Chapter VI: Investigations

Clause 255: Power to investigate

443.     The Authority or the Secretary of State can appoint a person to carry out investigations concerning collective investment schemes. The provisions do not generally extend to the investigation of oeics, as provision concerning those investigations is expected to be contained in the proposed Treasury regulations.

444.     The person carrying out the investigation has powers to investigate other persons or matters where necessary or relevant. The provisions concerning the conduct of investigations set out in clause 140 will generally apply and statements made to the investigator may be admissible in proceedings in the circumstances set out in clause 144. Persons will not be required to disclose privileged communications or information subject to the bankers' duty of confidentiality. The provisions of clause 147 will also apply, so that failure to comply with a requirement imposed in connection with an investigation will be an offence, and persons who are convicted as a result of an investigation may be liable to pay the Authority's costs.

PART XVII: RECOGNISED INVESTMENT EXCHANGES AND CLEARING HOUSES

445.     This Part provides for the regulatory regime for recognised investment exchanges and clearing houses. These recognised bodies are exempt from the need to be authorised. This regime is similar to that which exists under the FS Act 1986.

446.     Chapter 1 of this Part:

• gives the Treasury the power to set the requirements that such bodies have to meet in order to be recognised;

• sets out the application procedures and supervisory arrangements for recognised bodies, including conferring powers to revoke recognition and to direct recognised bodies to take steps to meet the recognition requirements;

• allows the Treasury, jointly with the Secretary of State, to extend special protection from insolvency law to organisations clearing certain non-investment contracts.

447.     Chapter II provides for competition scrutiny of recognised bodies. This places a duty on the DGFT, and gives him powers, to investigate and report on any significant anti-competitive effect of these bodies' rules, guidance and practices, or any abuse of a dominant market position. It allows the Treasury, on receipt of such a report, to direct, through the Authority, that appropriate changes are made to such rules, guidance or practices, if they are satisfied either that the anti-competitive effect is greater than is necessary to achieve various permitted purposes, or that a dominant position is being abused. Chapter III disapplies the general domestic competition law as it affects the matters covered by the Bill regime. Chapter IV contains definitions of key terms.

Chapter I: Exemption

Clause 256: Exemption for recognised investment exchanges and clearing houses

448.     Subsection (1) defines what is meant by a recognised investment exchange and a recognised clearing house.

449.     Subsections (2) and (3) set out the scope of the exemption for recognised bodies from the need to be authorised for carrying on regulated activities.

Clause 257: Qualification for recognition

450.     Subsection (1) allows the Treasury to set recognition requirements by regulations. Recognition requirements are the requirements which must be satisfied by an exchange or clearing house in order both to become recognised, and to remain recognised. In February 1999, the Treasury published draft regulations for public consultation (Financial Services and Markets Bill: Draft Recognition Requirements for Investment Exchanges and Clearing Houses).

451.     Subsection (2) allows the Secretary of State, jointly with the Treasury, to make additional recognition requirements in relation to those investment exchanges and clearing houses which enter into "market contracts". Market contracts are defined in Subsection (3) by reference to Part VII of the Companies Act 1989. Market contracts in this context are those entered into by the exchange or clearing house in connection with the provision of clearing services and under which it is therefore exposed to the risk of a default.

Clause 258: Application by an investment exchange

452.     This clause allows an organisation to apply for recognition as an investment exchange and sets out the information that the applicant must send to the Authority.

Clause 259: Application by a clearing house

453.     This clause allows an organisation to apply for recognition as a clearing house and sets out the information that the applicant must send to the Authority.

Clause 260: Applications: supplementary

454.     This clause allows the Authority to seek additional information, in whatever form it requires, in respect of any application for recognition. It also allows the Authority to require verification of that information.

Clause 261: Recognition orders

455.     This clause allows the Authority to make a recognition order if it is satisfied that the applicant meets the recognition requirements. The Authority is not obliged to make a recognition order in this circumstance and subsection (3) allows the Authority to take any information into account, and not just information concerning the recognition requirements, when deciding whether to grant recognition.

