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Should you have a designated professional body (DPB) licence?

“We do not undertake any investment business so we don’t need a DPB licence” – this is a common response that may underestimate the scope of licensed activities.

The Financial Services and Markets Act 2000 (FSMA 2000) provides for the designation of certain professional bodies, including ICAEW, for those professional bodies to provide arrangements through which firms may be licensed to carry on activities that are regulated under FSMA 2000.

Firms that have a licence then do not require direct authorisation with the Financial Conduct Authority (FCA),  for a limited range of exempt regulated activities, when they supply professional services to clients and, incidentally, are involved in carrying on regulated activities which are complementary to those services.

The issue is that some day-to-day activities fall within the scope of regulated activities, for example:

  • certain types of fee protection insurance;
  • commenting on advice following referral of a client to an IFA;
  • advising a minority shareholder on the sale of their shares; and
  • contacting an IFA on behalf of a client who wants insurance advice.

Fee protection insurance

Is a DPB licence required to provide fee protection insurance? The answer is that it depends on who is actually insured and whether the firm is acting as an insurance broker.

Schemes where the firm is the policy holder, rather than the client, are not regulated. In this case, the policy insures the practice itself rather than the clients directly; they are only acquiring an interest in the policy. This is the case whether or not the firm chooses to make a specific charge for the provision of the service.

Conversely, where the client is the insured party and firms either arrange the purchase of the insurance  as a result of passing the application and premium to the insurer or  recommend a specific contract of insurance, a DPB licence is required in such circumstances.

Referrals to an IFA

If a firm simply makes a referral to an IFA by providing the client with the IFA’s contact details, and has no further involvement in the process, then this is an excluded activity. This means that a firm does not require a DPB licence or FCA authorisation to make the referral.

However, if the firm contacts the IFA on the client’s behalf, where the client wants advice on a contract of insurance (investment linked contracts such as life assurance, pensions or non-investment linked insurance contracts such as pure protection policies), this will be a regulated activity for which a DPB licence is required.

But if the firm contacts the IFA on behalf of a client who wants general financial advice on investments or has expressed an interest in securities (shares, debentures, Government securities), this is exempted and will not require a DPB licence.

If the firm comments in any way on the advice (including explanation, endorsement or suggesting the need for further advice) the activity becomes regulated. This could put a firm in an impossible position – where they know that the advice is inappropriate, but are legally unable to comment. A DPB licence enables a firm to comment on advice given to a client (agree/disagree) but not give specific advice or make their own investment recommendations unless these fall within the scope of the licence.

If a firm makes referrals to an IFA it is therefore best if the firm is DPB licensed.

Advising minority shareholders

Corporate finance activity regarding the purchase or sale of a controlling interest in a company is an excluded activity. Therefore, a firm does not require a DPB licence or FCA authorisation.

However, where a company is, say, owned by a husband and wife who own the shares 60:40 then advising the spouse holding 40% to sell their shares for valuable consideration is potentially a regulated activity that requires a licence. The rules regarding whether or not the transaction is regulated are quite complicated; however, if a firm were licensed it would be allowed to undertake the transaction whether it was regulated or not.

In all the above cases, where a firm has a DPB licence they can simply get on with advising the client (providing it does not relate to purchasing listed company shares if the transaction is not excluded) rather than worrying about whether or not they are allowed to do so.

If you do not have a DPB licence and would like more information, access our "Fee protection insurance" and "Is it investment business?" webpages.

December 2013