or

-sibling.

Q24. Are home purchase plans limited to arrangements designed to comply with Islamic principles?

There is nothing in the definition of a home purchase plan to suggest that this is the case. However, it is clear from the comments made by HM Treasury in relation to the introduction of the Regulation of Financial Services (Land Transactions) Act 2005 that the definition is primarily directed at arrangements of this kind.

Q25. Will all Islamic home financing arrangements be home purchase plans?

No. Murabaha arrangements involve the homeowner buying the property from the provider on deferred payment terms. These types of arrangement will be regulated mortgage contracts assuming that they meet the necessary conditions including that there is a first legal charge over the property (see PERG 4).

Ijara arrangements (where the provider buys the land and allows the customer to occupy it whilst also making regular payments towards eventually buying the land) and diminishing Musharaka arrangements (where the provider and the customer share an interest in the land and the customer gradually acquires a greater interest in the land over a period of time) will be home purchase plans provided they meet the necessary conditions (see Q23).

A home purchase plan may also satisfy the requirements for a regulated mortgage contract. Where this arises, the plan is treated as a home purchase plan and not a regulated mortgage contract.

Q26. When will I be carrying on the activity of entering into a home purchase plan?

You will carry on this activity by entering into a home purchase plan as the home purchase provider. Unlike a reversion transferee under a home reversion plan, you will not be carrying on a regulated activity purely as a result of acquiring rights, obligations or interests in land from the provider.

Q27. What exclusions may be available to me if I am entering into home purchase plans as a provider?

The main exclusions are:

•for trustees who enter into a plan where the home purchaser is an individual who is a beneficiary under the trust or a related person (article 66(6C) of the Regulated Activities Order); and

•for overseas persons who satisfy certain conditions (see Q39).

Q28. When will I be carrying on the activity of administering a home purchase plan?

This will arise if you carry out either or both of the following functions in relation to a plan that was entered into by the home purchase provider by way of business on or after 6 April 2007:

•notifying the home purchaser of changes in payments due under the plan, or of other matters of which the plan requires him to be notified; and

•taking any necessary steps for the purposes of collecting or recovering payments due under the plan from the home purchaser.

But you will not be treated as administering a home purchase plan merely because you have, or you exercise, a right to take action for the purposes of enforcing the plan (or to require that such action is or is not taken).

Q29. I propose to administer home purchase plans. How will I know if the plan I propose to administer has been entered into by way of business?

In most cases, this will be obvious because the provider will be a body corporate whose business involves being a provider under such plans and, in the majority of cases, should be an authorised person. We understand that this is the usual situation with Islamic home financing arrangements. However, if the plan were to have been entered into by an investor, the factors set out in Q38 will need to be considered to determine whether it was entered into by way of business. A typical example of a plan not entered into by way of business would be where the provider is a friend or relative who does not seek to profit from acting as the provider. Another example might be a plan entered into by a charitable organisation that occasionally purchases interests in land with sums derived from charitable donations and that does so on non-commercial terms.

Q30. What exclusions may be available to me if I am administering home purchase plans?

Specific exclusions may apply if you are not an authorised person and:

•you administer the plan under an agreement with an authorised person who has Part IVpermission to administer such a plan.

The other main exclusions are those:

•for trustees who administer a plan where the home purchaser is an individual who is a beneficiary under the trust or a related person (article 66(6C) of the Regulated Activities Order); and

•for overseas persons who satisfy certain conditions (see Q39).

Q31. When will I be carrying on the activity of arranging home purchase plans?

There are three types of arranging activity that are regulated. These are making arrangements:

(1)for another person to enter into a plan as a home purchaser;

(2)for another person being a home purchaser to vary the terms of a plan entered into by him on or after 6 April 2007, in such a way as to vary his obligations under that plan; and

(3)with a view to a person who participates in the arrangements entering into a plan as a home purchaser.

But none of these arranging activities will apply to you if they relate to a plan to which you are or will, as a result of your arranging activities, become a party (article 28A of the Regulated Activities Order).

You will only be making arrangements under (1) or (2) if your actions are such as to bring about the entry into the plan or the variation as the case may be (article 26 of the Regulated Activities Order). This means that your involvement must be material to whether the transaction occurs. For example, assisting a home purchaser by completing the necessary application forms on their behalf or acting as their agent or attorney in negotiating entry will amount to bringing about the transaction.

Arranging activities under (3) will typically include making regular introductions of prospective home purchasers to a provider or intermediary.

