Commission and the Part 20 exemption: accounting to the client (FSMA 2000 s.327(3))
Ainsley Brook, an SRA-authorised firm in England that is not authorised by the FCA, is administering an estate. As an incidental part of that work, and relying on the exemption in Part 20 of FSMA 2000, the firm arranges for the executors to sell the deceased's holding of listed shares through an FCA-authorised stockbroker. The stockbroker pays Ainsley Brook a commission of £1,150 for the business. The firm's practice manager suggests keeping the commission as general firm income.
What must the firm do with the commission if it is to continue to rely on the exemption for professional firms?
Choose one answer to see the reasoning.
Worked answer
Correct answer C: Account to its client for it, because under s.327 the firm must not receive any pecuniary reward from a third party without accounting to the client.
THE RULE TO REMEMBER
A firm relying on the Part 20 exemption must not receive any pecuniary reward from a third party arising from the regulated activity for which it does not account to its client (FSMA 2000 s.327(3)).
Commission and the Part 20 exemption: accounting to the client (FSMA 2000 s.327(3))
Section 327 FSMA 2000 disapplies the general prohibition for a member of a profession, or a firm controlled or managed by members of a profession, carrying on regulated activities if the conditions in s.327(2)-(7) are met. The SRA Financial Services (Scope) Rules require SRA-authorised firms relying on Part 20 to satisfy s.327(2) to (5). One condition, in s.327(3), is that the firm must not receive from a person other than its client any pecuniary reward or other advantage, arising out of the regulated activities, for which it does not account to its client. The stockbroker's commission is exactly such a reward. If Ainsley Brook keeps it as firm income without accounting to the executors, it falls outside the exemption and would be carrying on a regulated activity without authorisation.
Why A is wrong: Section 327(3) contains no percentage threshold; any unaccounted-for third-party reward breaches the condition.
Why B is wrong: There is no requirement to pay commissions to the SRA; the duty is to account to the client.
Why D is wrong: Section 327(3) applies to rewards from any person other than the client, including authorised stockbrokers.
Why E is wrong: Publishing the commission is not accounting to the client for it, so the condition would not be met.
A little more practice done.
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