House of Commons - Explanatory Note
Financial Services And Markets Bill - continued          House of Commons

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Clause 15: Conclusion of inquiry

38.     Unless the Treasury otherwise direct under clause 13(3)(e), this clause requires a written report setting out the results of the inquiry and, where appropriate, making recommendations. The Treasury then have discretion whether to publish all or part of the report. However, the Treasury must make sure that they do not publish any material contained in the report which, if published, they consider would seriously prejudice the interests of a particular person, for example because there was a likelihood of subsequent court action in relation to the events covered, or publication would be incompatible with the UK's international obligations, such as those under the confidentiality provisions of one of the single market directives. A copy of any part of the report which is published must be laid before Parliament by the Treasury.

Clause 16: Obstruction and contempt

39.     The powers of the person appointed to conduct an inquiry are enforceable through certification to the High Court or Court of Session. The person conducting the inquiry must provide the court with a certificate stating the requirement that was imposed and the nature and facts of the alleged failure to comply. The court may then enquire into the matter, hearing witnesses and seeing documents as necessary. If it finds that a person has failed to comply with requirements placed upon him by the person holding the investigation, the court may deal with them as it would with a person in contempt of court.

PART II: REGULATED AND PROHIBITED ACTIVITIES

40.     This Part provides the basic mechanism for defining the scope of regulation under the Bill and for establishing the extent of the prohibition on issuing unapproved financial promotions.

Clause 17: The general prohibition

41.     This clause contains the basic prohibition on unauthorised persons carrying on regulated activities in the UK. It is referred to in the Bill as "the general prohibition" and prohibits persons who are not authorised or exempt under Part III from carrying on any regulated activity in the UK. Clause 353 elaborates on when regulated activities will be considered to be carried on in the UK. Contravention of the general prohibition is a criminal offence (see clause 21). Agreements made in the course of carrying on an activity in contravention of the general prohibition are unenforceable (see clauses 24 and 25).

Clause 18: Authorised persons acting without permission

42.     Authorised persons may only carry on in the UK those regulated activities for which they have been given permission by the Authority under Part IV or by or under any other provision of the Bill, for example under Schedule 3, 4 or 5.

43.     If an authorised person carries on regulated activities for which he does not have permission the consequences may include any of the sanctions available under Parts IV (Permission to Carry on Regulated Activities), XII (Incoming Firms: Intervention by Authority) or XIII (Disciplinary Measures) or withdrawal of authorisation under Part III. However, if an authorised person acts outside the scope of his permission, he will not commit a criminal offence, and any contract which a person enters into when acting outside the scope of his permission will not be made unenforceable simply by virtue of that fact.

Clause 19: Restrictions on financial promotion

44.     This clause prohibits unauthorised persons from issuing financial promotions, unless the content of the promotion is approved by an authorised person (who will be subject to rules made by the Authority), or unless an exemption applies. The regulation of financial promotions under the Bill is similar to the regulation of investment advertisements and cold-calling under the FS Act 1986. However, clause 19 reflects changing technologies and the fact that the borderline between advertisements and unsolicited calls has become blurred. Clauses 208 to 211 contain additional provisions relating to the promotion of collective investment schemes.

45.     The prohibition applies to "invitations or inducements" to engage in investment activity, which are made in the course of business. The Treasury will have power to determine the meaning of "in the course of business" although it indicated in Financial Promotion - A Second Consultation Document (October 1999) that it had no plans to give the phrase a special meaning. The prohibition will potentially catch communications whether they are made in the UK, into the UK from elsewhere, or from the UK to another country. Communications from outside the UK can potentially be caught only if they can have an effect in the UK (subsection (2)). It is expected that the exemption order which the Treasury intend to make under subsection (3) will further limit the territorial application of the financial promotion regime, so that communications issuing from overseas will generally only be caught if they are directed at the UK. This will be of particular significance in the context of internet communications.

