Clause 64: Disciplinary measures: procedure and right to refer to the Tribunal

135.     This clause sets out the procedures which the Authority is to follow when it proposes to take disciplinary action against an approved person

Clause 67: Practice statements and guidance

136.     This clause requires the Authority to develop and publish a policy about the circumstances in which it will impose penalties on approved persons under clause 63 and the basis on which the level of penalties will be determined for different types of misconduct. Before deciding on its policies in these areas, or changing those policies, the Authority will be required to consult interested parties

Clause 68: Action for damages

137.     If a private person suffers a loss because a person has acted in breach of the duty under clause 53(5) or 56(1) or (2) (allowing someone to carry out functions in contravention of a prohibition under clause 53, or without obtaining the Authority's approval under clause 56) they may bring an action for damages against the person.

PART VI: OFFICIAL LISTING

138.     EC law requires each member State to nominate or create a Competent Authority to maintain an official list of securities, to regulate the admission of securities to the official list, and to monitor issuers' adherence to the listing rules (as explained below) thereafter. In the UK these functions are exercised by the London Stock Exchange ("LSE"). The provisions of this Part implement these requirements of EC directives. These provisions replace those currently set out in Part IV of the FS Act 1986.

139.     There is no requirement for issuers of securities, for example companies issuing new shares, to apply for admission to the Official List. However, admission to the official list signals that certain standards regarding the financial status and history of the company have been met; that adequate information about a security has been made available to investors at the time of application; and that information about the performance and plans of the issuer will continue to be made available on a continuing basis so long as the company has securities listed on the official list.

140.     In carrying out its functions the competent authority makes rules which govern the admission of securities to listing, the continuing obligations of issuers, the enforcement of those obligations and the suspension and cancellation of listing. These rules are collectively known as "listing rules". They are currently published by the LSE, as the UK's Competent Authority, in the "yellow book". The competent authority also has a role in scrutinizing prospectuses and circulars where there is no application for admission to the official list.

141.     The Government has announced that as a result of the LSE's decision to seek to demutualise, it would no longer be appropriate for it to remain as the UK's Competent Authority for listing. The Economic Secretary announced to the Standing Committee on 28 October that the Bill will be amended to name the Financial Services Authority as the Competent Authority in place of the LSE. The Economic Secretary said that a number of other changes would be needed to the Bill to take account of this change and that appropriate amendments would be brought forward in due course.

Clause 69: The competent authority

142.     This clause confers the functions of competent authority on the London Stock Exchange Limited. The London Stock Exchange is currently designated as the UK's competent authority for listing under Part IV of the FS Act 1986. However, subsection (2) and Schedule 7 provide a new power for the Treasury to transfer some or all of the functions of the Competent Authority for the UK to another body in accordance with the requirements in that Schedule.

Clause 70: The official list

143.     This clause places a duty on the Competent Authority to continue to maintain the Official List. Clause 91 allows the Competent Authority to charge fees for this purpose. Currently the Official List is made up of securities which are admitted by the Competent Authority under the statutory provisions of Part IV of the FS Act 1986 and securities and other financial instruments which are admitted by the Competent Authority under contract with issuers (for example gilts and covered warrants). In future under the Bill there will be a single statutory regime for the official listing of all these securities and other instruments.

144.     As a result, the legislation gives the Treasury a power in subsection (3) to provide that certain categories of financial instrument cannot be admitted to the Official List. The Treasury do not currently anticipate having to use this power. It is a reserve power to ensure that the Treasury could stop the admission to the list of financial instruments which it considers, for example, pose undue risks to investors.

Clause 71: Applications for listing

145.     This clause provides that only applications for listing which are by, or with the consent of, the issuer and meet the requirements imposed by the Competent Authority may be granted. The Competent Authority can refuse an application for listing where it considers that granting it would be detrimental to the interests of investors.

146.     Subsection (3) provides that no application for listing can be entertained by the Competent Authority in respect of securities issued by a company of a prescribed kind. The Treasury intend to use this power to prescribe that securities issued by a private company or by an old public company (within the meaning of section 1 of the Companies Consolidation (Consequential Provisions) Act 1985) cannot be admitted to listing. This will replicate provisions currently in the FS Act 1986.

