How-to guide: The general prohibition – beware the consequences of breach (UK)

Introduction

This guide will assist in-house counsel, private practice lawyers, risk compliance teams and others to understand the meaning of the ‘general prohibition’ as set out in section 19 of the Financial Services and Markets Act 2000 (as amended) (FSMA) which is relevant in connection with most regulated activities. Businesses and individuals operating in the market or launching new financial products or services to the market will need to consider this restriction. This guide sets out the key components of the general prohibition and the consequences of its breach.

Carrying on any regulated activity in breach of the general prohibition has serious consequences and is a criminal offence potentially punishable with up to two years imprisonment and/or an unlimited fine. In addition, there is a risk of any agreement that was entered into in breach of the general prohibition being rendered unenforceable together with the associated reputational risk of enforcement action. Additionally, any sums paid to the person in breach may be recoverable.

This guide covers:

What is the ‘general prohibition’?
Who is an ‘authorised person’?
What is a ‘regulated activity’?
The ‘carrying on business’ test
When is an activity carried on in the UK?
Exemptions and exclusions
Consequences of breach

This guide can be used in conjunction with the following How-to guides: Introduction to the UK financial services regulators and Checklists: Preparing an application to the FCA or the PRA for a Part 4A permission, When does a firm need to be authorised by the FCA or the PRA, Preparing an application to cancel a Part 4A permission and Preparing an application to vary a Part 4A permission at the request of a firm.

Section 1 – What is the ‘general prohibition’?

1.1 The general prohibition

Section 19, FSMA (which is known as the general prohibition) provides that no person (which includes a company or partnership) may carry on a regulated activity in the UK ‘or purport to do so’ unless they are either an authorised person or an exempt person or the activities are covered by an exclusion. Note that the inclusion of ‘purport to do so’ means it may be possible to breach the general prohibition even where a person does not carry out a regulated activity but they represent that they do or attempt to do so (see section 24, FSMA).

Persons exempt from the general prohibition include appointed representatives (section 39, FSMA) as well as (among others) those exempted by means of an exemption order. See section 6 below.

Section 2 – Who is an ‘authorised person’?

2.1 Types of authorised person

An ‘authorised person’ is someone with regulatory authorisation from the FCA or PRA or otherwise authorised under FSMA. A person includes a body corporate as well as a natural person.

Types of authorised persons (as set out at section 31, FSMA) include:

Authorised persons by either the PRA or the FCA to carry on one or more regulated activity. This includes UK banks, asset managers, insurance companies and intermediaries and payment providers. The PRA and the FCA have the power to authorise a firm to carry on regulated activities under Part 4A, FSMA. See Checklist: Preparing an application to the FCA or the PRA for a Part 4A permission.
Persons otherwise directly authorised by or under FSMA.

Further, a person may have a deemed permission to carry on certain regulated activities and therefore be in an equivalent position to an authorised person if they were previously authorised as an EEA firm or Treaty firm prior to Brexit. To ensure a smooth transition, firms were entitled to opt-in to operate under the temporary permissions regime (TPR) (ie, a deemed permission permitting the carrying on of regulated activities for a limited period which ended 31 December 2023 during which time firms should have submitted an application for UK authorisation) or the time-limited financial services contracts regime (which enables EEA firms that did not enter the TPR or who wish to leave the TPR without being authorised to run-off existing UK business without taking on any new business). EEA-based investment funds that prior to Brexit passported into the UK can also continue to be marketed in the UK in the same manner as they were before Brexit, until 31 December 2025, provided they notified the FCA prior to the end of the Brexit transition period (31 December 2020) whilst they seek UK authorisation.

In addition, certain Gibraltarian firms qualify for authorisation by exercise of passport rights which is a reciprocal arrangement negotiated between Gibraltar and the UK.

Section 3 – What is a ‘regulated activity’?

3.1 Scope

What is considered a regulated activity is specified under section 22, FSMA. Under this section a regulated activity is a ‘specified activity’ that is ‘carried on by way of business’ in or into the UK and relates to:

a ‘specified investment’; or
information about a person’s financial standing; or
administering a benchmark; or
claims management services.

The list of regulated activities is found in schedule 2, FSMA and specified in the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 (as amended) (commonly known as the RAO). The RAO sets out a very long list of regulated activities that give rise to authorisation requirements unless exclusions apply, and these can vary from issuing electronic money and regulating mortgages to funeral plan contracts, so it is a very broad scope. The RAO is divided into two parts covering specified activities and specified investments as detailed below.

