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

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Clause 39: Variation etc at request of authorised person

85.     The Authority may vary the permission, including cancelling it completely, at the request of the authorised person, but must be satisfied that the person will satisfy the qualifying conditions for any resulting permission. If it is not satisfied, it may refuse the request outright, grant a more limited new permission than the one requested, or grant the requested permission, but subject to new requirements. The Authority may also refuse to grant a request for variation on the grounds that refusal is in the interests of consumers.

Clause 40: Variation etc on the Authority's own initiative

86.     This clause has the effect that the Authority may revoke or vary the terms of an authorised person's permission on its own initiative in four cases. These are where the Authority:

  • considers that the qualifying conditions are no longer satisfied in relation to the existing permission (case A);

  • has cause to believe that the authorised person has contravened, or is likely to contravene, a requirement under the Bill, for example a breach of a rule or of a restriction imposed under this Part, or has knowingly or recklessly misled the Authority or because the Authority has cause to believe that the authorised person has simply failed to make use of the permission to carry on a particular regulated activity for a year or more (case B);

  • considers that it is desirable to protect the interests of consumers, or potential consumers (case C);

  • has been informed by the Director General of Fair Trading ("DGFT") that an authorised person who would be able to carry on business within the EEA under the 2nd Banking Co-ordination Directive or the Investment Services Directive and which has a licence under the Consumer Credit Act 1974 (CCA 1974) has done any of the things listed in subsection 25(2) of that Act (case D).

87.     The things listed in that subsection could be factors in the DGFT's determination of whether a person is fit and proper to hold such a licence. The factors cover contraventions of any provision of that Act, offences involving fraud, dishonesty or violence, practising racial or other forms of discrimination, and engaging in deceitful, oppressive, unfair or improper business practices. Case D is necessary to ensure that the authorisations of persons authorised by virtue of their Part IV permission who have their head office in the UK and who hold a consumer credit licence cover such a licence for the purposes of the directives mentioned above. This enables them to benefit from the full breadth of the passport under those directives.

Clause 41: Variation of permission on acquisition of control

88.     The Authority may also impose a new requirement or vary an existing one if:

  • someone "acquires control" over the UK authorised person within the meaning of Part XI; and

  • the result is that although the Authority does not consider that it has grounds to object to the acquisition, it nevertheless considers that there is some significant uncertainty about the impact of the acquisition, or further acquisition, of control on the conduct of the authorised person's business.

Clause 42: Exercise of powers in support of overseas regulator

89.     This clause, which reproduces an existing power under section 128C of the FS Act 1986, enables the Authority to cancel or vary a permission on its own initiative on behalf of an overseas regulatory authority. The clause gives the Treasury power to prescribe by order the sort of authority and the sort of regulatory provisions that it should be open to the Authority to help. The functions that it is proposed should be prescribed in this way are functions corresponding to those of:

  • the Authority itself under this Bill;

  • the London Stock Exchange as competent authority for listing;

  • the Secretary of State under the Companies Act; and

  • the prosecuting authorities for insider dealing and money laundering.

90.     However, even where the overseas regulator and the provisions they are seeking to enforce meet these requirements, the Authority is not obliged to act in accordance with the request. The Authority must act reasonably, as it must in discharging any of its functions, but it is also directed to consider certain factors in particular. First among these is whether EC law obliges the Authority, as the competent authority under one of the single market directives or otherwise, to assist the overseas authority. There are further factors listed in subsection (4) which include the seriousness of the case and the public interest. The Authority is also able to charge a contribution towards the costs of taking the enforcement action, and to make this a condition of exercising the power.

Clause 43: Prohibitions and restrictions

91.     Among the requirements which the Authority can impose on an authorised person when acting under clause 40, 41 or 42 are:

  • restrictions on the use of or disposal of the authorised person's assets;

  • requirements to transfer its assets or assets it holds on behalf of investors to a trustee approved by the Authority;

  • prohibitions on making certain investments; and

  • requirements to dispose of certain types of investment.

92.     The purpose of these types of restriction is to prevent an authorised person disposing of particular assets or making certain types of investment, in circumstances where the Authority is concerned about a person's solvency or where it wishes to investigate suspected fraudulent behaviour.

93.     Where an authorised person's assets are held by a third party, for example by a bank, subsection (3) enables the Authority to give the institution notice of any restrictions it has placed on the authorised person's assets. This notice might state, for example, that a bank should not allow any payments to be made from the authorised person's account without the permission of the Authority. Subsection (4)(a) provides that if the institution refuses to comply with a request to make a payment from the account of an authorised person who is subject to a restriction notice, it is not to be taken as a breach of its contract with the authorised person. However if the institution were to allow a payment to be made from such an account, in breach of a restriction under subsection (4)(b) it would then have to pay the same amount of money to the Authority.