46.     Subsection (3) confers a power on the Treasury to make exemptions from the prohibition, in a similar way to the power to make exemptions from the investment advertisement prohibition under the FS Act 1986. It is possible for these exemptions to be made conditional on compliance with rules made by the Authority under clause 116. The consultation document on financial promotion published by the Treasury in March 1999 (Financial Services and Markets Bill: Financial Promotion - A Consultation Document) sought, in particular, views on the use which might be made of this power. The Treasury has taken into account responses it received in preparing the draft Order, to be made under this subsection, which was published in October 1999 for consultation (Financial Services and Markets Bill: Financial Promotion - A Second Consultation Document).

47.     What constitutes "engaging in investment activity" will be determined under subsections (4) and (5), which give the Treasury power to determine the scope of the basic prohibition on financial promotion. It is expected that "controlled activities" will be the activities which are regulated under the Bill, together with activities which would be regulated, but for an exclusion in an order made under clause 20(5). This approach, set out in the draft Order referred to above, reflects the position under the FS Act 1986.

Clause 20: The classes of activity and categories of investment

48.     This clause provides that the classes of regulated activity and types of investment to be regulated under the Bill are to be prescribed by the Treasury by Order to be made under subsection (5). A draft Order, setting out in detail the activities to be regulated under the Bill, was published by the Treasury for consultation in February 1999 (Financial Services and Markets Bill: Regulated Activities - A Consultation Document).

49.     Schedule 2 indicates the general range of activities and investments that the Treasury may include within the order defining the scope of regulation, but it does not exhaustively list them. It is therefore possible that other activities or investments may be brought within the scope of the regulation under the Bill. However, the general nature of the activities set out in Schedule 2 serves as a limitation on the extent of the Treasury's power to bring further activities within the scope of the Bill.

Clause 21: Contravention of the general prohibition

50.     This makes carrying on a regulated activity in breach of the general prohibition in clause 17 a criminal offence. It is a defence for a person to prove that he exercised due diligence and took all reasonable precautions to avoid committing the offence.

51.     A person convicted of this offence, which is referred to as an "authorisation offence", may be subject to a term of imprisonment of up to 2 years on indictment (6 months on summary conviction) and/or a fine (the statutory maximum for a fine on summary conviction is £5,000).

Clause 22: False claims to be authorised or exempt

52.     This creates an offence of falsely describing oneself, or holding oneself out, as authorised or exempt in relation to a particular regulated activity. It is a defence for a person accused of this offence to prove that he exercised due diligence and took all reasonable precautions to avoid committing the offence.

53.     Under subsection (3) a person found guilty of this offence is liable on summary conviction to a maximum of 6 months imprisonment and/or a fine not exceeding level 5 on the standard scale (currently £5,000). If the offence results from the public display of material, subsection (4) permits a fine of up to the statutory maximum (currently £5,000), to be multiplied by the number of days for which any material giving rise to the offence was on public display.

Clause 23: Contravention of section 19

54.     This clause provides that it is an offence to breach the financial promotion prohibition. The sanctions are the same as those which apply under clause 21 for a breach of the general prohibition.

55.     Subsection (2) provides a defence for a person accused of the offence if they can prove either that they believed on reasonable grounds that the content of the communication was prepared or approved by an authorised person, or that they exercised due diligence and took reasonable precautions to avoid committing the offence.

Clause 24: Agreements made by unauthorised persons

56.     Under this clause, agreements concluded in the course of carrying on business in breach of the general prohibition will be unenforceable by the authorised person against the customer. However, the customer can still recover any money paid or property transferred and compensation for any loss.

Clause 25: Agreements made through unauthorised persons

57.     Under this clause, agreements made by an authorised person in the course of his authorised business may also be unenforceable by that person if the agreement was entered into as a result of a third party's unauthorised regulated activities. This might arise if, for example, a contract was entered into as a result of investment advice given by an unauthorised third party.