3.2 Specified activities

The complete list of specified activities together with the relevant exclusions is found in Part II, RAO. See also PERG 2.7 of the FCA Handbook. Where exclusions apply, no authorisation is required (see section 6 below).

Examples of some of the activities subject to regulation include accepting deposits (article 5(1), RAO), effecting and carrying out contracts of insurance (article 10, RAO), and investment activities such as dealing as agent in a specified investment (article 21, RAO), arranging deals in investments (article 25(2), RAO) and giving investment advice (article 53, RAO).

3.3 Specified investments

Part III, RAO sets out specified investments. These include shares, bonds and other debt instruments, government securities, deposits, mortgages, units in collective investment schemes (CISs), contracts of insurance and certain other financial instruments. See also PERG 2.6 of the FCA Handbook for guidance. For example, giving advice is regulated if it relates to one of the categories of specified investments as set out at article 53 RAO such as:

a security;
a structured deposit; or
a relevant investment.

PERG 8.26.4G states that advice must relate to a particular investment and confirms that generic advice – for example, financial planning – will generally not fall within article 53, RAO. Be careful though if the generic advice is given in the course of or in preparation for a regulated activity as it can form part of that regulated activity and therefore require authorisation – see PERG 8.26.5G.

Section 4 – The ‘carrying on business’ test

4.1 Carried on by way of business

As noted at section 3.1 above, for an activity to be a regulated activity, it must be ‘carried on by way of business’. This is sometimes known as the ‘business test’.

4.1.1 What does this mean in practice?

The term is not comprehensively defined in FSMA or the RAO, and when activities are commercial it is more obvious than when acting for individuals or smaller unregulated firms when it is not quite so obvious, and caution is recommended. The restriction applies to any type of regulated activity and is not limited to financial services business. It is often a question of judgement based on the facts and assessed on a case-by-case basis. Key factors considered are the elements of continuity and profitability.

See Helden v Strathmore Ltd [2010] EWHC 2012 (Ch) which provides guidance as to how the courts applied the business test to the provision of loans within the meaning of section 22, FSMA. The courts assessed the different factors which swayed the decision that Strathmore was acting by way of business.

See also Jackson v Ayles and another [2021] EWHC 995 where the courts discussed the business test with regard to several factors in relation to regulated mortgage lending, and noted that ignorance of the rules is an insufficient basis for a person to contend that they have not contravened the law. Be warned!

4.1.2 FCA perimeter guidance manual (PERG)

PERG 2.3.3G notes that whether an activity is carried on by way of business is ultimately a question of judgement and sets out several factors that should be considered when determining whether an activity is carried on by way of business (none of which is likely to be conclusive) including:

the degree of continuity of the activity;
the existence of a commercial element;
the scale of the activity;
the proportion which the activity bears to other activities carried on by the same person but which are not regulated; and
the nature of the particular regulated activity that is carried on.

4.1.3 Guidance in the Business Order for certain regulated activities

The Financial Services and Markets Act 2000 (Carrying on Regulated Activities by Way of Business) Order 2001 (Business Order) refines the business test in respect of certain regulated activities setting out examples of when the activity is and is not regarded as being undertaken by way of business:

Examples of the activities that are detailed include:

deposit-taking business (article 2, Business Order);
certain types of investment activity (article 3, Business Order and see article 3(2), Business Order for the list of investment activities caught.); and
day-to-day management of an occupational pension scheme (article 4, Business Order).

See, FSA v Anderson and others [2010] EWHC 599 and R v Napoli [2012] EWCA Crim 1129. These cases provide useful guidance on application of the business test generally and provide an analysis of requirements for deposit-taking under the Business Order.

4.2 The role of HM Treasury

In addition, HM Treasury has powers to refine the business test either generally or in relation to certain types of activity or investments (section 419, FSMA).

Section 5 – When is an activity carried on in the UK?

Whether or not an activity is regarded as being carried on ‘in or from the UK’ appears straightforward; however, it can depend on many factors and is not as obvious as it may seem.

5.1 What does ‘in the UK’ mean?

In some cases, whether an activity is being carried on in the UK may be obvious, in others particularly when conducting cross-border transactions it is not quite as clear cut.

Guidance on territoriality is set out in the deeming provisions of section 418 FSMA and PERG 2.4 and activity taking place in the UK can depend on the location of both the client and the provider’s registered office, and the type and location of the activity being undertaken.

In some cases, there may be clear guidance – for example, in relation to investment advice, the general view is that investment advice is given from where it is provided (PERG 7.3.5G and PERG 7.3.6G). However, in other cases the question is more complex – for example, in relation to accepting deposits and effecting and carrying out contracts of insurance.

