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'Is it investment business?' and other articles

In this section you'll find examples of typical investment situations and a number of articles relating to other aspects of investment business.

Each investment situation (eg, giving advice about a personal pension) is described together with the legal background in terms of the Financial Services and Markets Act. We then say whether an unauthorised firm can advise, or whether the firm needs a DPB (Investment Business) licence or Financial Conduct Authority (previously, the Financial Services Authority [FSA]) authorisation.

A DPB (Investment Business) licenced firm should also be careful that any regulated activity it is allowed to undertake arises out of or is complementary to other professional services provided to the client.

An FCA authorised firm needs to have an appropriate Part IV permission for the activity under discussion. This is the permission given by the FCA for the firm to undertake investment activity. It also needs to have staff with the appropriate 'approved person' status to give the advice, etc. and guidance is given in each example on the controlled function that will apply.

Although some of the articles on this page may refer to the Financial Services Authority (FSA), their content remains valid despite the FSA becoming the Financial Conduct Authority (FCA) on 1 April 2013.

Other articles

Examples of corporate finance

This schedule describes some common corporate finance scenarios and identifies whether these are regulated activities and, if they are, whether a firm needs FCA authorisation or a DPB licence; or whether they're unregulated and so no authorisation or licence is needed.

Financial promotions

There are three articles in this section:

Giving advice on collective investment schemes

The Non-exempt Activities Order (SI 2001/1227) sets out various activities that a DPB licensed firm cannot do. Under article 4(d) of this Order, a DPB licensed firm cannot establish, operate or wind up a collective investment scheme or act as trustee to an authorised unit trust scheme. Find out more by reading this article.

Giving advice on purchasing shares

One of the main distinctions between the activities an FCA authorised firm can undertake and the activities a DPB (Investment Business) licensed firm can undertake is in relation to advice to an individual on purchasing shares in a company which is, or can be, traded on a public market.

Although there is an exclusion within the legislation which relates to the sale or purchase of a body corporate (primarily where the purpose of the transaction is to acquire day-to-day control), advice on purchasing a particular share which is traded on a public market can only be given by an FCA authorised firm.

The DPB (Investment Business) Handbook defines a public market as an investment exchange or any other market to which an investment is admitted for dealing. This definition reflects the terminology of the legislation and means that a DPB (Investment Business) licensed firm cannot advise on the purchase of shares which appear on Ofex, or any other market. Only an FCA authorised firm can give this type of advice unless an exclusion (such as the sale of a body corporate exclusion referred to above) applies.

A DPB (Investment Business) licensed firm can advise on the sale of a share, regardless of whether it is traded on a public market.

Is it mainstream or non-mainstream corporate finance?

This article concentrates on the questions raised by FCA authorised firms, but could also assist DPB licensed firms. It will also help firms that are not regulated for investment business activities by the FCA or ICAEW to determine what corporate finance activities they can undertake.

Using sale of a body corporate exclusion

Regulated activities can only be conducted by firms that are authorised by the FCA or, in some circumstances, licensed by ICAEW. One particular exclusion which firms find useful is RAO 70, which looks at the sale of a body corporate. The RAO 70 exclusion identifies two alternative tests and, if the transaction meets either of these tests, advising on or arranging the transaction for the purchaser or vendor is not a regulated activity.

The terms of the exclusion are lengthy and complex and so need to be considered carefully.

Test 1 - 50%+ interest

This applies where the transaction is one to acquire or dispose of shares in a body corporate and:

  • the shares consist of 50% or more of the voting shares, or
  • the shares, together with those already held by the acquirer, consist of at least 50% of the voting rights; and
  • the acquisition or disposal is between parties, each of whom is a body corporate, a partnership, a single individual or a group of connected individuals.

The RAO goes on to define connected individuals as being directors or managers of the body corporate (or to be directors or managers of the body corporate), close relatives of directors or managers or a person acting as a trustee for such an

Test 1 is therefore dependent on the number of shares and that the parties to the transaction meet the connected parties' requirements. If the acquirers or vendors are a group of disparate individuals, the test will not be met.

Test 2 - Day-to-day control

The alternative test applies if the object of the transaction may reasonably be regarded as the acquisition of day-to-day control of the affairs of the body corporate. Acting for an acquirer seeking day-to-day control is therefore an excluded activity.

Although the test itself does not specify 'disposal', the way the full text of the exclusion is drafted leads to the interpretation that it can equally apply to acting for a client in the disposal of shares, provided the object of the acquisition (ie, from the other party's viewpoint) is to acquire day-to-day control.

The exclusion does not apply if the client is disposing of day-to-day control, but the acquirers are a disparate group, ie, no party is seeking to acquire day-to-day control.

A professional firm will need to exercise judgement in deciding whether the purchaser is seeking to acquire day-to-day control. If the acquirer is in fact a disparate group of individuals, the firm must be satisfied that they are acting in concert with the objective of seeking control, although the firm does not need to act for all of the acquirers. One common scenario is that of a management buy-out (MBO) team acting in conjunction with a venture capitalist. Even if neither the MBO team nor the venture capitalist is seeking to acquire control individually, they can be regarded as acting in concert if, for example, both parties are to appoint directors to the board.