AUTH 2.6 Specified investments: a broad outline

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

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).

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). AUTH App 3.2.15 G to AUTH App 3.2.19 G contain guidance on the exclusion relating to electronic money.2

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

1. (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. (2)

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

3. (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.

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). 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 AUTH App 3 (Guidance on the scope of the regulated activity of issuing e-money).21

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.

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)).

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. 4

1. (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.4

2. (2)

   The second term is 'relevant investments'. This term applies to:4

   1. (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); and4

   2. (b)

      rights under contracts of insurance other than life policies (but not rights to or interests in such rights).4

   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 AUTH App 5 (Insurance mediation activities) for further guidance on such activities).4

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 AUTH 2.6.26 G) as well as arrangements that are excluded from the regulated activity of entering as provider into funeral plan contracts (see AUTH 2.8.14 G).

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 AUTH 2.6.10 G).

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 AUTH 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-transferrable 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).

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. (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. (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).

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.

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).

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.

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.

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.

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, such as those in the Public Offers of Securities Regulations 1995, 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 No 1060.

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 (Collective Investment Schemes) Order 2001 SI No 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).

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 6and approved by HM Revenue and Customs6. Rights under such schemes are specified investments for the purposes of the Regulated Activities Order. There are no exclusions in the Order.

The specified investment category of options is limited to 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 sellcontracts for differences, which are based on other commodities. But options to buy or sell other types of commodity may be contracts for differences (see AUTH 2.6.23 G).

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.

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).

The specified investment category of contracts for differences covers rights under contracts for differences and 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. In addition to fluctuations in the value or price of property of any description or in an index, those factors also include fluctuations in any 'other factor designated in the contract'. This catches a wide range of factors. 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 things that count as specified investments under this category are spread bets and interest rate swaps.

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.

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

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. This will be a specified investment with effect from 1 January 2002.

3In 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. (1)

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

2. (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. (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 AUTH App 4.4 (Guidance on regulated activities connected with mortgages).2

Rights to, or interests in, all the specified investments in AUTH 2.6 (except rights to, or interests in, rights under a regulated mortgage contract) 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.5

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 AUTH 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.