| Financial Services And Markets Bill - continued | House of Commons |
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Clause 169: Additional procedure for EEA firms in certain cases328. This clause imposes an additional procedure to be followed in some circumstances where the Authority proposes to use its intervention power against an EEA firm. This procedure applies where the EEA firm has contravened a requirement imposed by the Authority pursuant to host State functions under the relevant single market directive.
329. First, the Authority must require the firm to remedy the situation. If the firm fails to do so, the Authority must request the firm's home State regulator to take appropriate measures to ensure the firm remedies the situation and inform the Authority of the measures it proposes to take (or why it does not propose to take any measures). Only if the Authority considers that the measures that the home State regulator has taken are inadequate, or if no action has been taken by that regulator, may it exercise its powers.
330. However where the Authority decides it needs to act urgently it may do so before it has required the firm to remedy the situation and either before it requests the home State regulator to act or, having already made a request, before it is satisfied that the home state regulator is not going to take adequate action. But if the Authority takes urgent action in this way, it must inform the European Commission and must comply with any direction from the Commission to rescind or vary the requirements imposed.
Clause 170: Rescission and variation of requirements331. Either on its own initiative or at the request of the authorised person who is subject to a requirement under this Part, the Authority may rescind or vary such a requirement placed on an authorised firm under its power of intervention. Refusal to rescind or vary a requirement on request gives rise to a right to refer the matter to the Tribunal.
Clause 171: Re-issue of certificate of authorisation332. If the Authority has exercised its power of intervention to prohibit an authorised person from carrying on a regulated activity, or to restrict the way in which an activity may be carried on, this clause gives it the power to require that person to deliver up his certificate of authorisation so that it may be replaced with one reflecting the prohibitions or restrictions imposed.
Clause 172: Effect of certain requirements on other persons333. Where the power of intervention is used to impose a restriction of the type covered in clause 43, then the other provisions in that clause apply.
Clause 173: Actions for damages334. This clause makes a contravention of a requirement imposed on an authorised person in the exercise of the intervention power actionable by third parties in the same way as a contravention of a rule under Part IX.
Clauses 174: Powers to prohibit the carrying on of Consumer Credit Act business335. Under the Bill, EEA firms may, on the basis of their home State authorisation, be automatically authorised to carry on the types of activity covered by the passport under the various single market directives. Two of these directives include in their listed activities lending, which encompasses consumer credit business regulated in the UK under the CCA 1974. This means that EEA firms may carry on consumer credit business without having to apply to the DGFT for a consumer credit licence and they are therefore not subject to the DGFT's powers under the CCA 1974.
336. This clause, along with clause 175, confers on the DGFT separate powers to restrict or prohibit the carrying on, or the purported carrying carry on, of consumer credit business in the UK under the relevant directives if the firm or any of its employees has done any of the things listed in section 25(2)(a) to (d) of the CCA 1974, that is, if they have:
337. Contravention of a restriction or prohibition is a criminal offence. Schedule 9 sets out the procedure the DGFT must follow when imposing prohibitions or restrictions. This procedure follows that generally applicable in the CCA 1974 rather than in the other provisions of this Bill.
PART XIII: DISCIPLINARY MEASURES338. This Part gives the Authority powers to issue public statements or impose financial penalties in response to contraventions of rules or other requirements by authorised persons.
Clause 176: Public censure339. This gives the Authority the power to make a public statement concerning a contravention by an authorised person of any requirement imposed directly by the Bill, or under it, for example through the Authority exercising their rule-making power.
Clause 177: Financial penalties340. This enables the Authority to impose a financial penalty where it establishes that there has been a contravention by an authorised person of any requirement imposed by or under the Bill. The Authority may not both impose a penalty under this clause and withdraw the person's authorisation. A penalty imposed under this clause is payable to the Authority.