Unlike home reversion plans, arranging for a person to enter into, or vary, a plan as a provider is not, itself, a regulated activity.

Q32. What exclusions may be available to me if I am arranging home purchase plans?

If you are an unauthorised person the following exclusions may be available to you:

•where you are arranging for a transaction to be entered into with or through an authorised person (article 29 of the Regulated Activities Order) (see Q33);

Whether or not you are an unauthorised person, the other main exclusions that may apply include:

•introductions made with a view to the provision of regulated independent advice (article 33 of the Regulated Activities Order) (see Q17 which applies equally to home purchase plans);

•introductions made to a regulated person who carries on home reversion plan activities (article 33A of the Regulated Activities Order) (see Q34);

• overseas persons (article 72 of the Regulated Activities Order) (see Q39).

Q33. When will the exclusion in article 29 of the Regulated Activities Order be available to me if I am arranging home purchase plans?

The exclusion will apply to you when, as an unauthorised person, you are arranging for a prospective home purchaser (your client) to enter into a plan with an authorised home purchase provider or through an authorised intermediary;

This is subject to your meeting certain conditions which are, broadly speaking, that:

•you must not advise your client on the merits of his entering into the transaction; and

The requirement that you do not receive any payment other than from your client does not prevent you receiving payment from the authorised person but you must then treat the sums paid to you as belonging to your client. There is nothing to prevent you then using the sums to offset payments due to you from your client for services rendered to him. This is provided that you have your client's agreement to do so.

Q34. When will the exclusion in article 33A of the Regulated Activities Order be available to me if I am arranging home purchase plans?

Broadly speaking, the exclusion will apply where:

•the arranging activity you carry on is limited to making arrangements with a view to home purchase plans;

•you make introductions of prospective home purchasers (your client) to an authorised person, an appointed representative or an overseas person;

•you disclose to your client certain information about your relationship with the person to whom you are effecting introductions and about any reward you may receive for doing so.

Q35. When will I be carrying on the activity of advising on home purchase plans?
This will arise if you are:

•giving advice to a person who is or who is contemplating becoming a home purchaser; and

•the advice relates to the merits of his entering into a home purchase plan in that capacity or varying the terms of a plan that he has already entered into.

Advice on the merits of varying the terms of a plan is only regulated when the plan was entered into on or after 6 April 2007.

This differs from the position in relation to home reversion plans where advice given to the provider is also regulated.

Much of the detailed guidance on advising on regulated mortgage contracts in PERG 4.6 may be applied to the activity of advising on a home purchase plan.

Q36. What exclusions may be available to me if I am advising on home purchase plans?

The main exclusions that are available include:

•advice given in a periodical publication, broadcast or other form of regularly updated news or information service (article 54 of the Regulated Activities Order);

• overseas persons (article 72 of the Regulated Activities Order) (see Q39).

Detailed guidance on the exclusion in article 54 is in PERG 7.

Q37. Will changes involving the circumstances of the home purchaser that may take place after the plan has been entered into (such as moving house, marriage or change of occupants) have any implications in terms of regulated activity?

This depends on the facts and is a question of degree that requires an assessment against the criteria that make up the definition of a home purchase plan. There are two main issues that would need to be considered. These are:

•is the change likely to cause a new plan to be entered into? and

•does the change involve a variation of the terms of the plan (if it was originally entered into on or after 6 April 2007) such as to vary the obligations of the home purchaser?

Broadly speaking, it would seem likely that, if the home purchaser were to move house, there would be a need for the existing plan to be terminated and a new plan to be entered into. Where this happens, the person who enters into the new plan as provider and anyone arranging, or advising the home purchaser on, the new plan will potentially need to be authorised or exempt. Changes such as may occur due to marriage or change of occupants or of other relevant details may necessitate a new plan. Alternatively, they may involve a variation in the existing plan, depending on the extent to which they alter the obligations of the home purchaser. Where such changes do involve a variation, anyone advising the home purchaser on, or arranging, the variation would potentially need to be authorised or exempt. But this applies only where the plan was originally entered into on or after 6 April 2007.

06/08/2008

PERG 14.5

The 'by-way-of-business' test

06/11/2006

Q38. How do I know if I am carrying on regulated activities by way of business?

Whether or not any particular person will meet the requirement that he carries on a regulated activity by way of business and so needs authorisation or exemption will invariably depend on that person's individual circumstances. A number of factors need to be taken into account in determining whether the test is met. These include:

•the degree of continuity;

•the existence of a commercial element;

•the scale of the activity;

•the proportion which the activity bears to other activities carried on by the same person but which are not regulated; and

•the nature of the particular regulated activity that is carried on.