Caution is required when conducting cross-border transactions, as a person can still be considered as operating in the UK even if the client is overseas. A firm whose head office is not in the UK but which carries on regulated activities from an establishment maintained by it in the UK will be deemed to carry on regulated activities in the UK. See PERG 2.4 which sets out further clarification on the link between activities and the UK.

See also FSA v Fradley and Woodward [2005] EWCA Civ 1183 which provides helpful commentary as to the meaning of carrying on regulated activities by way of business in the UK. The case concerned the operation of a collective investment scheme contrary to the general prohibition. The issue of territoriality was relevant as Mr Fradley had moved his business from the UK to Ireland. The case determined that the communications with clients and prospective clients, and the maintenance of a bank account and an accommodation address, all of which took place in the UK were of sufficient regularity and substance to constitute carrying on the business in the UK despite the office move to Ireland.

Note a different territorial regime applies to activities relating to claims management services which are only in scope of regulation if carried on in Great Britain (ie, England, Wales or Scotland). This is not covered in any further detail in this guide.

Section 6 – Exemptions and exclusions

Applying for and maintaining authorisation to carry on regulated activity can be costly and takes time, so it is also worth considering whether you are able to avail of any exemptions to the general prohibition or whether any exclusions apply. In either case, where an exemption or exclusion applies, the activity falls outside the scope of regulation. These are considered in more detail below.

6.1 Exempt person

Examples of exempt persons from the general prohibition include persons exempt as a result of the following:

Exemption order – the FSMA (Exemption) Order 2001 lists persons who are exempt in respect of certain regulated activities (other than effecting and carrying out insurance business). This includes the Bank of England, the International Monetary Fund and various international authorities.
Appointed representatives – an appointed representative of an existing UK authorised firm is exempt from certain regulated activities (section 39 FSMA). Appointed representatives are appointed by an authorised principal under a contract. The authorised principal must take responsibility for the regulated activities carried on by the appointed representative under the contract. See SUP 12 of the Supervision Sourcebook of the FCA Handbook. More detailed analysis of the appointed representative regime is outside the scope of this guide however see How-to guide: The appointed representatives regime explained – what it means in practice and Checklist: Pre-appointment checks to consider when selecting an appointed representative.
There are exemptions from the general prohibition for recognised investment exchanges (RIEs) eg, London Stock Exchange (LSE) and recognised clearing houses eg, London Clearing House (LCH) – as set out in section 285, FSMA for regulated activities carried on as part of their business for trading investments or to facilitate the provision of clearing services, but these do not apply in respect of the regulated activity of administering a benchmark in article 63S of the RAO.
Certain central counterparties and central securities depositories – exemptions are as detailed at section 285 FSMA.

In addition, there are certain persons to whom the general prohibition does not apply subject to satisfying certain conditions eg, designated professional firms may be treated as exempt eg, solicitors and accountants or under section 316, FSMA in relation to insurance market activities conducted by members of the Society of Lloyd's subject to specific direction from the FCA or the PRA.

6.2 Exclusions

No authorisation is required when an exclusion applies such that a person who benefits from it is deemed not to be carrying out a regulated activity. A detailed explanation of the exclusions is beyond the scope of this guide however note that some exclusions are set out in the RAO under the two categories listed below.

General exclusions – There are a several generic exclusions that are grouped together and apply to some or all regulated activities eg, activities undertaken by trustees, nominees and personal representatives, activities incidental to a profession or non-investment business and to overseas persons. These exclusions are detailed in articles 66-72, RAO and will need to be considered on a case-by-case analysis by anyone who is considering whether they need authorisation.
Specific exclusions – exclusions that apply to a particular regulated activity. Most exclusions that are set out in the RAO directly following each regulated activity. For application of these exclusions, see Part II RAO and PERG 2.8.

Section 7 – Consequences of breach

Any person who carries out regulated activities in breach of the general prohibition faces potentially severe penalties. Businesses and individuals need to be aware of the risks of non-compliance and to undertake due diligence. A good starting point is to assume the regulator is going to be supervising everything you are doing and the activities you engage in.

You should analyse carefully whether the firm needs to be authorised (or whether you have the appropriate permissions if already authorised). See Checklist: When does a firm need to be authorised by the FCA or the PRA. You should also set up internal monitoring mechanisms and processes, have appropriate safeguards, record-keeping, and compliance and control procedures all as appropriate to the nature, scale and complexity of your operations, the products and services you provide and the amount and type of customers to whom you provide those products and services.

