A question that we are frequently asked here in the United Kingdom is the extent to which UK financial services law can impact financial services businesses operating in the United States (and elsewhere outside the UK). At one end of the spectrum, some US firms assume that, even if they have UK clients, they can ignore UK regulation provided that they only operate from the United States. At the other end of the spectrum, some assume that they will need to be authorized in the UK if they want to deal with UK clients.
In fact, the position is more nuanced. While it would be unwise to ignore UK regulation when dealing with UK clients, there are various ways in which US financial services firms can lawfully provide services to UK clients without having any particular status under UK law.
One important consideration is that UK financial services regulation has a broad scope. While it obviously covers the activities of banks, insurers and financial advisers, it can also cover a wide range of other businesses (including lenders, credit brokers and payment services firms).
In this article we provide an overview of the UK financial services regime, with a particular focus on how it can apply to US businesses.
Relevant Legislation
The Financial Services and Markets Act 2000 (“FSMA”) is the principal piece of legislation governing the carrying out of financial services in the UK. Beneath the FSMA is the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 (“RAO”). The RAO lists the activities and investments that are subject to regulation under the FSMA (“Regulated Activities” and “Regulated Investments”).
The list of Regulated Activities includes:
- dealing in investments
- arranging deals in investments (including broking insurance contracts and regulated credit agreements),
- advising on investments and
- entering into a regulated credit agreement as lender.
The list of Regulated Investments includes:
- shares,
- futures,
- contracts of insurance and
- electronic money.
Certain type of cryptoassets will fall within the definition of electronic money or of other types of Regulated Investment. Even if a given cryptoasset is not a Regulated Investment, it may be subject to the Money Laundering, Terrorist Financing, and Transfer of Funds (Information on the Payer) Regulations 2017 (“MLRs”), which list certain activities (“Cryptoasset Registration Activities”) that are subject to regulatory supervision. (While the MLRs capture the activities of certain cryptoasset firms (and other businesses such as estate agents and casinos), they do not cover FSMA-authorized firms dealing in Regulated Investments because such firms are already subject to the Financial Conduct Authority’s anti-money laundering regulation.) Additionally, the Payment Services Regulations 2017 (“PSRs”) list the regulated payment services (“Regulated Payment Services”).
The RAO, MLRs, and PSRs also set out exclusions and exemptions from the scope of various Regulated Activities, Cryptoasset Registration Activities, and Regulated Payment Services (collectively, “Relevant Activities”).
The principal financial services regulatory authorities in the UK are the Prudential Regulation Authority (“PRA”) and the Financial Conduct Authority (“FCA”). The PRA is the micro-prudential regulator for systemically important firms, including banks and insurers. The FCA is the prudential regulator for firms that are not systemically important and is the conduct regulator for all FSMA-authorized firms. The FCA also has supervisory/regulatory roles under the MLRs and the PSRs. (A more detailed account of the roles played by these regulators is beyond the scope of this article.)
Criminal Offenses
Section 19 of the FSMA establishes the “general prohibition.” This makes it a criminal offense for a person to carry out a Regulated Activity by way of business in the UK unless the relevant person is either authorized under the FSMA or exempt from the need to be authorized under the FSMA. The maximum penalty for breaching the “general prohibition” is two years’ imprisonment and an unlimited fine.
It is also a criminal offense to provide a Regulated Payment Service as a regular occupation or business activity in the UK without the correct regulatory status. Depending on the circumstances, it may also be a criminal offense to carry out Cryptoasset Registration Activities in the UK without the correct regulatory status.
Scope of the UK Financial Services Regulatory Regime
If a US financial services firm wishes to take on UK clients, one of the first questions that it should ask is, “Will our business fall within the scope of a Regulated Activity?”
Sometimes the answer to that question will be fairly clear. For instance, if the US firm would be advising clients on the buying and selling of shares, then there would be a good chance (subject to exclusions, etc.) that the US firm would be carrying out the Regulated Activity of advising on investments. However, depending on the precise nature of the service, it might be that the given business could be deemed not to be providing advice but merely to be providing information. In such a case, there may be a strong argument that no Regulated Activity would be carried out.
The distinction between a course of conduct that falls within the scope of a Regulated Activity and a course of conduct that falls outside the scope of a Regulated Activity can therefore be a fine one. The conclusion may depend on seemingly small points of detail. As such, it is possible for two firms to be pursuing similar (but not identical) business models where one is carrying out a Regulated Activity but the other is not.