Corporate plan providers and those who provide professional services to them or to home occupiers are likely to be carrying on their activities by way of business. Unpaid individuals who act as trustees for home occupiers are not likely to be.

With home reversion plans, it is quite possible that the reversion provider may be an individual who is acting purely in the capacity of investor. Such a person may not be acting by way of business when the criteria listed above are applied to his particular circumstances.

06/11/2006

PERG 14.6

Carrying on a regulated activity in the United Kingdom

06/11/2006

Q39. Does a person who acts as provider, administrator, arranger or adviser in relation to home reversion plans or home purchase plans from overseas and without maintaining an office in the UK need to be an authorised or exempt person?

The position on territorial application is complex. Detailed guidance on this aspect is provided in relation to regulated mortgage activities in PERG 4.11 and that guidance may generally be applied to home finance activities.

But, briefly, there are two issues to be considered by such a person:

•am I carrying on a home finance activity in the United Kingdom? and

•if so, does the exclusion for overseas persons in article 72 of the Regulated Activities Order apply to me?

Whether you are carrying on the activity in the UK depends on a combination of factors. In very broad terms, however, as an overseas person, you are more likely than not to be carrying on a home finance activity in the UK if the home occupier or reversion provideris normally resident in the UK at the time that he enters into the plan. The table that follows applies this broad principle to the various permutations taking account of the conditions applying to the exclusions for home finance activities under article 72.

Table indicating whether authorisation or exemption is likely to be needed by a person who is carrying on home finance activities from overseas.

Activity carried on by overseas person

Where the reversion occupier or home purchaser is or was normally resident in the UK at the time he enters or entered into the plan

Where the reversion occupier or home purchaser is or was not normally resident in the UK at the time he enters or entered into the plan

Home reversion plan

Home purchase plan

Home reversion plan

Home purchase plan

Entering into or administering.

Yes

Arranging for persons to enter into plans.

Yes

No, provided the reversion purchaser or the reversion transferee, as the case may be, is or was also not normally resident in the UK.

Arranging variations.

Yes

Advising.

Yes

No, unless the reversion occupier, reversion provider or reversion transferee is located in the UK at the time the advice is given to him.

No, unless the home purchaser is located in the UK at the time the advice is given.

06/11/2006

PERG 14.7

Exemptions

06/11/2006

Q40. Am I an exempt person in relation to home finance activities?

Yes, if you are:

•a person who is specifically exempt under the Financial Services and Markets Act 2000 (Exemption) Order 2001, such as a local authority or a registered social landlord; or

•an appointed representative whose agreement with his principal permits him to carry on the activities in question; or

•an exempt professional firm.

Q41. What home finance activities can I carry on as an appointed representative?

You will be able to carry on any of the following regulated activities:

• arranging (bringing about) a home reversion plan or arranging (bringing about) a home purchase plan; or

• making arrangements with a view to home reversion plans or making arrangements with a view to home purchase plans; or

• advising on a home reversion plan or advising on a home purchase plan; or

•agreeing to do any of the above.

You will not be able to carry on any of the following regulated activities:

• entering into a home reversion plan or entering into a home purchase plan ; or

• administering a home reversion plan or administering a home purchase plan ; or

•agreeing to do eitherof the above.

Q42. I am an exempt professional firm. Will I be able to carry on any of the regulated activities relating to home reversion plans and home purchase plans without needing FSA authorisation?

This depends on the activity in question. Subject to your being able to satisfy the general requirements of Part XX of the Financial Services and Markets Act 2000 you will be able:

•to carry on the regulated activities of:

- entering into a home reversion plan; or

- entering into a home purchase plan; or

- administering a home reversion plan; or

- administering a home purchase plan; or

-agreeing to do any of these things,

but only where you are acting as a trustee or personal representative and the reversion occupier or home purchaser is a beneficiary under the trust, will or intestacy;

•to carry on the regulated activities of:

- arranging (bringing about) a home reversion plan; or

- arranging (bringing about) a home purchase plan : or

- making arrangements with a view to home reversion plans; or

- making arrangements with a view to home purchase plans; or

-agreeing to do any of these things,

without any further restriction; and

•to carry on the regulated activities of:

- advising on a home reversion plan; or

- advising on a home purchase plan; or

-agreeing to do eitherof these things,

but only provided that:

-the advice is given to a trustee or a reversion provider who, in either case, is not an individual; or

-the advice is given to an individual but does not amount to a recommendation to enter into a plan as reversion provider, reversion occupier or home purchaser ; or

-the advice is given to an individual and does amount to a recommendation to enter into a plan as reversion provider, reversion occupier or home purchaser with a reversion provider or a home purchase provider but only if the advice endorses a corresponding recommendation that has been given to the individual by a suitably authorised or exempt person.