7.1 Criminal offence

Contravention of the general prohibition is a criminal offence punishable with an unlimited fine and/or a maximum of two years in prison (section 23, FSMA). This applies to officers of the company and the term is widely defined to include directors, chief executives and managers. It applies whether the offence was committed with their consent or as a result of their neglect (section 400, FSMA). A possible defence is set outat section 23(3), FSMA but the standard and objectives set to meet the criteria are exceptional.

7.2 Agreement rendered unenforceable

An agreement made by an unauthorised person in the course of carrying on a regulated activity in contravention of the general prohibition could be rendered unenforceable against the other party (section 26, FSMA), and the other party may be entitled to recover any money or other property paid or transferred by him under the agreement and compensation for any loss sustained. This section does not apply if the regulated activity is accepting deposits.

Agreements made by authorised persons in the course of their authorised business may also be unenforceable if the agreement is entered into as a result of a third party’s unauthorised regulated activities (section 27, FSMA).

Certain agreements are excluded from the scope of sections 26 and 27 FSMA:

agreements entered into before FSMA came into force (although such agreements will come within scope of the Financial Services Act 1986); and
agreements that are merely incidental to the regulated activity.

Where the person against whom the agreement is unenforceable elects not to perform the agreement or recovers money paid or other property transferred by him under the agreement, he must also repay any such money and return any property received by him under the agreement. The amount of compensation recoverable is either agreed between the parties or on the application of either party, the amount determined by the court.

Section 28, FSMA, empowers the court to exercise discretion to permit the enforcement of an (otherwise unenforceable) agreement and uphold the transaction or order money and property paid or transferred if it is just and equitable in the circumstances of the case to do so having regard to several factors.

In the case of agreements made unenforceable by section 26, FSMA, the court must consider whether the person carrying on the regulated activity reasonably believed that he was not contravening the general prohibition by making the agreement. See Helden V Strathmore Ltd [2010] EWHC 2012. In this case, Mr Helden argued that loans made to him were in breach of the general prohibition and so a charge on the property was not enforceable. The Court at first instance concluded that whilst the loan and therefore the charge was in breach of the general prohibition, it was just and equitable in the circumstances for the agreement to be enforced, for several reasons, including that the defendant making the loan (without authorisation) did not realise that FSMA could apply, and it was reasonable for them not to do so. On appeal, the Court upheld the first instance finding, and there is some useful discussion around people who carry on the regulated activity with knowledge of the law and reasonable belief that they are not contravening the general prohibition as opposed to people who carry on the regulated activity and are ignorant of the law.

In the case of agreements made unenforceable by section 27, FSMA, cases can hinge on whether the authorised person knew that the third party was unlawfully carrying on a regulated activity. See discussion in Adams v Options UK Personal Pensions LLP (formerly Options SIPP UK LLP and Carey Pensions LLP) [2021] EWCA Civ 474 re. claims that a self-invested personal pension scheme (SIPP) operator had used an unauthorised introducer to facilitate provision of unsuitable investments to an investor whose underlying investment sustained loss, and whether the contract could be declared unenforceable on the basis that the unregulated broker was in breach of the general prohibition.

Where an unauthorised person has contravened the general prohibition, the FCA has powers (among others) to grant court injunctions and restitution orders as set out under sections 380 and 382, FSMA. It may also initiate winding-up proceedings against the person in breach of the general prohibition (see section 367, FSMA).

7.3 Misleading statements about authorisation

A person who carries on a regulated activity without the appropriate authorisation but makes false claims either by describing themselves as authorised or exempt (eg, in their letterhead) or holds themselves out to be (eg, in their conduct) is at risk of criminal prosecution under section 24, FSMA. It is important to be aware of these risks and ensure that organisations and staff do not find themselves guilty of an offence. Ensure staff are aware of the risks by providing the appropriate training at induction and refresher training for employees.

7.4 Authorised person acting without permission

If an authorised person carries on a regulated activity without the appropriate permissions, they may be subject to enforcement action rather than criminal proceedings under section 20, FSMA. A possible example might be where an insurer carries on a banking business without the appropriate permissions, and more recently ‘fin-fluencers’ have become the focus of FCA attention where unauthorised individuals are offering investment advice. See How-to guide: Financial promotions and social media guidance.

7.5 Reputational damage

Public announcements of FCA or PRA enforcement (or indeed any enforcement action for non-compliance) can adversely impact the company and its officers. The reputational damage that results can sometimes have a long-lasting impact and can lead to a loss of trust in the company. This can be from customers directly or, for larger firms, from shareholders (where resulting share price drops can impact company profits) or investors.