456.     Subsection (2) requires the Treasury to give their approval before the making of a recognition order. The Treasury may not do this (under clause 273) unless they are satisfied that the rules, guidance and arrangements of the investment exchange or clearing house are not unjustifiably anti-competitive.

457.     Subsection (5) requires the Authority to notify an applicant of a refusal to grant recognition, giving reasons for the refusal and giving an opportunity to make representations. This follows the procedure for revocation of recognition in clause 269. Subsection (6) provides that these procedures do not apply where the Treasury have refused approval for recognition on competition grounds under clause 273.

Clause 262: Liability in relation to recognised body's regulatory functions

458.     This clause provides investment exchanges and clearing houses with immunity against legal action by their members for damages in respect of the recognised body's regulatory functions, except where it can be shown that the act or omission complained of was in bad faith.

Clause 263: Overseas investment exchanges and clearing houses

459.     This clause modifies the application procedures and requirements where the applicant concerned is an overseas investment exchange or clearing house.

460.     Subsection (2) provides that the recognition requirements for overseas applicants are not those set out in the regulations made by the Treasury under clause 257. Instead the applicant must show that it is subject to equivalent requirements and adequate supervision in its home territory. There must also be in place adequate arrangements for the body and its home territory regulators to cooperate with the Authority.

461.     Subsection (3) makes a number of consequential amendments to this part which are necessary because of the substitution of the requirements in subsection (2) for the recognition requirements which apply to domestic exchanges and clearing houses.

Clause 264: Notification requirements

462.     Subsections (1) to (4) allow the Authority to make rules requiring a recognised body to give it notice of, and information about, specified events or information about the recognised body which the Authority reasonably requires to carry out its functions. The Authority can also specify when, and in what form, the information should be provided.

463.     Subsections (5) to (8) place a duty on the recognised body to give the Authority immediate notice of new rules and guidance, or of changes to existing rules and guidance. The recognised body must attach a statement to any such notice stating whether the change is likely to have any effect on competition. Recognised bodies are also required to notify the Authority of changes to their clearing arrangements. Subsection (9) provides that these duties do not apply to recognised overseas bodies. They are placed under different obligations under clause 266.

Clause 265: Modification or waiver of rules

464.     This clause gives the Authority power to waive or modify the notification rules it can make under clause 264, at the request of the recognised body or with their consent. Subsection (3) sets out the circumstances in which the Authority may do this.

Clause 266: Notification: overseas investment exchanges and overseas clearing houses

465.     This clause requires overseas investment exchanges and clearing houses to produce an annual report giving details of any events which have occurred over the year which may have an effect on competition, or which might affect the Authority's assessment of whether the equivalence test is satisfied. The Authority can also make rules requiring that additional information should be included in the report.

Clause 267: Authority's power to give directions

466.     This clause allows the Authority to direct a recognised body which has failed to satisfy the recognition criteria, or has failed to comply with other obligations under the Bill (for example those in this Part) to take steps to remedy that failure. This is a new power which has been introduced to give the Authority a remedy to deal with problems which are not so serious as to merit withdrawal of recognition from the body concerned.

Clause 268: Revoking recognition

467.     This clause allows the Authority to revoke the recognition of a body which no longer wishes to remain recognised, or which no longer meets the recognition criteria or which has failed to comply with other obligations under the Bill.

Clause 269: Directions and revocation: procedure

468.     This clause sets out the procedure the Authority must follow when it proposes to give a direction or make a revocation order. This includes giving the recognised body, its members and third parties who might be affected the right to make written representations. Subsection (7) allows the Authority to give a direction without following these procedures if it considers that it is essential to do so and subsection (9) provides that these procedures do not apply where the Treasury have given a remedial direction to the Authority on competition grounds.

Clause 270: Complaints about recognised bodies

469.     This clause provides that the Authority must establish a procedure for the investigation of complaints against recognised bodies where the complaint is relevant to the question of whether the body should remain recognised or not.