Clause 73: Discontinuance and suspension of listing

147.     Occasionally circumstances arise which mean that normal dealings in listed securities cannot take place. For example a company may fail to comply with reporting requirements in the listing rules, so that investors and potential investors do not have sufficient information on which to make informed decisions about the company's securities in order to deal in the securities. Alternatively a company may be in financial difficulties which it has not clarified or quantified. This clause gives the Competent Authority the power to suspend or discontinue the listing of a company's securities in such circumstances. During a suspension, trading in the securities cannot take place on a recognised investment exchange.

Clause 74: Listing particulars and other documents

148.     Under EC law where there is an application for the listing of securities which are to be offered to the public in the UK for the first time, a prospectus must be approved by the Competent Authority and published. This is provided for by clause 79. Where a prospectus is not required, for example because the securities have already been offered to the public or because there is an exemption (as set out in Schedule 10) the Competent Authority can provide that securities can only be admitted to the Official List after publication of listing particulars and other documents approved by the Competent Authority. Listing particulars are documents which contain information on the nature and circumstances of the applicant and on the securities to be listed. The content is determined by listing rules. The existence of the power will allow investors to make informed decisions about that security. This is necessary given the comprehensive nature of the statutory regime under clause 70.

149.     Subsection (3) allows the Treasury to prescribe the persons responsible for listing particulars. The Treasury intend to exercise this power to prescribe those persons currently covered by section 152 of the FS Act 1986. However, the power will allow there to be some flexibility to adopt the admission of any new types of financial instrument to the official list.

Clause 75: General duty of disclosure in listing particulars

150.     This clause places a duty on those responsible for producing listing particulars to ensure that those particulars contain, at the very least, adequate information to enable investors and their professional advisers to make informed decisions about the issue and securities in question. The Competent Authority can authorise the omission of certain information in certain circumstances, as set out in clause 77.

Clause 76: Supplementary listing particulars

151.     This clause provides that where there is any significant change following the submission of listing particulars to the Competent Authority but before dealings in the securities have started, supplementary listing particulars must be approved and published.

Clause 78: Registration of listing particulars

152.     This clause provides that listing particulars must be lodged with the Registrar of Companies on or before the date on which they are published. The same requirement applies to prospectuses because of clause 81. Breach of this requirement is an offence under subsection (3). On summary conviction for such an offence a person is liable to a fine not exceeding the statutory maximum, currently £5,000. On conviction on indictment, the fine is unlimited.

Clause 79: Prospectuses

153.     This clause provides that a prospectus must be published before securities are offered to the public in the UK for the first time before admission to the official list, except in certain circumstances. These exceptions are set out in Schedule 10. For example a prospectus does not have to be published if the securities are to be offered to no more than fifty persons.

Clause 80: Publication of prospectuses

154.     This clause makes it a criminal offence for an unauthorised person to offer new securities for which an application for listing has been made without publishing a prospectus. For authorised persons a breach of this prohibition is treated as a breach of rules made by the Authority under Part IX.

Clause 81: Application of Part VI to prospectuses

155.     Under this clause the power of the Competent Authority to make listing rules, and the obligations of issuers and others under this Part, apply equally to prospectuses as they do to listing particulars.

Clause 82: Approval of prospectus where no application for listing

156.     Where securities are to be offered to the public in the UK for the first time and there has been no application for listing, listing rules may require issuers to submit prospectuses to the competent authority for approval. This clause terms such prospectuses "non-listing prospectuses". Where such a prospectus has been approved by the Competent Authority, under EC law it must be recognised by competent authorities in other member States as complying with their own rules on prospectuses. Accordingly there is no need in these circumstances to obtain further approval from another competent authority if the securities are to be issued in another member State.

Clause 83: Compensation for false or misleading particulars

157.     This clause provides that a person responsible for listing particulars (or, under this Part as applied by clauses 81 and 82, prospectuses or non-listing prospectuses) is liable to pay compensation to those who suffer loss as a result of untrue or misleading statements or the omission of any information which is required to be contained in those documents. There are some circumstances in which there is no liability to pay compensation. These are set out in Schedule 9.