Clause 178: Proposal to take disciplinary measures341. This clause requires the Authority to issue a warning notice where it proposes to make a public statement about an alleged contravention or impose a penalty. The notice must include the statement the Authority proposes to make or the amount of the proposed penalty. The authorised person has an opportunity to make representations in accordance with clause 338.
Clause 179: Decision notice342. If having issued a warning notice, and heard any representations, the Authority decides at the end of the relevant period to proceed with the public statement or penalty, it must issue a decision notice in accordance with clause 339. This should also set out the terms of the proposed statement or the amount of the proposed fine (either of which may change in response to any representations made). The authorised person has a right to have the matter referred to the Tribunal, in accordance with the provisions of Part VIII of the Bill. No action can be taken by the Authority during the period in which the person has the right to have the matter referred to the Tribunal or, where the matter has been referred, until the Tribunal hearing and any subsequent appeal have run their course.
Clause 180: Notice for payment343. Once the Authority has completed the procedure under clause 339, it may require payment under this clause. The authorised person has to pay the penalty within 14 days of receiving the notice imposing it. If the sum is not paid within this period, it may be recovered by the Authority as a civil debt.
Clause 181: Publication344. If, having gone through the appropriate procedures, the Authority decides to make a public statement under clause 176, subsection (1) provides that it must send a copy of the statement to the authorised person concerned and to any third parties to whom they copied the decision notice.
345. The Authority may publish details of a decision to impose a financial penalty under clause 339(5). Under subsections (2) and (3) of this clause, it may also publish details of a decision not to impose a financial penalty, if the authorised person concerned consents.
346. No such publication may take place during the period in which the person has the right to refer the matter to the Tribunal or, where the matter has been referred, until the Tribunal hearing and any appeal have run their course.
Clause 182: Statements of policy347. This clause requires the Authority to consult on, and publish, guidance on its policy concerning the imposition of penalties under clause 177 and the level of those penalties. Under subsection (7), the Authority must have regard to this published guidance when determining the level of penalties.
PART XIV: THE FINANCIAL SERVICES AND MARKETS COMPENSATION SCHEME348. There are currently five compensation schemes operating in the financial services sector:
349. This Part of the Bill provides for those existing schemes to be replaced with a single Financial Services and Markets Compensation Scheme, to be set up by the Authority. The Authority will have powers to prescribe the regulated activities to be covered by the scheme. Membership of the scheme will be compulsory for authorised persons carrying on relevant activities, except in the case of EEA firms that are members of equivalent schemes in their home State.
350. The scheme will be managed by an independent scheme manager and will be funded by authorised persons. The existing schemes are to be dissolved and the relevant legislation establishing them, for example the Policyholders Protection Acts 1975 and 1997, would be repealed. Plans to integrate the existing schemes are underway.
351. The compensation scheme will be able, as the current schemes do now, to compensate customers who suffer loss in various circumstances as a consequence of the inability of an authorised person to meet its liabilities. The scheme would not, other than in cases of the insolvency of an authorised person, provide compensation for a regulatory breach (for example the mis-selling of investments) where the liability would remain with the authorised firm.
352. In December 1997 the Authority issued a consultation paper, (Consumer Compensation; CP5) to seek the preliminary views of the various industry sectors and consumer groups. A further consultation paper (Consumer Compensation: A Further Consultation; CP24) was published in June 1999 setting out the Authority's current proposals and seeking views on issues such as the levels of compensation payable under the scheme.
Clause 183: The scheme manager353. The clause requires the Authority to establish a company to manage the scheme and sets requirements as to the company's constitution, including that the chairman should be appointed by the Authority with the approval of the Treasury and that board members should act independently of the Authority.
Clause 184: The compensation scheme354. This clause imposes certain requirements about the Authority's rules establishing the scheme, to provide for compensation to be payable. It also makes it clear that customers may be eligible to make a claim against an authorised person even if the claim arises in relation to an activity for which that authorised person did not have permission. A claim relating to an appointed representative who is an exempt person by virtue of clause 35 may also qualify under the scheme. Claims would not, however, be eligible if they related to regulated activities carried on by a person who should be authorised but is not.