Clause 271: Supervision of certain contracts

470.     This clause allows the Treasury, acting jointly with the Secretary of State, to make regulations which extend the provisions of Part VII of the Companies Act 1989, with any appropriate modifications, to certain non-investment contracts. Part VII of the Companies Act 1989 disapplies various provisions of insolvency law for market contracts in order to protect against systemic risk in the financial markets.

471.     Subsection (2) and (3) set out what kind of contracts can be covered by these regulations. There are two criteria:

• first, the contracts must be settled by someone who is on a list maintained by the Authority for the purposes of this section. The Treasury, under subsection (4), have to approve the conditions set by the Authority for admission to this list and the arrangements for admission to and removal from the list;

• second, the Treasury and the Secretary of State have to be satisfied that it is appropriate for the Authority to supervise the settlement arrangements for these non-investment contracts. In coming to a view, the Treasury and Secretary of State must have regard to the extent to which the contracts are dealt in by persons supervised by the Authority.

472.     Subsection (10) allows the Treasury and the Secretary of State, in making regulations under this clause, to apply any of the provisions of this Bill to the person settling these contracts. Without this power it would not be possible for the Authority to regulate such persons on a statutory basis, since they would be clearing non-investment contracts and so would not require authorisation or exemption.

Chapter II: Competition Scrutiny

Clause 272: Interpretation

473.     This clause describes the "regulatory provisions" (that is the rules, guidance, arrangements and particulars), practices and trading practices which are to be scrutinised under this Part to assess whether they have a significant anti-competitive effect as defined in this clause. "Trading practices" are the practices of members of the body which they are required to adopt as a result of their membership of the body concerned.

474.     Subsection (3) lists the "permitted purposes" referred to in clauses 273 and 274.

Clause 273: Examination of rules and guidance

475.     This clause provides that an investment exchange or clearing house cannot be recognised by the Authority unless the Treasury, following a report from the DGFT, has given their approval. Approval must be withheld if the Treasury consider that the applicant's proposed regulatory provisions:

• will have an anti-competitive effect greater than is necessary to achieve a permitted purpose; or

• may bring about the abuse of a dominant market position, either by the applicant institution, or by its members. (Such abuse may occur where the person is dominant in a particular market as a result of having a large market share.)

476.     Subsection (4) provides that if the DGFT is of the opinion that the regulatory provisions will not have a significant anti-competitive effect, then the Treasury may not withhold approval of the application.

Clause 274: Continuing scrutiny

477.     This clause gives the Treasury the power to give a remedial direction following an adverse report about a recognised body by the DGFT. The Treasury may give a direction only if they conclude that the body's regulatory provisions or practices or the trading practices of its members

• have an anti-competitive effect greater than is necessary to achieve a permitted purpose, or

• amount to an abuse of a dominant market position, either by the applicant institution, or by its members.

478.     Such a direction may take one of three forms. It may require the Authority

• to withdraw recognition from the body concerned;

• to direct the body to make changes to ensure that any anti-competitive effect is no greater than is necessary for the permitted purpose; or

• to prevent the person concerned from continuing with behaviour which amounts to an abuse of a dominant position.

Clause 275: Initial report by Director General of Fair Trading

479.     This clause requires the Authority to send to the DGFT and to the Treasury all the regulatory provisions or other information received in support of an application for recognition. The DGFT must then take a view and inform the Treasury whether, and if so why, any of these provisions produce a significant anti-competitive effect, or amount to an abuse of a dominant position.

Clause 276: Further reports by Director General of Fair Trading

480.     This clause requires the DGFT to keep all recognised investment exchanges and clearing houses under continuing competition scrutiny. To facilitate this, it provides that the Authority must copy to the DGFT and the Treasury any new or amended rules or guidance which it receives from a regulated body under clause 264(5), together with the statements provided under clause 264(8) as to the effect these changes might have on competition. If, at any time, the DGFT forms the view that any regulatory provision, practice or trading practice has a significant anti-competitive effect, or results in an abuse of a dominant position, then he must report this to the Treasury.