Clause 26: Agreements made unenforceable by section 24 or 25

58. This clause gives a court discretion to allow the contract which would otherwise be unenforceable under clause 24 or 25 to be enforced against the customer where it takes the view that it would be "just and equitable" to do so and certain other conditions are met.

Clause 27: Enforceability of agreements resulting from unlawful communications

59.     When a customer enters into an agreement or exercises any rights as a result of a communication in breach of the financial promotion prohibition, the agreement will be unenforceable against him. The customer will also be entitled to recover any property transferred and to receive compensation for losses incurred, but if he chooses to recover property transferred or not to continue the contract, he must return any money received.

60.     However, in certain circumstances the courts may enforce agreements made in contravention of the prohibition. The courts can allow agreements to be enforced and money and property transferred under the agreement to be retained if:

  • the customer was not influenced by the communication concerned;

  • the communication was not misleading; or

  • the communication was not made by the person seeking to enforce the agreement, or a person acting on his behalf, or by a person receiving commission as a result of the agreement.

PART III: AUTHORISATION AND EXEMPTION

61.     This Part sets out who is to be authorised and how authorisation is obtained. It also deals with exemptions from the general prohibition for particular persons or classes of persons. The Bill provides for a single route to authorisation to operate in the financial services industry, replacing several existing regimes.

62.     The main route to authorisation is through an application for a permission under Part IV (see following section), but authorisation may also be obtained by virtue of:

  • Notification in accordance with the relevant single market directive from the competent authorities under that directive in another EEA member State. The directives in question are the 2nd Banking Coordination Directive for banks and other credit institutions, the Investment Services Directive for investment firms, and the 3rd Life and 3rd Non-life Directives for insurance companies, including mutual insurers like friendly societies. The person, who must come from or be incorporated in, or formed under the law of another member State, is then referred to under the Bill as an "EEA firm" as defined in Schedule 3.

  • Exercise, in accordance with Schedule 4, of EU Treaty rights other than or beyond those governed by the single market directives in which case the person is then referred to under the Bill as a "Treaty firm". Again the person must come from, or be incorporated in, or formed under the law of another member State to qualify.

  • Exercise of rights under the EC Directive relating to collective investment undertakings to market in the UK collective investment schemes or product authorisation of certain open-ended investment companies ("oeics") under regulations to be made under Chapter IV of Part XVI.

  • A person being "grandfathered" by virtue of the transitional provisions. This includes existing persons authorised under the Banking, Financial Services, Insurance, Building Societies and Friendly Societies Acts (including members of self-regulating organisations and certain members of recognised professional bodies).

63.     The Society of Lloyd's is also authorised for the purposes of this Part by virtue of clause 286.

64.     It is possible for a person who becomes authorised through one of these routes to carry on regulated activities by virtue of other routes. For instance an EEA firm that is authorised by virtue of its home State notification under a single market directive may also carry on other regulated activities by virtue of notification under Schedule 4 or by an application to the Authority under Part IV for an extension of its permission. A Treaty firm may also obtain additional permission, for example under Part IV.

65.     For a person authorised by virtue of having permissions under Part IV, authorisation generally ends when that person no longer has permission to carry on regulated activities, whether at the initiative of the Authority or themselves. However, under clause 30 the Authority may refrain from withdrawing authorisation from a person with no permissions if it has good reason to do so.

Clause 28: Authorised persons

66.     This defines the circumstances in which a person is authorised under the Bill, and therefore able to carry on regulated activities without breaching the general prohibition.

Clause 29: Partnerships and unincorporated associations

67.     This clause makes particular provision for partnerships and unincorporated associations. In principle it is possible to view a change of partners in a partnership, or a change of the membership of an unincorporated association as the formation of a new partnership or association. It would be very burdensome and unsatisfactory if such changes meant that a partnership or association that was substantially the same had to renew its authorisation simply because of such a change to its membership. This clause therefore ensures that in such circumstances the authorisation is not interrupted. It also allows the authorisation to pass to a successor partnership or association in the event of dissolution, but where the members and the business of the successor are substantially the same as the original.