Given this, firms should be wary of simply copying the approach that is apparently being adopted by others in the given market. Firms can sometimes be tempted to observe that some of their competitors are not FCA-authorized and then to assume that they do not need to be authorized themselves. Unfortunately, such assumptions frequently prove to be mistaken. First, it may be that the given competitors do in fact need to be authorized and that they are in breach of the relevant regulation. Second, there may be a subtle difference between the business model that the new entrant wants to roll out and the business model being operated by its competitors. This difference may not be apparent to anyone without a deep understanding of both business models, but it can make all the difference to the question of whether or not a Regulated Activity is being carried out.
Carrying Out Relevant Activities from Outside the UK
As we have seen, a person who is neither authorized nor exempt under the FSMA will be committing a criminal offense if they carry out a Regulated Activity by way of business “in the United Kingdom.” This will often be a particularly relevant consideration for US financial services firms. Unfortunately, the mere fact that the provider of a given financial service is in the United States (and therefore not physically in the UK) when they perform the given activity does not necessarily mean that the person will not be carrying out a Regulated Activity “in the UK.”
By way of example, in the context of the Regulated Activity of advising on investments, FCA guidance states that “advising . . . is generally considered to take place where the advice is received.”
The position can be more nuanced in relation to other Regulated Activities. For instance, FCA guidance in the context of the Regulated Activity of dealing in investments as principal states that “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 this Regulated Activity, however, a US firm may be able to use an exclusion for “overseas persons” who enter into transactions as principal “with or through an authorised person” or with “an exempt person who is acting in the course of a business comprising a regulated activity in relation to which he is exempt.” As such, if the US firm can establish a suitable relationship with a UK person who has the relevant regulatory status, it may be able to carry out its business model (or at least a version thereof) without needing to be authorized under the FSMA.
Regulatory guidance also assists in determining whether Regulated Payment Services or Cryptoasset Registration Activities are being carried out “in the UK.”
If a US firm can structure its business so that any Relevant Activities that it may carry out are not carried out “in the UK” for regulatory purposes, then, subject to further analysis, it should be able to do so without breaching the general prohibition.
In such a case, the given US business would probably turn its attention to the question of how it would win UK clients in the first place (and to the question of how to do so in compliance with UK law).
Marketing
A separate point relates to the issue into the UK of “financial promotions,” which in summary are invitations or inducements to engage in investment activity—for example, placement memoranda and various advertisements. The starting point in relation to these is that an unauthorized person may only issue a financial promotion that is capable of having an effect in the UK if (i) the content has been approved by a suitably qualified authorized person or (ii) it falls within an exemption set out in the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (“FPO”).
Some FPO exemptions relate to the nature of the promotion’s recipient(s). These exemptions are designed for recipients such as investment professionals and high-net-worth individuals. Such exemptions require the promotion to include various warnings and pieces of information. There are also specific exemptions for “overseas communicators.”
It should be noted that some exemptions only apply to certain Regulated Activities, Regulated Investments, or types of communication. It is also worth noting that the financial promotions rules can apply even to promotions regarding businesses that fall within exclusions from the scope of Regulated Activities.
Reconfiguring a Financial Services Business
If an initial analysis concludes that a given business model does fall within the scope of a Relevant Activity, then financial services firms may wish to think about whether they can restructure their operations so as to take them outside this scope. One way of doing this might be to alter the arrangements so that they fall within an exclusion.
More broadly, a firm may be able to partner with a firm that is FCA-authorized. A common approach in this regard is to become an appointed representative (“AR”) of an FCA-authorized firm (the AR’s “Principal”).
ARs may lawfully carry out some (though not all) Regulated Activities without authorization because they benefit from their Principal’s FCA permissions. ARs are not subject to direct regulation by the FCA, but Principal firms often impose stringent monitoring procedures on their ARs.
From the point of view of US firms, it should be noted that special arrangements apply in the context of overseas ARs.
Authorization
If restructuring is not an option and if a US firm’s business model would entail carrying on Relevant Activities by way of business and/or as a regular occupation in the UK, then the firm may need to establish a UK company and apply for authorization under the FSMA.
Conclusion
It is not always easy to navigate the UK’s financial services regime. However, many US firms are able to structure their businesses so that they can act for UK clients without attracting an excessive compliance burden.