06/11/2006

PERG 14.8

Financial promotions

06/11/2006

Q43. Are there any restrictions if I wish to promote my home finance activities?

Yes. The restriction in section 21 of the Financial Services and Markets Act 2000 will apply, broadly speaking, to any communication which:

•is made in the course of business; and

•invites or induces persons to:

-become a reversion occupier or home purchaser; or

-become a reversion provider; or

-vary the terms of a home reversion plan or a home purchase plan that was originally established on or after 6 April 2007; or

-be provided, as a reversion occupier or home purchaser or as a reversion provider, with arranging or advisory services.

Communications of this kind are termed financial promotions.

Promotions of home finance administration services or promotions intended to dissuade persons from entering into or varying the terms of regulated plans will not be financial promotions and so no restriction will apply to them.

The following table summarises when the restriction will apply.

Table indicating when the financial promotion restriction will apply to communications about home finance plans.

A communication inviting or inducing...

To...

Will be a financial promotion?

...potential reversion occupiers or home purchasers

...enter into a home reversion plan or a home purchase plan

Yes

...potential home reversion purchasers or transferees

...enter into a home reversion plan

Yes (in the case of transferees, regardless of whether the plan was originally established before 6 April 2007)

...potential home purchase providers

...enter into a home purchase plan

...potential or existing:

•reversion occupiers or home purchasers; or

•reversion or home purchase providers

...be provided with administration services

...potential or existing:

•reversion occupiers or home purchasers; or

•reversion purchasers or transferees

...be provided with arranging or advisory services

Yes (but where the promotion relates to such a person varying the terms of a plan, this is only where the plan was originally established on or after 6 April 2007)

...potential or existing home purchase providers

...be provided with arranging or advisory services

...potential or existing:

•reversion occupiers or home purchasers; or

•reversion or home purchase providers

...decline from entering into or varying the terms of a plan

...potential or existing:

•reversion occupiers or home purchasers; or

•reversion or home purchase providers

...dispose of rights, obligations or interests in land that they have under a plan

Q44. What are the restrictions that apply if I am making a financial promotion about home finance plans or activities?

The financial promotion will need either to be communicated or approved by an authorised person or to be exempt under the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (the Financial Promotion Order).

If you are an authorised person who is communicating or approving the financial promotion and it is not exempt you will need to comply with the provisions of the Mortgages and Home Finance: Conduct of Business Sourcebook (MCOB 3 for financial promotions of home reversion plans and MCOB 2.2.6A R for financial promotions of home purchase plans).

Q45. What exemptions may be likely to be available to me when I communicate financial promotions about home finance plans or activities?

A number of exemptions may be available. Those most likely to apply are summarised below.

(1)Introductions (article 15 of the Financial Promotion Order). This applies, broadly speaking, where you introduce clients to an authorised person or an exempt person in the circumstances covered by the exclusion in article 29 of the Regulated Activities Order (see Q17). But this is provided the person to whom you make the introduction is not your close relative or a member of your group. In addition, there is an exemption for promotions concerning introductions relating specifically to home finance plans - see (5).

(2)Exempt persons (article 16 of the Financial Promotion Order). This applies, subject to certain conditions, if you are an exempt person such as a local authority, a registered social landlord or an appointed representative.

(3)Generic promotions (article 17 of the Financial Promotion Order). This applies to a general promotion that does not identify any particular persons as being either providers of, or as offering arranging or advisory services relating to, home finance plans.

(4)One-off promotions (articles 28 and 28A of the Financial Promotion Order). These apply to promotions that are intended for a particular recipient (or group of connected recipients).

(5)Introductions relating to home finance plans (article 28B of the Financial Promotion Order). This applies to real time financial promotions relating to home finance plans for the purpose of making introductions. This exemption is subject to the same conditions as apply to the exclusion in article 33A of the Regulated Activities Order (see Q18 and Q34); and

(6)Advice centres (article 73 of the Financial Promotion Order). This applies to bodies such as citizens' advice bureaux when they make promotions about home finance plans in the course of their business of providing free advice about debt matters.

Further guidance on these and other exemptions from the financial promotion restriction is in Chapter 8 of PERG (PERG 8).

06/08/2008