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Session 1999-2000
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Financial Services And Markets Bill


 

These notes refer to the Financial Services and Markets Bill
as introduced in the House of Commons on 18th November 1999 [Bill 1]

Financial Services And Markets Bill


EXPLANATORY NOTES

INTRODUCTION

1.     These explanatory notes relate to the Financial Services and Markets Bill as amended in Standing Committee A in Session 1998-99 and re-introduced in the House of Commons on 18 November 1999. They have been prepared by HM Treasury in order to assist the reader of the Bill and to help inform debate on it. They do not form part of the Bill and have not been endorsed by Parliament.

2.     The notes need to be read in conjunction with the Bill. They are not, and are not meant to be, a comprehensive description of the Bill. So where a clause or part of a clause does not seem to require any explanation or comment, none is given.

SUMMARY

3.     The Bill provides the framework within which a single regulator for the financial services industry, the Financial Services Authority ("the Authority"), will operate. It equips the Authority with a full range of statutory powers and creates the Financial Services and Markets Tribunal ("the Tribunal"). The Bill also establishes the framework for single ombudsman and compensation schemes to provide further protection for consumers.

4.     The Bill makes provision, amongst other things, for:

  • the constitution and accountability of the Authority;

  • the definition of the scope of regulated activities;

  • the control of financial promotion;

  • powers of the Authority to authorise, regulate, investigate and discipline authorised persons;

  • the recognition of investment exchanges and clearing houses;

  • arrangements for the approval of controllers and performance of regulated activities;

  • regulation and marketing of collective investment schemes;

  • certain criminal offences;

  • powers to impose penalties for market abuse; and

  • the transfer to the Authority of registration functions in respect of building societies, friendly societies, industrial and provident societies and certain other mutual societies.

5.     An overview of the Bill is set out below. A detailed description of each Part and the clauses is contained in the commentary. Terms used are defined in the text. There is a glossary of certain defined terms which are used throughout these notes.

BACKGROUND

Financial Services Overview

6.     The UK financial services industry accounts for approximately 7 per cent of GDP, employing over 1 million people in the City of London and across the country.

7.     Businesses to be authorised and regulated under the Bill include:

  • Banks

  • Building societies

  • Insurance companies

  • Friendly societies

  • Credit unions

  • Lloyd's

  • Investment and pensions advisers

  • Stockbrokers

  • Professional firms offering certain types of investment services

  • Fund managers

  • Derivatives traders

Regulatory Framework

8.     Until now, regulation of financial services has been the responsibility of a range of different bodies:

  • the Authority (formerly the Securities and Investment Board);

  • the Self-Regulating Organisations ("SROs"): most recently the Personal Investment Authority, the Investment Management Regulatory Organisation and the Securities and Futures Authority;

  • the former Supervision and Surveillance Branch of the Bank of England;

  • the Building Societies Commission;

  • the Insurance Directorate of the Treasury;

  • the Friendly Societies Commission; and

  • the Registry of Friendly Societies.

9.     Since the Government announced its proposals to introduce legislation to reform the regulation of financial services in May 1997, steps have been taken to transfer responsibility for regulation to the Authority. Certain functions under the Banking Act 1987 ("Banking Act") have been transferred by the Bank of England Act 1998. In other cases, the Authority has entered into contracts with the relevant bodies to perform regulatory functions on their behalf. For example, the Treasury have contracted with the Authority for the performance of certain functions under the Insurance Companies Act 1982 ("ICA 1982"). Many relevant staff have become employees of the Authority in the meantime and relocated to the Authority's headquarters. This process of integration cannot be completed until the Bill is enacted.

10.     The Bill will broadly continue the regime for recognised investment exchanges and clearing houses under the Financial Services Act 1986 ("FS Act 1986"), although the Authority's powers under the Bill will be widened as compared with those under the current legislation. The Authority will have powers to regulate the Lloyd's insurance market, and powers of direction over the Council of Lloyd's, although the latter will retain its responsibilities under Lloyd's Acts for the superintendence and governance of the Society of Lloyd's. The recognised professional bodies regime under the FS Act 1986 will not continue. In future, professional firms (solicitors, accountants and actuaries) carrying on mainstream regulated activities under the Bill will be authorised and regulated directly by the Authority. However, the Government announced on 13 October 1999 certain other categories of professional firm may benefit from an exclusion from the scope of the Bill, subject to arms length oversight and certain powers of the FSA. Appropriate amendments will be introduced in due course. The professional bodies will retain their wider powers to regulate the professional activities of members of their respective professions.

