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

back to previous text

Clause 111: Non-regulated activity rules

185.     This clause allows the Authority to make rules concerning unregulated activities carried on by authorised persons in certain circumstances. These rules are referred to as non-regulated activity rules and can be made where necessary to prevent other activities of a firm having an adverse effect on its regulated activities, and as a result on the customers of those activities. It is intended that rules under this clause will include the following:

  • financial resources and large exposures rules which cover a bank's unregulated lending business, as well as, for example, its regulated deposit-taking business; and

  • Rules preventing authorised persons from gaining in their own account trading at the expense of customers.

186.     The non-regulated activity rules will not, however, allow the Authority to make rules binding on EEA firms operating in the UK under a passport on matters (such as capital adequacy) which are reserved to home State regulators under the single market directives.

Clause 112: Miscellaneous ancillary matters

187.     This clause elaborates on the provisions which the Authority can make under the rule-making powers.

188.     For example, the Authority may supplement rules relating to the financial resources of authorised persons with individual administrative notifications which impose different requirements on a case by case basis, based on an authorised person's individual risk profile. These requirements might, for example, relate to the capital adequacy or liquidity of an authorised person. The broad rules must be made under the same constraints in the legislation which apply to all other types of rules (so that consultation and other procedural requirements may apply). However, the administrative notifications can be made on a case by case basis and are not subject to the same procedural requirements. Notifications can be set for the authorised person on a group as well as individual basis.

189.     This clause also enables the Authority to make rules in respect of the handling of client money by authorised persons. The rules could be used to require money to be held in trust.

190.     This clause also allows the Authority to make rules which require authorised persons to allow customers a "cooling off" period after agreeing to enter into an agreement. Under current rules, for example, persons entering long term insurance contracts have 14 days in which to cancel and retrieve any premium paid.

Clause 113: Insurance business : regulations supplementing Authority's rules

191.     This clause enables the Treasury to make regulations applying to parent undertakings of authorised insurance companies. The regulations would supplement the asset identification rules to be made by the Authority. Asset identification rules are essentially rules similar to those currently made under section 29 of the ICA 1982 which identify the assets of the insurance company which are protected for a particular aspect of the business. The regulations could, for example, prevent the assets being transferred in specified circumstances.

192.     Subsection (3) clarifies that the regulations may render any mortgage or charge on the assets void or prevent dividends from being paid. It is intended that the regulations would prevent assets representing a fund maintained in respect of long term insurance business being transferred to another company. Subsection (4) gives the Treasury powers to make regulations which would make void any mortgages or changes made, in prescribed circumstances, by an insurance company over its own assets.

193.     Breaches of regulations made under subsection (1) would constitute a criminal offence, with the maximum penalty a fine at level five on the standard scale (currently £5,000).

Clause 114: Endorsement of codes etc issued by other bodies

194.     This clause confers a power on the Authority to make rules endorsing the City Code on Takeovers and Mergers ("the Takeover Code") and the Substantial Acquisition Rules ("SARs").

195.     This clause provides a mechanism enabling the Authority to exercise its disciplinary powers for a breach of the endorsed provisions of the Takeover Code or SARs. The arrangements are designed to ensure that authorised persons seek to procure their own clients' compliance with the Takeover Code and SARs and, in practice, to ensure that the adviser will cease to act for a bidder or target which does not comply with the Takeover Code or SARs. Subsection (3) has the effect that disciplinary or intervention powers in respect of endorsed provisions may be taken by the Authority if the Takeover Panel has requested it to do so.

196.     The clause sets out the procedural requirements which the Authority must follow in order to endorse codes. These requirements include a requirement to consult and largely shadow those in clause 125. However, if the Takeover Panel alters its rules, the Authority may endorse the amended rules without consultation, provided it has confirmed that it is satisfied with the Takeover Panel's consultation procedures.

Clause 115: Price stabilising rules

197.     This clause allows the Authority to make rules regarding actions which may be taken by authorised firms to stabilise the price of investments. Clause 341(4)(b) provides that a person has a defence to a charge of creating a false or misleading impression as to the market in certain investments if he proves that he was acting in conformity with rules made under this clause.

