PART XXVII: INTERPRETATION

609.     This Part defines a number of the terms used in the Bill.

Clause 353: Carrying on activities in the United Kingdom

610.     This clause deals with the territorial scope of the authorisation requirement, and establishes its so-called "outward"?application, whereby persons based in the United Kingdom who carry on regulated activities overseas need to be regulated in the United Kingdom. The clause reflects the provisions of the EC directives in determining when a person is to be considered to be carrying on regulated activities in the United Kingdom, and sets out three broad cases:

• First, all persons who have their head or registered office in the United Kingdom, but who only carry on regulated activities in another EEA State, will need to be authorised in the United Kingdom;

• Second, all persons who have their head or registered office in the United Kingdom, but who only carry on regulated activities in non-EEA states, will need to be authorised if they direct the day-to-day management of the activities from an establishment in the United Kingdom; and

• Third, even if a person does not have a head or registered office in the United Kingdom and is not dealing with United Kingdom customers, he will still need to be authorised if the activity is carried on from an establishment maintained by him in the United Kingdom.

611.     These provisions complement the so-called "inward" territorial scope of the Bill, whereby overseas persons who carry on regulated activities in the United Kingdom need to be regulated unless an exemption or exclusion applies. The "inward"?scope of the Bill is implicit in the terms of clause 17, but it may also be further amplified or restricted by the order to be made under clause 20. This was addressed in the draft order published by the Treasury for consultation in February 1999 (Financial Services and Markets Bill: Regulated Activities - A Consultation Document).

Clause 354: Parent and subsidiary undertaking

612.     The definitions of parent and subsidiary undertaking for the purposes of the Bill are consistent with the definitions used in the single market directives.

613.     Although individuals are not themselves "undertakings", it is possible for an individual to have a relationship with an undertaking which would be classified as a parent/subsidiary relationship if they were an undertaking. Subsection (2) clarifies that for the purposes of the Bill such an individual is to be included as a parent undertaking. The undertaking with whom the individual has a parent/subsidiary relationship is to be included as a subsidiary undertaking.

614.     Subsection (2) also extends the definitions in relation to EEA bodies to cover any undertaking which would be treated as a parent or subsidiary undertaking under the law of the EEA state where the body is established.

PART XXVIII: SUPPLEMENTAL

615.     This Part contains various supplemental provisions. For example, provisions as to Parliamentary control over statutory instruments and provisions enabling the Treasury to make transitional provisions and consequential amendments. It also determines the name by which the Bill may be cited.

Clause 361: Consequential and supplementary provision

616.     This clause gives the Treasury a power, exercisable by order, to make incidental, consequential, transitional or supplemental provisions. The provisions which may be made include ones which appear to the Treasury to be necessary or expedient in order to give full effect to the Bill.

Clause 363: Parliamentary control of statutory instruments

617.     All of the Treasury's powers to make orders under the Bill are subject to the negative resolution procedure with the following exceptions:

• the power initially to set the definition, or to extend the scope of, regulated activities under clause 20(1) is subject to the affirmative resolution;

• the power initially to specify circumstances under clause 19(3) and (5) in which persons will be exempt from the financial promotion prohibition is subject to the affirmative resolution procedure, as is any order which has the effect of removing or restricting any exemptions under that order;

• the power to set the scope of price stabilising rules under clause 115(4) is subject to the affirmative resolution procedure;

• the powers to vary, remove from or add to the classes of notifiable influence under clause 161(a) and (d) are subject to the affirmative resolution procedure;

• the power for the establishment and regulation of collective investment schemes in Great Britain taking the form of oeics under clause 233 is subject to the affirmative resolution procedure;

• the power under paragraph 1 of Schedule 7 to allow any exercisable function conferred on the Competent Authority to be transferred in order for another person to exercise that function is subject to the affirmative resolution procedure;

• the power to appoint a day for the commencement of particular provisions of the Bill under clause 365(2) is not subject to Parliamentary control.

SCHEDULE 1: THE FINANCIAL SERVICES AUTHORITY

618.     Part I of this Schedule sets out requirements for the Authority's constitution and imposes certain obligations on it. Part II deals with the status of the Authority. Part III provides powers for the Authority to make fees rules other matters. It also gives the Authority and those who work for it limited immunity from suit.