94.     Subsections (5) to (10) are concerned with the transfer of an authorised person's assets to a trustee approved by the Authority.

95.     Subsection (5) requires a trustee not to release any of the assets transferred to them unless the Authority agrees. If the trustee does release assets without the Authority's consent, they are guilty of an offence under subsection (8). However subsection (10) protects the position of the persons who are beneficiaries of the trust by preserving all the remedies they would normally have under trust law. The beneficiaries of the trust are the owners of the assets transferred to the trustee. This will be either the authorised person or, where the assets transferred include assets the authorised person was holding or controlling on behalf of other investors, those investors.

96.     Subsection (6) makes void any charge that the authorised person makes over his assets while they are held by a trustee. Any charges arranged before the assets were transferred to a trustee remain valid. The effect of this is that were the authorised person to enter into a contractual arrangement which gave a third person a right ahead of existing creditors or a liquidator to any of his assets which, as a result of a requirement made by the Authority under subsection (1)(b), were held by a trustee, that contract would be void and the rights of the liquidator and existing creditors to the assets would be upheld.

Clause 44: Persons connected with an applicant

97.     Subsection (1) of this clause makes clear that, in deciding whether to approve an application, the Authority may also have regard to other relevant persons who are related to the applicant in some way. What constitutes a relevant relationship is not defined, but is left to the Authority to interpret in the particular circumstances of the case.

98.     The Authority is obliged under subsection (2) to consult with the home State regulator of an EEA firm as defined by Schedule 3 before granting an application from a person who is a subsidiary undertaking of that firm or the subsidiary undertaking of a parent undertaking of that firm.

Clause 45: Authority's duty to consider other permissions etc.

99.     When considering the exercise of its own initiative power to cancel or vary the additional permissions of EEA or Treaty firms or collective investment schemes, the Authority must take account of relevant EC law and EEA or Treaty firms' and schemes' home State authorisation. Such consideration may inform the Authority's view on whether the firm or scheme is fit and proper to continue to hold the additional permissions in question, or its view on whether the cancellation or variation it proposes is appropriate in light of the wider assessment of the firm which the home State regulator is responsible for making.

Clause 46: Applications under this Part

100.     This clause sets out what must be included as a minimum in an application for a new permission. It also enables the Authority to specify the manner in which an application may be made, for example whether applications by e-mail will be accepted, and such other things that should be included as the Authority considers necessary or appropriate. The Authority can require additional information after the application is received, and can require the applicant to verify any of the information supplied.

Clause 47: Determination of applications

101.     The Authority is required to determine an application within 6 months of receiving the completed application. The Authority has discretion whether to determine incomplete applications, but it must determine even incomplete applications within 12 months of the initial receipt of the application. The Authority may, of course, refuse an application on the grounds that it is incomplete where it is appropriate to do so. Under subsection (3) an applicant may withdraw an undetermined application at any time.

102.     Once the Authority has determined an application it must give written notice of its decision and, if the application is being granted, the date upon which the authorisation takes effect and from which the relevant activities may commence.

Clause 48: When permission is given

103.     Where an application is granted, this clause requires the Authority to issue the applicant with a certificate of authorisation. This certificate has evidential weight in other matters relating to the authorised person's permission under the Bill. The clause confers power on the Treasury to make further provision by order with respect to the form of these certificates and how they are to be amended if the permission is varied or cancelled.

104.     Subsection (3) applies where the Authority has previously issued a warning notice to the effect that it proposed to refuse the application, or grant it only in part, and that notice was copied to a third party because they were identified in the reasons for refusal in such a way that the Authority considered that this was prejudicial to them in their office or employment. In these circumstances, if and when the Authority does grant a permission in response to the application, that notice must be copied to any third parties who received the warning.

Clause 49: Refusal of application for permission

105.     This sets out the procedure which the Authority must follow when refusing an application. First, the Authority must give the applicant a warning notice (in accordance with clause 338) of its proposed refusal. However, the Authority is not obliged to issue a warning notice if its reason for refusing to grant the permission under this Part is because they are an EEA firm and it is properly something for which they would be entitled to permission under Schedule 3. The Authority is able simply to advise the applicant how to proceed without engaging in the full warning and decision notice procedures.

106.     On receiving a warning notice, the applicant then has the opportunity to make representations, as set out in that clause. If, taking account of any such representations, the Authority refuses the application, it must issue a decision notice, in accordance with clause 339.

Clause 50: Procedure on exercise of the Authority's own initiative power

107.     This clause sets out the procedure to be followed when the Authority exercises its own initiative power, but there is no particular urgency. For instance, there is unlikely to be any urgency if the grounds for exercising the power were that the authorised person had not made use of their permission to carry on a particular regulated activity for more than a year.

108.     The clause requires the Authority to issue a notice to the authorised person setting out its proposed action and the reasons for it. The Authority must allow a period for the person to make representations, which must be specified in the notice.