481.     Subsection (5) provides that if the DGFT concludes that a new regulatory provision notified to him will not have a significant anti-competitive effect, or will not amount to an abuse, then he has discretion as to whether to report this to the Treasury.

Clause 277: Reports: supplementary

482.     Subsections (1) and (2) provide that, if the DGFT does make a report to the Treasury under clause 276, his report must include the reasons for his conclusion.

483.     Subsection (3) provides that the DGFT has discretion whether or not to publish any report he makes under clause 276(5), whereas subsection (4) provides that the Treasury must publish any report which it receives from the DGFT which says that there is a significant anti-competitive effect or an abuse of a dominant position. In each of these cases, subsection (5) requires that any confidential information relating to a person other than the investment exchange or clearing house in question should, so far as practicable, be removed from the report before publication.

Clause 278: Investigations by the Director General of Fair Trading

484.     This clause confers powers on the DGFT to enable him to carry out his functions under clauses 275 and 276. The DGFT will be able to request relevant documents from any person, and to request relevant information from any business. Subsection (4) makes it clear that these powers do not extend to communications which are legally privileged.

485.     Subsections (5) and (6) provide that if a person fails to produce the information or documents required, then the DGFT may report the matter to the court. If the court is satisfied that there was no reasonable excuse for this failure, the person may be punished as if he had been guilty of contempt of court.

Clause 279: Procedure on exercise of certain powers by the Treasury

486.     This clause provides that if the Treasury have received an adverse report from the DGFT, whether at the application stage or later, and are considering taking action in response to this, then they must invite the body concerned, and any other interested parties, to make representations prior to their taking a decision not to approve recognition, or to give the Authority a remedial direction. Representations may be made in relation to both the contents of the DGFT's report, and to the steps, if any, that the Treasury might take in response.

Chapter III: Exclusion from other UK competition law

Clause 280: Monopoly situations etc

487.     This makes clear that in carrying out investigations into possible complex monopoly situations under the Fair Trading Act 1973, the Competition Commission must not take into account the effects of any regulatory provisions or practices of recognised investment exchanges or clearing houses, or trading practices of their members, nor of any action taken in compliance with these.

Clause 281: The Chapter I prohibition

488.     This clause makes clear that the prohibition of agreements preventing, restricting or distorting competition within the United Kingdom in Chapter I of the Competition Act 1998 does not apply to the constitution of a recognised investment exchange or clearing house or to a body which has applied for recognition; or to the regulatory provisions of a recognised body; or to a decision or practice of a recognised body, in respect of its regulatory functions; or to the trading practices of a member of a recognised body.

Clause 282: The Chapter II prohibition

489.     This clause makes clear that the prohibition of abuse of a dominant position in a market which may affect trade in the United Kingdom in Chapter II of the Competition Bill, does not apply to the regulatory provisions or practices of a recognised investment exchange or clearing house, or to the trading practices or conduct of its members, to the extent that these are required by the body's regulatory provisions.

PART XVIII: LLOYD'S

490.     This Part of the Bill makes a number of provisions which supplement other parts of the Bill to bring the Society of Lloyd's (the "Society") within the general regulatory framework. These provisions are needed to reflect the unique legal status of the Society and its members, and the functions of the Council of Lloyd's (the "Council"), the governing body of the Society, under the Lloyd's Acts 1871-1982, in relation to the Lloyd's community.

491.     Lloyd's is currently regulated for solvency purposes by the Authority in accordance with the arrangements under Part IV of the ICA 1982. The FS Act 1986 provides an exemption for Lloyd's and underwriting agents as respects investment business carried on by them in connection with or for the purposes of insurance business at Lloyd's. For most purposes, regulation of the Society has been undertaken by the Council.

492.     The Bill gives the Authority considerable discretion as to how it discharges its obligations for the regulation of Lloyd's. In December 1998, it published its proposals for public consultation (The future regulation of Lloyd's; CP16). The Authority expects to publish a feedback statement on that exercise during summer 1999.