Clause 84: Penalties for breach of listing rules

158.     This clause gives the Competent Authority a new power to impose financial penalties on issuers who have breached the listing rules. At present the Competent Authority can issue private or public censures or suspend or cancel the listing of securities. The new power is intended to provide additional flexibility in this area. The Competent Authority will also be able to impose penalties upon present and former directors (which is defined in clause 352 to include shadow directors) who were knowingly involved in a breach of the listing rules. However, it may not impose a penalty later than two years after it first became aware of the breach. Clauses 85 and 88 set out the procedures the Competent Authority must follow when imposing a fine. Clause 87 requires the Competent Authority to make arrangements for appeals against penalties. The Competent Authority is also required to publish a statement of its policy as regards penalties (see clause 86).

PART VII: PENALTIES FOR MARKET ABUSE

159.     This Part confers power on the Authority to impose penalties for market abuse. The Bill sets out the kinds of behaviour which will constitute market abuse and places a duty on the Authority to produce a code which will help to determine whether particular behaviour amounts to market abuse. This code will carry evidential weight, and in certain circumstances will provide a defence, or "safe harbour", against allegations of abuse. This Part also gives the Treasury the power to prescribe the coverage of the regime by specifying both the markets, and the investments traded on those markets, to which it applies. It sets out the procedures the Authority must follow when proposing to impose a penalty. It also confers a right to refer a decision to impose a penalty to the tribunal.

Clause 95: Market Abuse

160.     This clause sets out the behaviour which constitutes market abuse. It also confers on the Treasury an order-making power to specify which markets and which investments come within the scope of this clause. The Treasury has published in June 1999 a draft Order naming the six currently recognised UK investment exchanges as the markets covered by the regime (Financial Services and Markets Bill - Market Abuse: Prescribed Markets).

161.     Subsections (1) and (2) set out the conditions which must be satisfied before behaviour can be regarded as market abuse (and a penalty possibly imposed). In order to be abuse the behaviour must:

take place in relation to qualifying investments traded on a market to which the clause applies;

• be behaviour of a particular kind, as set out in subsection (2); and

• be behaviour which is likely to be regarded by a regular user of the market as a failure on the part of the person (A) engaged in the behaviour to observe the standards which the regular user would reasonably expect of a person in A's position. The regular user of the market is defined in subsection (11) to be a reasonable person who deals on the market. He is intended to represent the distillation of the standards expected by those who regularly use the market.

162.     There are three kinds of behaviour set out in subsection (2). Broadly speaking, these are that the behaviour is based on information not generally available to the rest of the market where the information would be likely to be regarded by the regular market user as relevant to the terms on which a transaction might be effected; that the behaviour is likely to give the regular market user a false or misleading impression; or that the regular user would be likely to regard the behaviour as behaviour which would distort the market.

163.     Subsection (3) provides a safe-harbour for those who take care to avoid engaging in market abuse or who believe that the behaviour does not amount to market abuse. These will be considerations which will affect the judgement of the regular user as to whether the person concerned failed to live up to expected standards of behaviour.

164.     Subsection (6)(a) brings behaviour which takes place in relation to the subject matter of investments within the definition of behaviour which can be caught by these provisions. This means that, for example, behaviour in relation to a precious metal which affects the price of a futures contract in the metal can potentially be caught by these provisions if it is behaviour which falls within all of the tests set out above. Subsection (6)(b) also brings investments within the regime which are not themselves qualifying investments for the purposes of this clause, but which are derivatives of a qualifying investment (for example options on options); or whose price or value is expressed by reference to the price or value of qualifying investments, for example spread bets.

Clause 96: The Code

165.     This clause places a duty on the Authority to prepare and publish a code which will allow it to set out in more detail than the primary legislation the kinds of behaviour which can constitute market abuse. The purpose of this code is to give guidance as to whether or not behaviour is abusive. The Authority has already taken steps to begin this process, publishing an initial draft code for consultation in June 1998 (Market Abuse Part 2: Draft Code of Market Conduct; CP10). It proposes to publish a revised draft code for further consultation in Spring 2000.