11.     The Bill is intended to coordinate and modernise financial regulatory arrangements which are currently established under a number of different enactments:

  • the Credit Unions Act 1979

  • the Insurance Companies Act 1982

  • the Financial Services Act 1986

  • the Building Societies Act 1986

  • the Banking Act 1987

  • the Friendly Societies Act 1992

12.     Those enactments are generally supplemented by secondary legislation or rules. The relevant parts of that legislation, and rules and regulations made under it, will be substantially repealed when the Bill comes into force. Certain other enactments will also be repealed, or substantially repealed, including the Policyholders Protection Acts 1975-97, the Industrial Assurance Acts 1923-48 and the Insurance Brokers (Registration) Act 1977.

Consultation and scrutiny

13.     In July 1998, the Treasury published a paper entitled Financial Services and Markets Bill: A Consultation Document which explained its policy in detail and included a draft of the Bill. That consultation exercise attracted comments from over 220 firms and bodies interested in the regulation of financial services, including those representing consumers. The Treasury have since published the following papers:

  • Regulated Activities - A Consultation Document (February 1999) which sets out proposals for the scope of regulation, including a draft Order to be made under clause 20(5) of the Bill;

  • Draft Recognition Requirements for Investment Exchanges and Clearing Houses (February 1999) which sets out proposals as to requirements for the purposes of recognition under Part XVII;

  • Progress Report (March 1999) which sets out details of the Treasury's revised proposals for the Bill following the consultation exercise;

  • Financial Promotion - A Consultation Document (March 1999) which gives details of the proposed arrangements for the regulation under the Bill of the promotion of investments;

  • Memorandum to the Joint Committee - Additional Provisions Omitted from July 1998 Draft (April 1999) which includes four additional draft Parts which were not published in the July 1998 consultation document;

  • Market Abuse: Prescribed Markets (June 1999) which includes a draft Order under clause 95 designating the markets to which the arrangements under Part VII of the Bill will apply; and

  • Financial Promotion - Second Consultation Document: A New Approach for the Information Age (October 1999) which includes a draft Order to be made under clause 19 of the Bill.

14.     The draft Bill was subject to pre-legislative scrutiny prior to its introduction. The Treasury Committee published its third report of Session 1998-1999 on Financial Services Regulation in February 1999 (Financial Services Regulation, Volumes I and II; House of Commons 73 I - II). The Government's response was published in March 1999 (Financial Services Regulation: The Government's Response to the Third Report from the Committee of Session 1998-99; House of Commons 347).

15.     A Joint Committee of both Houses of Parliament was also established (pursuant to Standing Order number 137) to consider aspects of the draft Bill. That committee was also able to consider the Treasury's Progress Report published in March. The Joint Committee published its first report on 29 April 1999 (Draft Financial Services and Markets Bill: First Report; House of Lords, 50 I - II; House of Commons, HC328 I - II) and its second report on 2 June 1999 (Draft Financial Services and Markets Bill: Second Report; House of Lords, 66; House of Commons, HC465). The Government's response to the Committee's recommendations was published in June 1999.

16.     The Authority has been consulting widely on the way it proposes to use its powers and carry out functions under the Bill. By November 1999 it had issued 33 consultation papers, and in some cases feedback statements, covering a range of relevant topics. The commentary on the Bill below gives details of relevant consultation papers in the context of the appropriate provisions.

THE BILL

17.     The Bill is in 28 Parts.

Part I, The Regulator. This Part sets out the Authority's general duties and statutory objectives. It also, with Schedule 1, imposes requirements about the Authority's constitution and accountability and about the exercise of certain of its functions.