109.     If, in light of any representations received, the Authority decides to proceed with the action, a further notice must be issued. This must state the reasons for proceeding with the action, inform the authorised person of their right to have the matter referred to the Tribunal, and specify the date on which it takes effect if not referred.

Clause 51: Exercise of own initiative power with immediate effect

110.     In some circumstances it will be necessary for the variation in an authorised person's permission to have immediate effect, for example where the action is intended to forestall the possibility of a financial failure, or to prevent further business being conducted that might be fraudulent or otherwise damaging to the interests of consumers or potential consumers. The urgent procedure provided for in this clause is therefore only applicable where it appears to the Authority that there is such a threat and that it is desirable in the interest of consumers or potential consumers to act without delay.

111.     Under this procedure the Authority must specify the date on which the action takes effect in the first notice it issues. That date would be the date on which the notice is issued. It must also give the reasons and inform the authorised person of their rights to make representations within a specified period. At the end of that period, the Authority must consider whether to take further action, for example reversing the variation to the permission, and must inform the authorised person of this decision, giving its reasons. The second notice must inform the authorised person of their right to have the matter referred to the Tribunal.

Clause 52: Right to refer matters to the Tribunal

112.     A decision by the Authority to refuse an application for a permission, or to vary or cancel a permission, or to vary or cancel a permission on its own initiative, may be referred to the Tribunal.


113.     This Part confers on the Authority a range of powers which will enable it to ensure that people who work for authorised persons for certain purposes are fit and proper to perform the functions for which they have been engaged. While the focus of regulation is on authorised firms, the Part gives the regulator powers to prevent harm which might otherwise be caused by persons attached to firms.

114.     Under the existing regulatory framework, there is considerable variation between the arrangements applying to employees working in different sectors. The SROs have introduced a contractual system which requires employees to sign up to regulatory and disciplinary arrangements. Lloyd's has applied similar regulation to employees of underwriting agents, using its byelaw making powers. Banking and insurance legislation provides for pre-vetting of certain senior management positions, in some cases as part of the regime for the regulation of controllers of such firms. The current legislation does not provide for the regulator to take disciplinary action against those managers, although senior managers, as officers of the firm, could commit a criminal offence where the firm itself had committed such an offence. There is, in addition, a power in section 59 of the FS Act 1986 for the Authority to prohibit a person's employment in connection with investment business. These arrangements will be replaced by arrangements under this Part.

115.     The Part seeks to harmonise these arrangements. It provides a power for the Authority to ban unfit individuals from carrying out specified functions within the financial services sector. It also provides for:

  • the Authority to require its approval to be obtained before a person may perform specified functions,

  • the Authority to issue statements of principle with which approved persons must comply, and codes of conduct elaborating on the statements, and

  • a disciplinary regime for those who fail to comply with the principles.

116.     This Part provides for firms and individuals concerned to refer matters to the Tribunal if the Authority:

  • issues a prohibition order,

  • refuses an application to vary or revoke a prohibition order,

  • refuses an application for approval,

  • takes disciplinary action, or

  • withdraws approval.

117.     The Part is primarily directed at the employees of authorised firms. However, it extends beyond employees to include, for example, directors, representatives and contractors of an authorised person, and extends to bodies corporate where relevant. If for example, a life insurance company entered into a marketing agreement with a firm of estate agents to sell life insurance, the agency and relevant sales staff giving investment advice might need prior approval. Part V would also cover "matrix managers" who carry out certain functions, often on a fairly informal basis, for a group of companies even though technically they are "employees" of a sister company rather than of the authorised person for whom they carry out relevant functions. Such arrangements are increasingly common in multi-national groups.

Clause 53: Prohibition orders

118.     This clause enables the Authority to make an order prohibiting any individual whom it considers is not fit and proper to perform functions in connection with regulated activities. A prohibition may relate to all functions in relation to any regulated activities carried on by all authorised (or exempt), persons or it can specify the kind of functions, activities or authorised (or exempt) persons to which it relates. A prohibition order may be varied or revoked. Where the Authority proposes to issue an order, it must give notice in accordance with the standard notice requirements in clauses 338 and 339.

119.     Subsection (4) makes it an offence for an individual not to comply with a prohibition order. The maximum penalty for this offence is a fine at level 5 on the standard scale (currently £5,000).

120.     Subsection (5) imposes an obligation on an authorised (or exempt) person to take reasonable care not to engage individuals who have been disqualified under this clause from performing relevant functions. Failure to comply with this requirement could trigger the use of the Authority's powers to amend the authorised person's permission or discipline the firm. It also potentially gives rise to a cause of action under clause 68 from a private person who suffers a loss as a consequence of the breach.