355. The scheme will levy authorised persons to cover both the costs of compensation, and its administrative costs.
356. Subsection (4) means that in setting the levy, the scheme manager should try, so far as is practicable, to avoid cross-subsidy between sectors. The Authority proposes to maintain separate "sub-schemes" for insurance, deposit taking and investment business and has proposed that those groups might be further sub-divided into contribution groups. This would mean that, for example, building societies would not normally have to contribute to cost of failures in the insurance sector, or stockbrokers for failures among pensions advisers.
357. Subsection (9) makes it clear that claims can only be made against the scheme in relation to a person who is authorised to carry on regulated activities in the UK under passporting arrangements if they were a member of this scheme. Under EEA passporting arrangements, an EEA firm need not join the compensation scheme where it is a member of an equivalent home State scheme which covers its activities here. However, such firms may join this UK scheme for "top up" cover where benefits payable under this scheme are higher. A number of other clauses in this Part apply to EEA firms only to the extent that they were members of the scheme.
Clause 185: General358. This clause clarifies the scope of the Authority's power to make scheme rules, but the power is not limited by the list.
359. Subsection (1) provides, in particular, that the scheme may consist of a number of different compensation funds, for which levies can be raised from different sectors of the industry and different rules may be made as to the level of and eligibility for compensation.
360. Subsections (2) to (4) enable the scheme to limit the eligibility of claimants according to a number of different factors, including where the event took place or where the claimant resides.
361. Subsection (6) confers on the scheme manager a power to enter into arrangements with schemes established in other countries outside the EEA. Where, for example, a US firm does business in the UK and the level of compensation under the US scheme is lower than in the UK, the firm would be able to become a member of the UK scheme for the purposes of topping-up its cover. If the firm was unable to meet its liabilities, claimants might have a claim against both the US and the UK schemes. This power would enable the UK scheme to enter into an arrangement with the US scheme to avoid the need for the claimant to submit a claim to both schemes. It will be possible to make reciprocal arrangements under the power in subsection (1)(k).
Clause 186: Rights of the scheme in relevant person's insolvency362. Subsection (1) makes provision for the scheme to assume the rights of an eligible claimant to recover a debt from the authorised person. The authorised person's liability to the claimant would be extinguished or reduced, depending on whether the amount of compensation paid by the scheme had covered the whole of the debt. This means that where there were customers making claims in relation to the same firm, the scheme can pay compensation and then make a single claim against the assets of the authorised person for the full value of those claims, thereby reducing the inconvenience to the consumer and the administrative costs to the scheme. This provision is in line with section 54(2)(e) of the FS Act 1986.
363. Subsection (2) allows the scheme to take on the voting rights of claimants at creditors' meetings where claimants have passed their rights to the scheme.
Clause 187: Continuity of long-term insurance policies364. The special nature of long-term insurance means that should an insurer go into liquidation, a simple payment of compensation may not necessarily be enough to enable policyholders to find alternative cover. This would be a problem especially where a person had developed health problems since taking out the original policy. The purposes of this clause, which carries forward special powers of the Policyholders Protection Board, is to enable the Authority to include in the scheme rules a requirement for the scheme to seek to the transfer the long-term business of a failing insurer to another company, or to secure the issue of substitute policies by another insurer.