Part II, Regulated and Prohibited Activities. This Part provides a power for the Treasury to set the scope of regulation by order, within the overall object and purpose of the Bill. It prohibits persons who are not authorised (or exempt) from carrying on a regulated activity in the United Kingdom and from holding themselves out as being authorised or exempt. It also sets out arrangements for the regulation of financial promotion.

Part III, Authorisation and Exemption. This Part sets out which persons are to be authorised for the purposes of the Bill and gives the Treasury power to exempt certain persons from the requirement to be authorised. Authorised persons will include those persons given permission under Part IV and certain persons from other member States who are authorised in accordance with arrangements under the Treaty of Rome (the "Treaty") and the single market directives.

Part IV, Permission to Carry on Regulated Activities. This entitles persons to apply for the Authority's permission to carry on particular regulated activities and makes provision about the giving, variation and revocation of such permissions by the Authority.

Part V, Performance of Regulated Activities. This Part requires persons, such as employees and office holders, who perform specified types of function for authorised persons, to be approved by the Authority. It requires such approved persons to comply with any statement of principles of conduct issued by the Authority and gives the Authority certain disciplinary powers. It also gives the Authority powers to prohibit persons from carrying out specified functions.

Part VI, Official Listing. This Part broadly replicates the existing powers and functions of the London Stock Exchange as the competent authority for listing, and gives it new powers to impose penalties for breaches of listing rules. It also gives the Treasury a power to transfer some or all of these functions to another organisation in certain circumstances.

Part VII, Penalties for Market Abuse. This Part confers on the Authority power to impose penalties for market abuse. The Bill sets out the kinds of behaviour which will constitute market abuse and requires the Authority to produce a code which will help to determine whether particular behaviour amounts to market abuse.

Part VIII, Hearings and Appeals. This Part establishes the Tribunal and sets out the procedure for referring cases to it where the Authority has decided to take regulatory action under the various powers conferred by the Bill. It gives a right to appeal against a decision of the Tribunal on a point of law.

Part IX, Rules and Guidance. This Part confers powers upon the Authority to set regulatory requirements for persons authorised under the Bill. It gives the Authority power to issue guidance on requirements imposed by and under the Bill. It also sets out the procedures that the Authority must follow in exercising those powers.

Part X, Information Gathering and Investigations. This Part sets out the powers of the Authority to require the production of information and documents, to require reports to be prepared, to conduct investigations and to gain access to premises with a warrant.

Part XI, Control over Authorised Persons. This Part requires persons who propose to acquire control over certain authorised persons to notify and secure the approval of the Authority.

Part XII, Incoming Firms: Intervention by the Authority. This Part confers powers on the Authority to intervene in the activities of authorised persons from other member States who are authorised in accordance with rights under the Treaty and EC directives. It sets out the grounds on which the powers are exercisable and the procedures for exercising them.

Part XIII, Disciplinary Measures. This Part gives the Authority powers to issue public statements about, or impose penalties on, authorised persons who have failed to comply with requirements imposed by or under the Bill.

Part XIV, The Financial Services and Markets Compensation Scheme. This Part requires the Authority to create a scheme for the payment of compensation to consumers who suffer financial loss as a consequence of the inability of an authorised person to meet its liabilities. It also confers a certain number of powers on the manager of the scheme.

Part XV, The Financial Services Ombudsman. This Part requires the Authority to establish a single, compulsory ombudsman scheme for the speedy and informal resolution of disputes between members of the public and authorised persons and confers certain powers on the operator of the ombudsman scheme for that purpose. It also provides for the ombudsman to adjudicate on certain other types of dispute, on a voluntary basis.

Part XVI, Collective Investment Schemes. This Part recreates, with modifications, the existing arrangements for the regulation of collective investment schemes under the FS Act 1986, for example by giving the Treasury powers to enable a wider range of open-ended investment companies to be formed.

Part XVII, Recognised Investment Exchanges and Clearing Houses. This Part sets out the regulatory regime for investment exchanges and clearing houses and provides for competition scrutiny of the regulatory provisions and practices of those bodies.

Part XVIII, Lloyd's. This Part makes the Society of Lloyd's an authorised person and gives the Authority certain powers to direct the affairs of the Society, its members and Lloyd's managing and members' agents.