166.     Subsection (2) makes clear that the code may describe behaviour which, in the opinion of the Authority either does or does not amount to abuse. (Clause 97 provides that a statement in the code that a particular type of behaviour is not an abuse is conclusive evidence of this fact.) It may also set out factors which, in the Authority's opinion, should be taken into account when determining whether an abuse has occurred. An example of such factors might be an individual's expertise or the fact that someone holds a position of particular responsibility. Subsections (6) to (8) place the Authority under a duty to consult on the initial version of the code and on any subsequent changes to it.

Clause 97: Effect of the code

167.     Subsection (1) provides a so called safe harbour, by making it clear that if a person undertakes any behaviour which the code currently in force specifically states does not amount to market abuse, then he cannot be held by the Authority or the Tribunal to have abused the market. Subsection (2) makes clear that in other circumstances the code may be relied upon insofar as it indicates the behaviour in question will or will not amount to market abuse.

Clause 98: Power to impose penalties in cases of market abuse

168.     This clause allows the Authority to impose a monetary penalty on any person, whether an authorised person or not, who has engaged in market abuse or has required or encouraged another to engage in market abuse.

Clause 99: Statement of policy

169.     This clause places a duty on the Authority to prepare and publish a statement of its policy in respect of penalties under clause 98. The Authority will be able to set out in this document the circumstances in which it might impose a penalty and factors it will take into account in deciding what level of penalty to impose. Subsection (2) requires that the Authority's policy for determining the amount of a penalty, must take into account the effect and seriousness of the behaviour, whether or not it was deliberate or reckless and whether the person who engaged in the abuse was an individual. The Authority may also take into account other matters it considers appropriate. The Authority must consult on the initial version of the statement and on any subsequent changes. Subsection (4) makes clear that, having published this policy statement, the Authority must then have regard to it in using its powers.

Clause 101: Decision notices and right to refer to Tribunal

170.     This clause provides that if the Authority decides to impose a penalty, it must send a decision notice to those people who were sent the warning notice. A decision notice brings with it the procedures set out in clause 339. The clause also provides a right to refer the matter to the Tribunal.

171.     Subsection (3) modifies clause 339(2) so that the Authority does not have to notify an affected third party if it decides also to take action against that person directly.

Clause 103: Suspension of investigations

172.     This clause allows the Authority to direct a recognised investment exchange or recognised clearing house not to conduct an inquiry or to stop any inquiry it is already undertaking where the Authority is, or is considering, carrying out an investigation itself, or imposing a penalty on a person for market abuse.

Clause 104: Power of court to impose penalty in cases of market abuse

173.     This clause allows the Authority to apply to the court to impose a penalty for market abuse where the court is considering whether to grant an injunction under clause 331 or order restitution under clause 333 in a case of market abuse.

Clause 105: Guidance

174.     This clause allows the Treasury, with the approval of the Attorney General and the Secretary of State, if the need arises, to issue guidance to the relevant prosecuting authorities (as set out in subsection (3)). The purpose of this guidance would be to help those authorities in deciding whether a case should be subject to criminal prosecution, or the imposition of penalties under the market abuse provisions, in the area of overlap between these provisions and the criminal offences of insider dealing (in the Criminal Justice Act 1993) and misleading statements and practices (in clause 341).

PART VIII: HEARINGS AND APPEALS

175.     This Part establishes the Financial Services and Markets Tribunal. Various clauses in the Bill provide a right to refer a matter to the Tribunal once the Authority has notified the person concerned of its decision. This Part sets out the procedural framework for referrals to the Tribunal and for appeals from the Tribunal to the Court of Appeal, or in Scotland to the Court of Session, on a point of law. The Part gives the Lord Chancellor a general power to make rules for the Tribunal's operation. Schedule 11 sets out further details of the Tribunal's constitution and operation.