Part I: General

Paragraph 2: Constitution

619.     This requires the Authority to have a chairman and a governing body which includes the chairman. Both the chairman and the members of the governing body must be appointed and be liable to removal from office by the Treasury.

620.     Subparagraph (4) provides for the acts of the Authority still to be valid irrespective of a vacancy in the office of chairman or any defect in an appointment to the governing body. This is to prevent the Authority's rules, and any action it takes in pursuit of its functions, being rendered invalid purely as a result of such a vacancy or defect.

Paragraph 3: Non-executive members of the governing body

621.     This provides that the Authority's governing body must include a majority of non-executive members and requires there to be a committee of the non-executive members of the governing body, the chairman of which is to be appointed by the Treasury.

Paragraph 4: Functions of the non-executive committee

622.     The non-executive committee has three specified functions. These are:

• keeping under review the efficiency and economy with which the Authority uses its resources;

• keeping under review its internal financial controls; and

• determining the remuneration of the chairman and the executive members of the governing body.

623.     The committee's function of keeping the Authority's economic and efficient use of its resources under review must be undertaken by the whole committee. However, the function of reviewing internal financial controls and determining the remuneration of the chairman and executive members of the governing body may be performed by a sub-committee.

Paragraph 5: Arrangements for discharging functions

624.     This allows the Authority's functions, with the exception of its legislative functions, to be delegated below the level of the governing body. Legislative functions include rule-making, giving guidance, issuing statements of principle or policy and issuing codes.

Paragraph 6: Monitoring and enforcement

625.     The paragraph requires the Authority to maintain arrangements for monitoring compliance with and enforcing requirements imposed by or under the Bill. The Authority may arrange for whom monitoring, but not enforcement, to be delegated to another body or person which it believes is competent, which might include, for example, a professional body. If it does so, the Authority remains responsible for ensuring that proper monitoring arrangements are in place.

Paragraph 7: Arrangements for the investigation of complaints

626.     The Authority is required to put in place a scheme, the "complaints scheme", for the independent investigation of complaints made against it. These might typically be complaints about the Authority's conduct towards an authorised person, the personal conduct of its staff or the way in which the Authority has dealt with a complaint about an authorised person. This would include granting a degree of tenure in office, a matter enhanced by the requirement to obtain the Treasury's approval of any dismissal.

627.     Subparagraphs (1) and (2) require the Authority to appoint an independent investigator whose appointment and removal will be subject to the approval of the Treasury.

628.     Subparagraph (3) requires the investigator be appointed on terms and conditions designed to ensure his independence from the Authority.

629.     Subparagraphs (4) to (6) provide for the Authority to consult on its proposals for the independent investigation of complaints.

630.     Subparagraph (6) provides that the Authority is required to publish details of the complaints arrangements themselves and the powers of the independent investigator.

Paragraph 8: Investigation of complaints

631.     This paragraph is concerned with the operation of the complaints scheme. The Authority may decide not to investigate a complaint in accordance with the scheme where it considers the complaint would more appropriately be dealt with in another way. However, the Authority is required to ensure that the independent investigator has the means at his disposal to conduct a full investigation of complaints referred to him and the investigator may choose to investigate complaints which the Authority has, itself, declined to pursue.

632.     Subparagraph (2) enables the investigator to publish his report if he considers that it ought to be brought to the attention of the public. If a report is critical of the Authority, the Authority must inform the investigator and the complainant of the steps it proposes to take in response, and the investigator may require the Authority to publish all or part of that response.

Paragraph 9: Records

633.     The Authority must have satisfactory arrangements for recording its decisions and safe-keeping those records which it considers should be preserved.

Paragraph 10: Annual report

634.     This requires the Authority to report annually to the Treasury on the discharge of its functions and, in particular, the extent to which the statutory objectives have been met and other matters as directed by the Treasury, and requires the Treasury to lay the report before Parliament.

635.     Subparagraph (2) requires that the report of the Authority must be accompanied by a report by the non-executive members of the governing body and allows the Treasury to direct that any other reports or information, including material prepared by third parties such as an auditor's report, also accompany it.