Clause 188: Insurers in financial difficulties365. The Policyholders Protection Board is able to take measures to prevent an insurer going into full liquidation so that its existing policies can run their course. The special features of long term (or "life") business are noted above. But even general insurance business (for example car or product liability insurance) can result in claims arising from events which may have happened several years earlier. This long tail of claims means that it is much more difficult to crystalise the liabilities of an insurer in liquidation. The administration of insurance claims is costly and the delays for policyholders can be substantial while a liquidator seeks to work out the level of payments that can be made to creditors. Accordingly, this clause carries forward arrangements to enable the compensation scheme to give assistance to insurance companies in financial difficulties, either by transferring the insurance business to another insurer, or by enabling the continuance of insurance business by that firm. Before using this power, which is potentially of substantial benefit to policyholders, the compensation scheme must be satisfied that payments to the firm should not materially benefit other persons such as shareholders or company directors. It must also be satisfied that these measures would not cost more than the costs of compensation if the firm were allowed to go into default.
Clause 190: Scheme manager's power to require information held by liquidator etc.366. The efficient settlement of claims will sometimes require the scheme to obtain information from a variety of sources. This clause provides the scheme manager with powers to require the provision of specified information which it considers necessary in order to be able to assess claims. Information may be required of the authorised person, or from a person who was knowingly involved in the events giving rise to the claim. Failure to comply with such a request for information, or a request under clause 191, may be punished as a contempt of court.
Clause 191: Scheme manager's power to inspect information367. This clause allows the scheme manager to inspect information held by the liquidator, administrator or trustee in bankruptcy of an insolvent relevant person. The scheme manager is only allowed to inspect documents rather than require them to be produced, which means that the cost of copying documents will be borne by the scheme and not by the liquidator. This should reduce costs to the liquidator, administrator or trustee in bankruptcy. The clause does not apply to the Official Receiver, or his Scotland and Northern Ireland counterparts.
Clause 193: Statutory immunity368. This clause provides immunity for the scheme and its staff from actions for damages except where they act in bad faith or where damages are sought under the Human Rights Act 1998.
Clause 194: Management expenses369. This clause ensures that the scheme may only recover from levies management expenses up to a certain limit. The limit must be set before the scheme includes management expenses in its calculations of the levies.
Clause 195: Tax treatment of levies and repayments370. This clause provides for levies to be treated as a tax-deductable expense and for levy rebates made to authorised persons to be treated as trading receipts. This carries forward section 30 of the Building Societies Act 1986 and section 66 of the Banking Act, and will apply to all the sub-schemes of the compensation scheme.
PART XV: THE FINANCIAL SERVICES OMBUDSMAN371. There are a number of ombudsman and arbitration schemes currently operating in the financial services sector:
372. Some of these schemes are provided for in legislation and others are purely voluntary schemes run by the industry concerned. This Part of the Bill provides for the creation of a single, compulsory ombudsman scheme for the speedy and informal resolution of disputes between authorised firms and their customers.
373. The ombudsman's decision will be binding upon authorised firms but the complainant may choose whether or not to accept an ombudsman's determination and may instead pursue the matter in the courts.
374. The new statutory scheme will replace the existing schemes. Plans to establish the new scheme are being put in place in advance of the enactment of the Bill. The detailed operation of the scheme will be determined largely by rules made by the Authority, on which it will be required to consult in the usual way. This stage of consultation will begin in the autumn of 1999. In December 1997 the Authority published a consultation paper (Consumer Complaints; CP4) with proposals for the exercise of their powers under the Bill. In August 1998 it issued a further paper (Policy Statement on Consumer Complaints: The New Financial Services Ombudsman) which reported on the steps being taken in the light of consultation.
Clause 197: The scheme and the scheme operator375. This makes clear that the object of the scheme is to resolve disputes involving consumers quickly and with minimum formality. This is a key characteristic of existing schemes. The operator of the Financial Services Ombudsman Scheme must be a body corporate.