493.     The external regulation of the Lloyd's community by the Authority is achieved by a number of different provisions in the Bill. By virtue of this Part, the Society - a body corporate - is to be authorised to carry on certain regulated activities. The permission will be defined by the Authority, as if it had been granted under Part IV. Primarily, the permission will cover making arrangements which enable members to carry out contracts of insurance. The activities of managing and members' agents (or "underwriting agents"), will become regulated activities for the purposes of the Bill, and so underwriting agents will need to be authorised and have relevant permission under Parts III and IV. Having been authorised, the Society and agents will be subject to the full range of the Authority's powers under the Bill, including its rules and its powers of investigation and discipline and, ultimately, the power to withdraw authorisation, as is the case with other authorised persons under the general provisions of the Bill.

494.     Members of Lloyd's will benefit from an exemption from the need to be authorised in relation to their insurance business at Lloyd's. They will, nonetheless, be subject to regulatory arrangements as directed by the Authority under powers contained in this Part, and subject to the powers of the Council. As a minimum, the Authority will need to require the members to meet the solvency requirements laid down under the relevant EC Directives. A member of Lloyd's would, however, need to be authorised to carry on any other regulated activity, for example advising on investments.

Clause 284: Authority's general duty

495.     The current intention is that Lloyd's should not be subject to full regulation by the Authority when the legislation is enacted. Certain regulatory functions will be left with the Council. However, the Authority will at any time be able to take a greater degree of direct responsibility for regulation if it considers it appropriate and this clause, therefore, places a duty on the Authority to keep matters under review.

Clause 285: The Society: authorisation and permission

496.     This clause makes the Society an authorised person, without it needing to submit an application. This is needed because, unlike most other current businesses, Lloyd's does not have an authorisation from an existing regulator that can be grandfathered.

497.     Subsection (3) limits the activities for which the Society has permission, at the time it becomes authorised, to arranging deals in insurance contracts, syndicate participation and connected activities. However, subsection (4) gives the Authority a power, where it considers it appropriate, to limit the scope of the permission, at the time the authorisation comes into force, or at any time thereafter. Lloyd's would apply for an extension of that permission in accordance with Part IV.

Clause 286: Direction by Authority

498.     This clause confers on the Authority power to give directions in relation to "insurance market activities". This power can be used in relation to a member of Lloyd's, or members taken together, though they will not, at least at the outset, be authorised persons. Directions under this clause can specify the extent to which the "core provisions" of the Bill, as set out in clause 287, will apply to them and would impose requirements directly on the members which the Authority will be able monitor and enforce. The Authority could, for example, apply to members general rules requiring persons carrying out contracts of insurance to appoint an actuary to assess the extent of their liabilities. It could also require members to be authorised if it considers that appropriate.

Clause 287: The core provisions

499.     The core provisions which the FSA may decide to apply to members of Lloyd's under clause 286 relate to:

• the performance of regulated activities

• rules and guidance

• information gathering and investigations

• control over authorised persons

• auditors and actuaries

• notices

Clause 288: Exercise of powers through the Council

500.     This clause gives the Authority an alternative mechanism to its power of direction under clause 286. Instead of directing the members of Lloyd's themselves, the Authority can direct the Society of Lloyd's, acting through its Council, to impose obligations on its members. The Council of Lloyd's can then implement any requirements using its byelaw making powers under the Lloyd's Act 1982. It would, therefore, be open to the Authority to set solvency requirements for Lloyd's members, perhaps specifying in a direction only the high level requirements required by the EC Directives; the Council would then make byelaws specifying the detailed arrangements in accordance with the requirements of the direction. The Council would then be responsible for enforcing its byelaws and for demonstrating to the Authority that the relevant requirements had been met.

501.     Subsection (2) also allows the Authority to use this power to direct the Council in respect of managing and members' agents, rather than exercising powers against them directly as authorised persons.

502.     Subsection (3) makes it clear that if the Authority chooses to give directions in this way, it is not precluded from using its other regulatory powers under the Bill.