636.     Subparagraphs (4) - (6) allow the Treasury to direct the Authority to comply with provisions of the Companies Act which would otherwise not apply to it dealing with accounts and their audit. The direction may modify provisions under that Act in their application to the Authority. This is to ensure that the Authority is required to prepare audited accounts which are open to inspection irrespective of any exemptions which are made under that Act which would otherwise apply to the Authority.

Paragraphs 11: Annual public meeting

637.     The Authority must hold an annual public meeting to consider the most recent report of the Authority. The meeting should allow for a general discussion of the contents of the annual report and give those attending an opportunity to put questions to the Authority on the discharge of its functions. Paragraph 12 requires the Authority to publish a report of the proceedings of the meeting.

Part II: Status

Paragraph 13: Status

638.     This has the effect that the Authority does not act on behalf of the Crown and that none of its staff are Crown servants.

Paragraph 14: Exemption from requirement of "limited" in Authority's name

639.     The Authority is a company limited by guarantee. This paragraph exempts the Authority from having to include "limited" in its name, as would normally be required under the Companies Act. It also provides for the Secretary of State to remove that exemption if it is inappropriate for it to continue.

Part III: Fees

Paragraph 16: Penalties

640.     This paragraph provides that in determining its policy with regard to the level of penalties to impose under powers in the Bill, the Authority may take no account of its expenses or anticipated expenses. It clarifies that there is to be no link or incentive to fund the Authority by levying penalties on the regulated community.

641.     Subparagraph (2) requires the Authority to operate a scheme to ensure that penalties paid to the Authority are to be applied for the benefit of authorised persons. The Authority is required to consult on these arrangements.

Paragraph 17: Fees

642.     This provides for a rule-making power for the Authority to raise fees for what it does in the discharge of its functions under the Bill. It may use the fees to meet its expenses, to repay borrowing incurred in preparing for the assumption of functions under the Bill and by virtue of the Bank of England Act 1998 and to maintain adequate reserves.

642.     The Authority may not take into account any penalties which it has received, or expects to receive, in setting the fees under the Bill.

Paragraph 18: Services for which fees may not be charged

644.     Fees may not be charged when a person gives notice of their intention to exercise passporting rights under Schedule 3 or to persons approved under the employed persons regime in Part V.

Paragraph 19: Exemption from liability in damages

645.     This paragraph provides immunity for the Authority 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. Similar immunity is granted to the independent investigator appointed under paragraph 7, and by clause 263, it is also granted to recognised investment exchanges and clearing houses in respect of liabilities to their members.

Paragraph 20: Disqualification for membership of House of Commons

646.     Serving members of the Authority's board are disqualified from membership of the House of Commons. Paragraph 19 makes similar provision in respect of the Northern Ireland Assembly. Provision in respect of the Scottish Parliament and the Welsh Assembly are made respectively in the Scotland Act 1998 and the Government of Wales Act 1998.

SCHEDULE 2: REGULATED ACTIVITIES

647.     This Schedule does not define what activities are regulated under the Bill. The regulated activities will be those activities which are prescribed using the power conferred by clause 20. The Schedule sets out a list of "activities" and "investments" which, together, indicate the broad scope of activities which are potentially regulated under the Bill. The scope of the Bill is not strictly limited by the Schedule, but rather by the overall object and purpose of the Bill. However, the general nature of the activities set out in the Schedule serves as a limitation on the extent of the Treasury's power to bring further activities within the scope of the Bill.

648.     It is within this overall object and purpose that the power under clause 20 to prescribe the regulated activities operates. Orders made under clause 20 will be an exhaustive statement of the regulated activities.

649.     The Schedule is in three parts. The first Part describes certain activities which when carried on in relation to "investments" may be regulated. The second describes the "investments". The third makes further provisions as to the scope of the order-making power under clause 20.

650.     The activities, which in each case include offering or agreeing to carry on the activity as well as actually carrying it out, are:

• Dealing in investments, which includes buying, selling, subscribing for or underwriting investments. It covers a person acting as either principal or agent. In relation to insurance, dealing also includes carrying out a contract of insurance.

• Arranging deals in investments on behalf of others, or making arrangements which enable other persons to deal.

• Accepting deposits.

• Safeguarding or administering assets for another person, or arranging for their assets to be safeguarded or administered.

