AUTH 2.7 Activities: a broad outline

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

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.

Guidance on the regulated activity of issuing e-money is given in AUTH App 3.43

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, constitute other regulated activities; for example, brokers arranging long-term insurance contracts may be caught as carrying on the regulated activity of arranging (bringing about) deals in contractually based investments (see AUTH 2.7.7 G).

5In 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. (1)

   life policies, where the regulated activities concerned are:

   1. (a)

      dealing in investments as principal (see AUTH 2.7.5 G);

   2. (b)

      managing investments (see AUTH 2.7.8 G);

   3. (c)

      safeguarding and administering investments (see AUTH 2.7.9 G); and

   4. (d)

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

2. (2)

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

   1. (a)

      dealing in investments as agent (see AUTH 2.7.5 G); and

   2. (b)

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

   3. (c)

      assisting in the administration and performance of a contract of insurance (see AUTH 2.7.7 G);

   4. (d)

      advising on investments (see AUTH 2.7.15 G); and

   5. (e)

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

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

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 AUTH 2.8.4 G (1)).

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:5

1. (1)

   for dealing in investments as principal, securities or contractually based investments (except rights under a funeral plan contract); and5

2. (2)

   for dealing in investments as agent, securities and relevant investments (except rights under a funeral plan contract);5

5Because 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 AUTH 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).

5There are four arranging activities that are regulated activities under the Regulated Activities Order. These are:

1. (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. (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. (3)

   arranging (bringing about) regulated mortgage contracts, which includes arranging for another person to vary the terms of a regulated mortgage contract entered into before 31 October 2004 (article 25A(1)); and

4. (4)

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

5The 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 aimed at cases where it may be said that the transaction is "brought about" directly by the parties. This is where this happens in a context set up by a third party specifically with a view to the conclusion by others of transactions through the use of that third party's facilities. This will catch the activities of persons such as exchanges, clearing houses and service companies (for example, persons who provide communication facilities for the routing of orders or the negotiation of transactions). A person may be carrying on this regulated activity even if he is only providing part of the facilities necessary before a transaction is brought about.

5Further guidance on the arranging activities as they relate to regulated mortgage contracts and contracts of insurance is in AUTH App 4.5 (Arranging regulated mortgage contracts) and AUTH App 5.6 (The regulated activities: arranging deals in, and making arrangements with a view to transactions in, contracts of insurance) respectively.

The regulated activity of managing investments includes several elements.

1. (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. (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. (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.

5The 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 AUTH App 5.7 (The regulated activities: assisting in the administration and performance of a contract of insurance)

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. (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. (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 AUTH 2.7.8 G)).

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.

The regulated activities relating to sending dematerialised instructions relate to the operation of the system for electronic transfer of title to security or contractually based investments. This is the system maintained under the Uncertificated Securities Regulations 2001 (and currently operated by CREST). 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.4

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 CIS 2 (Authorised fund applications) and CIS 16 (Application and notification).62

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

1. (1)

   Acting as trustee of an authorised unit trust scheme is expressly included as a regulated activity.

2. (2)

   Acting as a 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. (3)

   Acting as a sole director of such a company is a regulated activity.

4. (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 AUTH 2.7.5 G) or managing investments (see AUTH 2.7.8 G)).

5. (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 authorisedopen-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. (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.

The regulated activities carried on in relation to stakeholder pension schemes are the establishment, operating or winding up of a stakeholder pension scheme. Managers of such schemes will require authorisation as they will be operating the schemes.

7This 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 AUTH 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 AUTH 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 AUTH 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.

7A person ('P') carries on the regulated activity of providing basic advice on a stakeholder product when:

1. (1)

   P gives the advice:

   1. (a)

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

   2. (b)

      in the course of a business that P carries on;

2. (2)

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

3. (3)

   the following conditions are met:

   1. (a)

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

   2. (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:

      1. (i)

         describes that product to C; and

      2. (ii)

         gives a recommendation of that product to C; and

4. (4)

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

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 AUTH 2.7.16A G and AUTH 2.7.17 G (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 advice.5

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 AUTH App 1.24 (Advising on investments).5

7In certain circumstances, the activity of advising on investments can also amount to providing basic advice on a stakeholder product (see AUTH 2.7.14A G (Providing basic advice on stakeholder products)). 4

5Under 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. (1)

   entering into a particular regulated mortgage contract; or

2. (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 AUTH App 4.6 (Advising on regulated mortgage contracts).

Certain activities carried on in connection with business at Lloyd's will be regulated. In addition to those already mentioned (arrangingdeals 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. (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. (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 AUTH 2.7.15 G). Appropriate permission will be needed.

3. (3)

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

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 AUTH 2.8.14 G). This became a regulated activity on 1 January 2002.4

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

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 AUTH App 4.7 (Entering into a regulated mortgage contract) and AUTH App 4.8 (Administering a regulated mortgage contract).54

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 or carrying on any of the activities that are regulated in relation to collective investment schemes and stakeholder 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).4