Clause 198: Compulsory jurisdiction376. It will be compulsory for firms authorised by the Authority to submit to the jurisdiction of the scheme. The scheme's compulsory jurisdiction may only be applied to persons who were authorised at the time the activity to which the complaint relates was carried out, and the rules must have been in force at that time. The Authority will make rules determining which activities of authorised persons fall within the compulsory jurisdiction. These activities must either be regulated activities as specified by the Treasury under clause 20 or other activities which are not regulated, but could be made regulated activities under that clause. The Authority is expected to include most of the financial services activities of authorised persons. For example in the case of insurance companies the jurisdiction of the scheme is likely to include the marketing of general insurance products even though it is not the Government's current intention that this activity should be regulated. The Authority would on the other hand be free not to include certain activities, for example kinds of professional business where it is unlikely that retail customers would ever be involved.
377. If an activity is included in the compulsory jurisdiction of the scheme, the ombudsman will be able to consider all disputes which arise from the carrying on of that activity by the authorised person. For example if deposit-taking is specified as an activity covered by the compulsory jurisdiction of the scheme, the ombudsman will be able to consider all disputes arising from the operation of a bank account such as the withdrawal of money from a cash machine, or a stopped cheque.
378. The clause also sets the circumstances in which a complaint can be dealt with, namely that the complainant meets the relevant eligibility criteria (set by the Authority) and has asked the ombudsman to consider the case. The scheme is not able to deal with complaints made by authorised persons, except in circumstances specified in the rules.
Clause 199: Voluntary jurisdiction379. Firms which are not authorised by the Authority will be able to join the scheme on a voluntary basis. Under the voluntary jurisdiction, the ombudsman scheme will be able to deal with complaints which are related to unregulated financial services activities. If an unregulated activity is subject to the compulsory jurisdiction for authorised persons, complaints about that activity when carried on by unauthorised persons can be brought within the scope of the ombudsman scheme (provided that the unauthorised person was a member of the scheme at the time to which the complaint relates, and that the rules were in force at that time). For example, the activities of consumer-credit firms who are not also authorised persons could be dealt with under the voluntary jurisdiction.
380. The scheme's voluntary jurisdiction rules can only relate to activities which are subject, or could be made subject, to the compulsory jurisdiction rules. The voluntary jurisdiction can be applied to authorised persons where a complaint relates to an activity which could be, but has not been, made subject to compulsory jurisdiction rules.
381. Voluntary jurisdiction rules can be made by the scheme operator with the approval of the Authority. The rules will also define which complainants are eligible.
Clause 200: Determination under the compulsory jurisdiction382. The ombudsman will make a decision about the complaint on the basis of what he considers is fair and reasonable in the circumstances. The scheme operator has the power under paragraph 15 of Schedule 14 to specify what matters can be taken into account when determining what is fair and reasonable. The complainant may accept or reject the award by a date set by the ombudsman. If he accepts the decision the ombudsman's award is binding on the respondent. The clause also sets out the procedures to be followed by the ombudsman.
Clause 201: Awards383. If a complaint under the compulsory jurisdiction is determined in favour of the consumer ("the complainant"), the firm ("the respondent") may be ordered to pay compensation up to a maximum limit which may be set by the Authority. The limit may be different for different kinds of complaint. The Authority may specify a separate limit for compensation which can be awarded for losses of a kind for which a court does not have a power to award damages for breach of contract, such as for distress and inconvenience. The ombudsman can only make a binding award up to the limit set by the Authority, but he may recommend a greater amount as fair compensation. The respondent may also be ordered to take steps to rectify the matter complained of, and this can be enforced through the courts by the complainant, if necessary.
Clause 202: Costs384. This clause allows the scheme operator to make rules concerning the costs which can be awarded by the scheme. These rules are subject to some constraints. Where a complaint is settled in favour of the consumer, the rules could allow the firm concerned to be required to meet the costs of both the consumer and the scheme. A consumer could only ever be required to meet the costs of the scheme, and then only if the ombudsman believes that their conduct has been improper or unreasonable, if they have been responsible for an unreasonable delay, or if their complaint was considered to be vexatious or frivolous. The clause also makes provision for recovery of costs by the scheme operator.
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| © Parliamentary copyright 1999 | Prepared: 17 June 1999 |