• Managing assets on behalf of another person, where those assets are or may include investments.

• Giving advice on the buying, selling, subscribing for or underwriting of an investment or about the exercise of any right conferred by an investment to buy or sell, subscribe or otherwise convert an investment (examples of conversions on which advice might be given would include a corporate bond which, in certain circumstances, could be converted into, or redeemed in return for a share of the equity in the company concerned).

• Establishing, operating or winding up a collective investment scheme, including acting as trustee, or depositary or sole director of the scheme.

• Sending, or causing to be sent, instructions by means of a computer based system as to the transfer of investments. This element would cover computer-based clearing systems such as that operated by CREST.

651.     Part II of the Schedule is an indicative list of the investments relevant to the question whether an activity could be brought within regulation under clause 20. These are:

• Stocks and shares in companies incorporated in the UK or elsewhere, or in unincorporated bodies constituted under the law of any territory.

• Instruments creating or acknowledging indebtedness, such as loan stock, certificates of deposit, debentures and bonds, including debt issued by Governments, local authorities or international organizations of which the UK or any other EU member State is a member, such as the United Nations or the OECD.

• Instruments, such as warrants, conferring a right to subscribe in other types of investment (including investments which are not yet in existence or which, like ordinary shares in a company, are not individually identifiable).

• Instruments which confer contractual or property rights to underlying investments and which can be traded or transferred without reference to the party holding the underlying investments. Explicit inclusion of this element reflects the established practice whereby a public issue of securities might be made by issuing the securities themselves to a third party, which would issue certificates (which may confer only a proportionate property right to a security) to the subscribing public, which are then tradeable as if they were the underlying securities themselves.

• Units in, or securities issued by, collective investment schemes and open-ended investment companies.

• Options to buy or sell property.

• Futures, which are contractual rights to buy or sell a commodity or property at a future date and at a price agreed at the time that the contract is made (though the price might still be contingent on other factors). This includes both bilateral "forward" contracts as well as standardized futures contracts traded on a futures exchange such as London International Financial Futures Exchange ("LIFFE").

• Contracts for differences and other contracts whose value depends on fluctuations in the value of some factor such as property or index, eg interest rate swaps.

• Contracts of insurance.

• Membership and potential membership of a Lloyd's syndicate and the underwriting capacity of such a syndicate.

• Deposits, that is contracts under which money is paid other than in return for goods or services and on the basis that it will be repaid, with or without interest, on demand or at some specified times or circumstances.

• Loans secured on land, such as mortgages.

• Any other right or interest in any other investment.

652.     Part III makes provision as to the scope of the order-making power under clause 20. The first order to be made under that clause must be subject to an affirmative resolution procedure - that is, it must be laid before Parliament after being made, and it will cease to have effect if it is not approved by a resolution of each House within 28 days of being made. The same procedure will apply where an order under clause 20 has the effect of extending the scope of activities to be regulated under the Bill.

SCHEDULE 3: EXERCISE OF PASSPORT RIGHTS BY EEA FIRMS

653.     This Schedule gives effect in UK law to the single markets in banking, investment services and insurance as provided for by the relevant directives, the 2nd Banking Coordination Directive, the Investment Services Directive and the 3rd Life and Non-Life Directives.

654.     Under the directives, credit institutions (a term embracing both banks and building societies), investment firms and insurance companies (which includes friendly societies) with head offices in any member State of the European Economic Area (EEA), that is the 15 States of the EU plus Norway, Iceland and Liechtenstein, have rights to carry on certain activities in other member States by virtue of their "home" State authorisation. These rights are often referred to as their "passport" and cover a range of financial services (some of which may only be conducted by firms which are authorised under these categories), which include deposit-taking, writing and carrying out life or general insurance.

655.     Under the 2nd Banking Coordination Directive, subsidiaries of credit institutions which meet certain criteria set out in article 18, paragraph 2 of that directive may also have passport rights, and are therefore included in the definitions of EEA firms and UK firms in this Schedule.