Clause 30: Withdrawal of authorisation by the Authority

68.     This clause enables the Authority to withhold a direction withdrawing authorisation from a person with no permissions if they have good reason to do so. An example of such a reason would be that there were continuing investigations of the affairs of that person, and it was therefore necessary for the Authority to retain its investigatory powers in relation to them. Or there may be outstanding contracts as a result of their regulated activities and the Authority may judge it necessary to retain powers over the person to ensure that these contracts are discharged or unwound without prejudice to the interests of its customers.

Clause 31: EEA firms

69.     So long as an EEA firm retains its home State authorisation, the Authority may not remove the firm's authorisation under Schedule 3. Such a person will only cease to qualify for authorisation under Schedule 3 if their home State regulator, that is the competent Authority under the relevant directive from the person's home State, notifies the Authority that it is withdrawing authorisation for the person to continue to carry on the regulated activities in the UK, which may or may not be as part of withdrawing the person's authorisation completely, including in the home State.

70.     However, if the person has also obtained a permission under Part IV, loss of the grounds for its authorisation under Schedule 3 does not necessarily lead to loss of its authorisation unless the Authority decides that as a result of the changed circumstances it should also withdraw the permission granted by it under Part IV. The Authority may also cancel an authorisation under Schedule 3 on request from the EEA firm.

Clause 32: Treaty firms

71.     As for an EEA firm, a Treaty firm ceases to qualify for authorisation under Schedule 4 if the relevant home State authorisation is withdrawn. The Authority may remove any additional permission under Part IV, but loss of home State authorisation does not necessarily mean that Part IV permission would be withdrawn. The Authority can also cancel an authorisation on request from a Treaty firm.

Clause 33: UCITS qualifiers

72.     This clause enables the Authority to cancel the automatic authorisation under Schedule 5 of managers and depositaries of UCITS schemes at their request. However, if the person also has permissions under Part IV, it does not cease to be an authorised person as a result.

Clause 34: Exemption orders

73.     This clause gives the Treasury the power to make orders exempting specific natural or legal persons or classes of person from the general prohibition under Part II, and therefore from the need to be authorised. A draft order to be made under this power was published by HM Treasury for consultation in February 1999 (Financial Services and Markets Bill: Regulated Activities - A Consultation Document). This carries over a number of exemptions under existing legislation, but not including those which are obsolete or where a person is now to be subject to regulation, notably Lloyd's and underwriting agents at Lloyd's.

Clause 35: Exemption of appointed representatives

74.     This clause makes an exemption from the general prohibition for appointed representatives of authorised persons. The exemption only applies if the authorised person, referred to as the principal, has:

  • contracted with the representative for the latter to carry on the relevant sort of investment business on their behalf; and

  • accepted responsibility in writing for the conduct of those regulated activities.

75.     Any regulated activities which are carried on by the representative in accordance with such an arrangement are the responsibility of the principal, who must therefore have permissions (see Part IV below) for all the activities. The Authority may therefore take regulatory action against the principal in respect of anything said or done (or not said or not done) by the representative in carrying on the investment business as if they had expressly authorised the action or inaction in question. Such acts or omissions will be taken into account by the Authority in determining whether the principal has breached any rules or requirements under the Bill. However, nothing in this clause would make the principal liable to prosecution for a criminal offence in place of the representative. The representative may also be subject to the arrangements under Part V.

76.     This clause is similar to, and replaces, section 44 of the FS Act 1986. The Treasury have the power to limit the types of business that may be carried on under this exemption. The intention is that this will broadly reproduce the breadth of the current provision. However, unlike now, it will not be possible under the new clause for an appointed representative to be exempt for some activities and authorised for others. This would fall foul of the prohibition under clause 18 on authorised persons carrying on regulated activities which are not covered by their permission. With the bringing together of various previously separate authorisation regimes, it would not be necessary or appropriate to allow an authorised person to obtain an exemption rather than have their permission extended.