Part XIX, Mutual Societies. This Part confers powers on the Treasury to transfer to the Authority and to the Treasury certain functions relating to the registration and regulation of building societies, friendly societies and industrial and provident societies and certain other mutual societies.

Part XX, Auditors and Actuaries. This Part concerns the appointment of auditors and actuaries by authorised persons and their responsibilities.

Part XXI, Public Record and Disclosure of Information. This Part requires the Authority to maintain a public record of authorised (and certain other) persons, and makes provision about the purposes for which confidential information may be disclosed by and to the Authority.

Part XXII, Insolvency. This Part gives the Authority powers to ask the courts to wind up, or initiate other insolvency procedures, against authorised (and certain other) persons. It also enables the Authority to be heard by the court when such proceedings are commenced by third parties.

Part XXIII, Injunctions and Restitution. This Part gives the Authority and the Secretary of State powers to seek injunctions in relation to regulatory contraventions and offences for which the Authority has powers to prosecute. It also provides for restitution to be paid by those who have incurred a loss as a result of such a contravention.

Part XXIV, Notices. This Part sets out the procedures which the Authority must follow when giving notice of proposed actions under various provisions of the Bill. It relates, for example, to decisions not to give permissions or to refuse applications for approvals and to decisions to take regulatory action, such as imposing penalties or making public statements.

Part XXV, Offences. This Part creates certain offences, including making misleading statements and supplying false information to the Authority. It also makes general provision about offences under the Bill and contains provision about the institution of proceedings, for example under Part V of the Criminal Justice Act 1993 (insider dealing) and the Money Laundering Regulations 1993.

Part XXVI, Miscellaneous. This Part contains provisions giving the Treasury power to direct the Authority and certain other bodies to comply with the UK's international obligations, including European Union decisions to take reciprocal trade action. It also contains provision concerning gaming contracts.

Part XXVII, Interpretation.

Part XXVIII, Supplemental. This Part contains provisions dealing with the commencement of the legislation and its territorial scope. It also makes certain consequential amendments and repeals and confers powers on the Treasury in relation to consequential and transitional provisions.

COMMENTARY ON CLAUSES

PART I: THE REGULATOR

18.     This Part sets out the Authority's general duties and statutory objectives. Together with Schedule 1, it specifies statutory requirements for the Authority's constitution and status and the exercise of certain of its functions. It sets out arrangements which the Authority is required to make for consulting practitioners and consumers. It provides powers for the Treasury to commission reviews of the economy, efficiency and effectiveness with which the Authority has used its resources and to arrange independent inquiries into regulatory matters of serious concern.

Clause 1: The Financial Services Authority

19.     The Authority is an existing company limited by guarantee formed under the Companies Act and is currently carrying out functions under the FS Act 1986 and the Banking Act. It also exercises functions under the ICA 1982 on behalf of the Treasury.

Clause 2: The Authority's general duties

20.     This clause requires the Authority to discharge its general functions in accordance with its objectives and with regard to a number of principles. The objectives do not in themselves impose specific statutory duties or functions on the Authority. Rather, the clause requires the Authority to carry out its general functions insofar as possible in a way which is compatible with the objectives and which, taking into account any need to balance the objectives as a whole, it considers most appropriate to their fulfilment.

21.     Subsection (2) lists the Authority's objectives, which are elaborated in clauses 3 to 6.

22.     Subsection (4) then applies those objectives to the Authority's functions in two distinct ways:

  • they apply directly to the exercise of the Authority's rule-making, code issuing and guidance functions taken as a whole;

  • they apply to the policy and principles by which it exercises its other functions.

23.     Subsection (3) lists the principles to which the Authority must also have regard in making its rules and guidance and determining the policy and principles by which it exercises its other functions.

Clause 4: Public awareness

24.     The Authority published in November 1998 a consultation paper (Promoting Public Understanding of Financial Services: A Strategy for Consumer Education; CP15). In May 1999 it issued a policy statement setting out how it intends to meet this objective (Consumer Education: A Strategy for Promoting Public Understanding of the Financial System).