Clause 56: Approval for particular arrangements

121.     This clause requires authorised persons to obtain the approval of the Authority before allowing persons, natural or corporate, to perform certain functions. Subsection (2) makes it clear that an authorised person must also take reasonable steps to ensure that any contractor does not allow a person to perform such functions without the approval of the Authority. A person in respect of whom approval is given is an "approved person". The nature of the functions requiring approval will be specified by the Authority's rules, within the limits set out in subsections (5) to (7) and subject to the normal consultation requirements under Part IX. The limits can be summarised:

  • The function may enable a person significantly to influence the conduct of the authorised person (for example a director). By virtue of subsection (9) account may be taken of influence which might result from a failure properly to carry out that function (for example a proprietary trader).

  • The function involves dealing with consumers (for example a financial adviser) or dealing with their property (such as a stockbroker) in a way that is substantially connected with the carrying on of a regulated activity by the firm.

122.     Subsection (8) limits the application of this clause in the case of EEA or Treaty firms. The Authority will only have powers to act in relation to functions over which it, rather than the home State regulator, has jurisdiction.

Clause 57: Applications for approval

123.     This clause requires an application for approval to be submitted by the authorised person concerned, or in the case of new firms awaiting authorisation, a prospective authorised person.

124.     Subsection (2) gives the Authority the powers to specify the information it will require to support applications for different types of posts and subsection (3) enables it to request any additional information it needs to assess the suitability of each candidate.

Clause 58: Determination of applications

125.     This clause sets out the basis on which the Authority is to assess the suitability of a candidate for approval, whether they are an individual or a body corporate. Subsection (1) requires the Authority to be satisfied that a candidate is fit and proper to perform the functions in question before it is able to give its approval. Where the Authority proposes to refuse an application, clause 59 requires it to give notice in accordance with the standard notice requirements in clauses 338 and 339. Notice must be given to the authorised person, the candidate and, where relevant, a contractor.

Clause 60: Withdrawal of approval

126.     This clause gives the Authority power to withdraw the approval granted for the purposes of clause 56 where it no longer considers that the person is a fit and proper person to carry out the functions for which they had been approved, for example because the Authority had obtained new information which cast doubt over its initial assessment. If the Authority proposes to exercise this power it must give notice in accordance with the requirements in clauses 338 and 339.

Clause 61: Conduct: statements and code

127.     This clause gives the Authority power, as part of its wider rule making functions, to issue statements of principle, setting out in general terms the kinds of behaviour which it requires from approved persons in respect of any particular type of function. Any statements of principle issued under this clause must be elaborated by a code of practice. Such a code would not need to be exhaustive but it would have to illustrate the circumstances in which it would regard a principle as having been complied with, or not complied with, as the case may be. Different statements of principle and codes could be made to apply to employees of different categories.

128.     Subsection (5) makes it clear that failure to comply with a principle does not give a third party grounds for action against the approved person. Therefore, if for example a financial adviser employed by an insurance company failed to comply with a statement of principle when arranging a personal pension, that would not give a customer a right of action against the employee, with whom they had no contractual relationship. This provision would not remove or lessen any rights, including those under contract or by virtue of clause 68, the customer may have against the authorised person who had entered into an agreement to provide the pension.

Clause 62: Statements and codes: procedure

129.     Before issuing statements of principle and codes of practice, the Authority will need to follow similar consultation requirements as it would when exercising its general rule making powers under Part IX.

130.     The Authority issued a consultation paper setting out its proposals in August 1999 (The regulation of approved persons; CP26).

Clause 63: Disciplinary powers

131.     This clause gives the Authority a power to take disciplinary action against approved persons when the two conditions set out in subsection (1) have been met. The Authority must first be satisfied that it is appropriate to take action against them. In this context, the Authority would have to have regard, among other things, to its regulatory objectives set out in Part I. The Authority would need to take into account whether disciplinary action against the approved person, rather than action against the firm would be appropriate, taking into account the responsibility of the senior management of the firm for the conduct of the firm and its employees. A second important factor would be to ensure that any action, or any particular course of action, it takes should be proportionate to the nature and seriousness of the misconduct.

132.     In addition, a person must have been found guilty of misconduct, as defined in subsection (2). One possibility is that the approved person has acted in breach of a statement of principle, issued under clause 61, as evidenced by a breach of a code of practice. The other possible situation is that an approved person has been knowingly involved in a breach by the authorised firm of rules made by the Authority or of any requirement by or under the Bill.

133.     Subsection (3) gives the Authority powers to impose a penalty on an approved person or to make a public statement about their misconduct.

134.     Subsection (4) restricts the period during which the Authority may take action under this clause to a period of two years after the Authority became aware of the misconduct. This period reflects the time available to the Secretary of State to bring disqualification proceedings against a company director under the Company Directors Disqualification Act 1986.

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Prepared: 19 November 1999