Clause 107: The Financial Services and Markets Tribunal

176.     This clause establishes the Tribunal and gives the Lord Chancellor the power to set its procedural rules. The Council on Tribunals is to be given oversight of the new Tribunal in keeping with the role established for the Council under the Tribunal & Inquiries Act 1992. Schedule 11 sets out requirements for the appointment of the President of the Tribunal, and the "panel of chairmen" panel and lay panel from which members of the Tribunal will be drawn. It includes provision for their qualifications and terms of office. It also permits the appointment of a Deputy President and administrative staff. It further provides power for the Tribunal to summon witnesses and to award costs. Subsection (3) contains the power for the Lord Chancellor to make rules for the Tribunal. The Lord Chancellor's Department will publish draft rules for consultation in due course. Schedule 11, paragraph 7 sets out examples of the aspects of the Tribunal's procedures which might be covered by the Lord Chancellor's rules (such as when hearings might be held in private). Subsection (4) provides that this does not limit the Lord Chancellor's power.

Clause 108: Proceedings: general provision

177.     This clause gives the Lord Chancellor power to make rules setting the length of the period following a decision notice during which a reference to the Tribunal may be made. In the absence of such rules, the period will be 28 days. The Tribunal will also have discretion to allow references after this period has expired, subject to any rules the Lord Chancellor may set on how this discretion should be exercised. The clause also makes clear that the Tribunal may hear any evidence it considers relevant to determining the case before it, including evidence that was not available to the Authority when it made its decision. The Tribunal can confirm, vary or completely set aside the Authority's decision, it can remit the matter back to the Authority, and it may make recommendations as to the Authority's rules or procedures. If the case is remitted back to the Authority, the Authority must act in accordance with the Tribunal's decision. A decision referred to the Tribunal does not take effect until the case has been finally disposed of, including any subsequent appeals (see clause 109 below). Once it does take effect it may be enforced as if it were an order of a county court in England, Wales or Northern Ireland, or the Court of Session in Scotland.

Clause 109: Further appeal on a point of law

178.     This clause establishes the right to appeal against a decision of the Tribunal on a point of law. An appeal is made to the Court of Appeal, or in Scotland to the Court of Session. Those Courts may determine the matter or remit it back to the Tribunal. Further appeal may be made to the House of Lords. Appeal against the Tribunal's decision may only be made with the permission of the Tribunal or the Court to which the appeal would be addressed. Similarly an appeal to the House of Lords may only be made with the leave of the Court of Appeal or Court of Session, whichever has considered the case, or the House of Lords. The Lord Chancellor may make procedural rules in relation to the exercise of these appeal rights.

PART IX: RULES AND GUIDANCE

179.     This Part of the Bill confers powers upon the Authority and the Treasury to set regulatory requirements for firms authorised under the Bill. It also gives the Authority power to issue guidance on requirements imposed by or under the Bill. The Authority published a consultation paper in April 1998 on the overall approach to creating its handbook (Designing the FSA Handbook of Rules and Guidance; CP8)

Chapter I: Rule-Making Powers

180.     Chapter I concerns the Authority's basic rule-making powers, the purpose for which rules can be made and the scope of the powers. Parts V, XVIII and XX also contain specific powers which enable the Authority to impose requirements on approved persons, members of Lloyd's and auditors and actuaries. This Chapter also sets out the relevant procedural requirements.

Clause 110: General rule-making power

181.     This clause confers a power on the Authority to make rules applying to authorised persons with respect to their carrying on of regulated activities. Rules made under this clause are referred to as "general rules" and can only be made to protect the interests of the persons mentioned in subsection (1), that is mainly for the protection of users of financial services. There need not be a direct relationship between the authorised firms to whom the rules apply and the consumers who are protected by the rules - so, for example, the Authority will be able to make rules under this clause to protect the interests of beneficiaries of trust, to further market integrity, as required by the Investment Services Directive, or to protect against systemic risk.

182.     The bulk of the Authority's handbook of rules and guidance will be constructed using the rule-making power in this clause. The power will also enable the Authority to make appropriate rules, including financial resources rules imposing capital adequacy and liquidity requirements (which take into account other group entities), rules relating to firms' systems and controls and rules regulating the conduct of firms' business with customers. These could, for example, include "know your customer" rules and "disclosure" requirements.

183.     The provisions in this clause enable the Authority to make rules at differing levels of detail, from rules with a high level of generality, which the Authority refers to as principles, to detailed conduct of business provisions.

184.     Clauses 122 to 125 set down the procedural requirements which the Authority must follow when making rules.