77.     The Treasury have the power to prescribe further conditions which the contract between the principal and his representative has to meet. The intention is that this power would be used to reproduce the detailed requirements in sections 44(4) and (5) of the FS Act 1986. These are aimed at ensuring that the principal has adequate control over activities the appointed representative may carry on for the benefit of, or on behalf of, other providers of investment products to ensure that the exemption is not misused.

PART IV: PERMISSION TO CARRY ON REGULATED ACTIVITIES

78.     This Part governs the way in which a person can obtain permission to carry on regulated activities. It is through obtaining one or more permissions that authorisation is generally obtained under clause 28(1). A consultation paper published by the Authority in October 1999 (The Permission Regime, CP29), sets out the process in some detail. However, this route to authorisation does not apply to those EEA firms who qualify for authorisation by virtue of Schedule 3 or those Treaty firms who qualify by virtue of Schedule 4. These provisions only apply to EEA and Treaty firms to the extent that they have obtained additional permissions beyond those that they obtained under those Schedules.

Clause 36: Application for permission

79.     This sets out the type of person who can be given permission and therefore who can be authorised by this route. Permissions can be applied for and granted to individuals, bodies corporate, partnerships and unincorporated associations. In the case of some regulated activities, however, there are specific constraints on the type of person which may be given permission. For example only bodies corporate or members of Lloyd's can be permitted to carry on insurance business. These restrictions are included in the qualifying conditions in Schedule 6. The Authority issued a consultation paper (The Qualifying Conditions for Authorisation, CP20), published in March 1999, discusses these in more detail.

80.     A single permission may cover a number of regulated activities. Permission is only given once, after that is it simply changed. Thus, subsection (2) rules out an application for the grant of permission to an authorised person where he already has permission. Therefore, if a person wishes to carry on additional activities, he would need to apply for a variation of permission under clause 39.

Clause 37: Giving permission

81.     Having received an application for permission, the Authority must consider it against the qualifying conditions in Schedule 6. The Authority must be satisfied that the applicant would satisfy those conditions in respect of all the regulated activities covered by the permission it would have. In order to achieve this, the Authority has discretion to grant permission for all the activities applied for, or just some of them.

82.     The Authority can also frame the permission it grants so as to cover activities which are wider or narrower than the activities as described in the application, and may thus impose its own limitations on the way in which an activity may be carried on. This allows the Authority to design the permission in order to be satisfied that the qualifying conditions are met in circumstances where it would not be satisfied if it granted the permission sought in full. The ability to grant a wider permission than was applied for would enable the Authority, if it so chose, to have standard types of permission that it granted. However, the Bill does not constrain the Authority to operate in this way.

Clause 38: Imposition of requirements

83.     When granting permission, the Authority may impose, as part of the new permission, requirements on the authorised person to act, or refrain from acting, in a certain way in order to ensure that the Authority can continue to be satisfied that the qualifying conditions will be met. The Bill allows the Authority to specify a period during which such requirements have effect. Thus the Authority might impose a limit on the amount of a certain type of business the person may conduct during the first five years after receiving the permission. This would enable the Authority to continue the current practice adopted by the insurance supervisors of restricting the premium income that can be received by insurance companies in the period following its authorisation to undertake a new form of insurance business.

84.     Such requirements may also be imposed in respect of unregulated activities. For instance, the Authority might have misgivings about the way in which a regulated activity might be carried on in conjunction with an unregulated activity that the person already carried on, or which he proposes to carry on. Those misgivings may not justify preventing the person from commencing the regulated activity because the Authority may not consider that the unregulated activity, of itself, casts doubt about the person's fitness to carry on the regulated one. It may, however, be concerned that the juxtaposition of the two activities could be confusing to consumers, or that the manner in which the unregulated activity was carried on might pose a threat to their interests. Therefore, the Authority could place limitations on the way in which the unregulated activity was carried on for a period after the granting of the new permission in order that it could observe how the activities were carried on, or related to each other, in practice.

 
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Prepared: 19 November 1999