Clause 5: The protection of consumers

25.     Subsection (2) sets out factors to which the Authority must have regard when considering the appropriate degree of protection. These are, briefly, the degree of risk involved, the sophistication and experience of the parties to the transaction, the need of customers for advice and information and the general principle that consumers should take responsibility for their decisions. There is no obligation on the Authority to place particular weight on any one of these factors.

Clause 6: The reduction of financial crime

26.     This provision does not by itself impose any duties on firms. The Authority is expected to pursue this objective in cooperation with various law enforcement agencies.

Clause 7: The Authority's general duty to consult

27.     This clause requires the Authority to make and maintain effective arrangements for consulting practitioners and consumers. These arrangements must include, but are not limited to, the establishment of Practitioner and Consumer Panels.

28.     The statutory obligation for the Authority to maintain a panel to represent the interests of practitioners was not present in previous financial services, banking or insurance legislation. The Authority has already established a panel of practitioners on a non-statutory basis. In October 1997, the Authority issued a consultation paper on practitioner involvement (Practitioner Involvement; CP2).

29.     The statutory obligation for the Authority to maintain a panel of consumers was not present in previous financial services, banking or insurance legislation. The Authority has already established a panel of consumers on a non-statutory basis. In October 1997, the Authority issued a consultation paper on the representation of consumer views (Consumer Involvement; CP1).

Clause 10: Reviews

30.     This clause provides that the Treasury can commission independent reviews of the economy, efficiency and effectiveness with which the Authority has used its resources.

Clause 11: Right to obtain documents and information

31.     The person appointed by the Treasury to perform a review has a right of access to documents held by the Authority.

Clause 12: Cases in which the Treasury may arrange independent inquiries

32.     This clause, together with clauses 13 to 16, provides the mechanism for the Treasury to appoint a person to hold an independent inquiry into the circumstances surrounding regulatory events which give rise to serious questions or public concern about the regulatory framework or the effectiveness of regulation in practice. They provide a statutory basis for launching the type of inquiry which has been conducted in the past into the failures of the Bank of Credit & Commerce International (BCCI) in 1991 and Barings in 1995. The Bingham Inquiry into BCCI was conducted on a non-statutory basis and therefore had no powers to require witnesses to attend or give evidence. The Barings Inquiry was conducted by the Board of Banking Supervision, an advisory body within the Bank of England using powers under the Banking Act.

33.     The types of events into which an inquiry may be held are set out in this clause. There are two cases. The first case, set out in subsection (2), relates to events concerning persons carrying on regulated activities or collective investment schemes. To trigger the power, it must appear to the Treasury that two conditions are met. The first of these is that the events posed, or could have posed, a grave risk to the financial system, or caused, or could have caused, significant damage to the interests of consumers. The definition of the financial system is the same as under clauses 3 and 4. The definition of consumers which applies in this case is set out in subsection (5). Unlike the definition in clause 5 this includes those who use, or are or may be contemplating using, the services of unauthorised persons who are illegally carrying on regulated activities. The second condition is that the Treasury take the view that a serious failure in the regulatory system, or in the operation of that system, might have caused or exacerbated the risk or damage, or potential risk or damage.

34.     The second case, set out in subsection (3), relates to the listing function under Part VI. Here the Treasury must be concerned with the damage, or potential damage, that might have been caused by a serious failure in the listing regime or its operation.

35.     Subsection (4) provides that in either case the Treasury may initiate an inquiry only where it considers that it is in the public interest to do so.

Clause 13: Power to appoint person to hold inquiry

36.     Under subsection (1), the Treasury may appoint a person whom it considers appropriate to conduct an investigation and, under subsection (2), may give directions to that person concerning the scope of the inquiry, how it is to be conducted, when it is to be completed by, and the form of any report of the inquiry. The power to direct the inquiry enables the Treasury to ensure that it focuses on the important questions, and is concluded in a manner and on a timescale that is appropriate in light of any public concern there might be.

Clause 14: Powers of appointed person and procedure

37.     This clause gives the person holding the inquiry discretion as to how the inquiry is conducted, and provides that person with powers to obtain evidence, both in the form of documents and through the examination of witnesses. These powers are the same as those exercisable by the High Court, or the Court of Session in Scotland.

 
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Prepared: 19 November 1999