656.     The authorities in the member States, other than the home State, where these passporters are carrying on business under their passports (referred to as the host State authorities) may only impose limited regulations on the conduct of business under the passport, in accordance with the established principle of the "general good". This requires those rules to be proportionate, non-discriminatory and non-duplicative of home State rules with equivalent effect. Conduct of business rules generally come within the host State remit. The home State retains full responsibility for authorising the passporting firms, conducting their overall prudential supervision (ie supervising their financial soundness and ensuring that they and their controllers are fit and proper to conduct such business).

657.     The passport may be exercised in order to establish a permanent place of business, referred to in the directives as a "branch" irrespective of the number of sites involved, or in order to provide cross-border services without a permanent place of business. Indeed the passport may be exercised in order to provide services, perhaps different services, by these two means in parallel.

658.     The business activities covered by the passport do not necessarily correspond exactly to the activities which are regulated under the law of any member State, although certain activities, such as deposit-taking, insurance business or the core investment services defined under the Investment Services Directive, must be regulated, and will all be regulated activities under the order made under clause 19. There are therefore activities for which firms may have rights to conduct in other member States by virtue of the passport, but which are not necessarily central to the definition of those firms which qualify for the passport. There may equally be activities which are covered by the passport, but which are not regulated activities in every member State.

659.     A good example is lending. Lending, in conjunction with deposit-taking, is a defining characteristic of what is a credit institution and therefore of who may qualify for passport rights under the 2nd Banking Coordination Directive. However, the directives do not require that lending should be regulated, though they do require the regulation of deposit-taking. The passport under that directive therefore not only covers lending, but qualification for that passport depends on it being part of the business of the firm. However, lending is not covered by the other directives (indeed insurance companies are prohibited from carrying on the business of lending unless it is ancillary to their insurance business) and it does not need to be regulated by member States. It is not currently a regulated activity in the UK, apart from lending which falls under the CCA 1974.

660.     This Schedule, in conjunction with clause 27, therefore defines the firms from other EEA member States, which may qualify for authorisation via this route, and the procedures which, in accordance with the various directives, must be followed (see paragraphs 12 to 14 in Part II).

661.     Part III of the Schedule gives effect to the outward passport entitlements of UK credit institutions, investment firms and insurance companies. For the reasons referred to above, those qualifying for the passport form a narrower class than all persons who have their head office in the UK and who are authorised by virtue of having a Part IV permission. For example, not all banks and building societies are necessarily credit institutions, though the vast majority are. Equally the definition of an investment firm for the purposes of the Investment Services Directive is restricted to a firm which is authorised to carry on the business of providing for third parties the core services defined under that directive.

662.     Paragraphs 18 and 19 set out the procedure and conditions on which the Authority may grant the passport to those UK firms who qualify.

663.     The Schedule also gives the Treasury powers to make regulations governing the continuing regulation of both EEA firms and UK firms.

SCHEDULE 4: TREATY RIGHTS

664.     This Schedule gives effect in UK law to the rights of establishment and to provide services which belong to persons established in the other member States of the EEA (the EU plus Norway, Iceland and Liechtenstein) which go beyond those which are covered by the single market directives in banking, investment services and insurance (see Schedule 3).

665.     These rights allow persons who are authorised under the law of one member State to carry on an activity in the other member States so long as the relevant law of the home State provides equivalent protection to that of the host State and meets any EU minimum requirements applicable in that area of law. These rights are given precise effect for many financial services firms through the single market directives, and the member State laws giving national effect to them. However, as explained in relation to Schedule 3, the directives do not cover the full range of financial services or financial service providers. It is necessary, therefore, to provide an equivalent mechanism to permit persons from other EU member States to exercise their Treaty rights in the absence of formal directive passporting arrangements. The provisions in this Schedule, in conjunction with clause 18, provide for that mechanism.

666.     The Schedule does not seek to define the extent of Treaty rights, which are in any event the subject of extensive and developing case law in the EU, but sets the conditions that must be met for authorisation by this route in terms of the general principles described above. It requires home State confirmation of a firm's home State authorisation and provides for the Treasury to take the decision as to whether the particular laws of a particular member State provide the equivalent protection required.

667.     The firm is also required to give notice of their intention to exercise their Treaty rights and to provide such information as the FSA may require. Failure to give proper notice is a criminal offence, unless all reasonable precautions have been taken to avoid the commission of the offence. It is also an offence knowingly or recklessly to provide false or misleading information.