198.     Subsection (3) provides that the Authority may make rules which provide a similar defence to persons who have stabilised investments in compliance with the price stabilisation rules of an overseas body which is specified by the Authority. If an overseas body which is specified under this clause changes its rules, the amended body's rules will be taken by the Authority to be endorsed under this clause if the Authority has confirmed that it is satisfied with the overseas body's consultation procedures.

199.     Subsection (4) confers on the Treasury a power to make regulations setting the outer boundaries of the Authority's power to make price stabilising rules.

Clause 116: Financial promotion rules

200.     This clause confers a power on the Authority to make rules applying to authorised persons in relation to the regulation of financial promotion under Parts II and XVI of the Bill.

201.     Subsection (3) enables the Treasury to restrict this power.

Clause 117: Money laundering rules

202.     The Authority may make rules applying to authorised persons concerning the prevention and detection of money laundering in connection with the carrying on of regulated activities. These will enable the Authority to make compliance with the Money Laundering Regulations a regulatory obligation. The Authority will also be able to make rules supplementing the Money Laundering Regulations.

Clause 118: Modification or waiver of rules

203.     This clause concerns the power of the Authority to waive or modify certain kinds of rules, as set out in subsection (1), at the request of an authorised person or with their consent. Subsection (4) specifies the circumstances in which the Authority may waive or modify these rules.

204.     Waivers or modifications of rules can have indefinite effect or can be revoked by the Authority. Breaches of conditions attached to a waiver or modification are equivalent to a breach of rules.

205.     Subsections (6) and (7) concern the obligation on the Authority to publish rule waivers or modifications. They provide that the Authority must publish waivers or modifications in such a way as to bring them to the attention of the people who are likely to be affected, unless the Authority thinks it would be inappropriate to do so. In considering whether publication would be appropriate, the Authority should take into account whether it believes that publication would unreasonably prejudice the authorised person's commercial interests or contravene any international obligations of the UK. The Authority would also need to take into account whether a breach of the rule in question would give rise to a right of action by a private person under clause 120. Persons affected by the modification or waiver will include clients of the authorised person and other authorised persons who might wish to benefit from similar arrangements.

206.     In deciding whether certain of the conditions for withholding publication are met, subsection (8) requires the Authority to consider whether it can publish a waiver or modification of a rule without disclosing the identity of the authorised person concerned.

Clause 119: Evidential provisions

207.     This clause enables the Authority to make rules which, if breached, will not lead to any disciplinary or other sanction provided for under the Bill. Rules made under this clause must state that they will not give rise to sanctions under the Bill, but they must also indicate that their contravention can be relied on as indicating that another rule has been contravened, or that compliance with the rule can be relied on as indicating that another rule has been complied with. In particular, this power will enable the Authority to elaborate on rules, including principles, which are framed at a higher level of generality. The power can be used to promulgate codes, such as a code of practice, whereby rules comprising the code carry evidential status as to whether a higher level principle, which is underpinned by the code, has been breached.

Clause 120: Actions for damages

208.     This clause sets out the circumstances in which persons who suffer loss as a result of a rule breach by an authorised person have a right of action for damages for resulting losses. This clause does not remove any common law cause of action which a person might otherwise have. It allows a class of people to be able to recover losses just by showing that there has been a breach of a rule as a result of which they have suffered loss rather then having to rely on that breach as evidence of negligence.

209.     The clause creates a presumption that private persons (as defined by the Treasury) who suffer loss as a result of a rule breach have a right of action for damages. The right does not extend to breaches of financial resources rules or other rules which may be specified by the Authority. Customers would only generally suffer loss as a result of a breach of financial resources rules if the authorised person concerned became insolvent. In those circumstances, the relevant person's rights in the insolvency would not be altered by a separate right of action. Additionally, it might not be appropriate to attach a right of action to certain other rules, such as those drawn at a high level of generality.

210.     There is a presumption that persons other than private persons do not have a right of action for damages, although the Authority is able to specify that breaches of certain rules are actionable by non-private persons.

Clause 121: Limits on effect of contravening rules

211.     Breach of the Authority's rules does not make a person guilty of an offence, nor does it make a transaction unenforceable or void.

Clauses 122: Notification of rules to Treasury

212.     This clause places a requirement on the Authority to give the Treasury written notice when the Authority makes or amends a rule.

Clause 123: Rule-making instruments

213.     This clause require the Authority to publish written copies of its rules. As a result of subsection (3), if rules do not specify the power under which they are made, they will not have effect.

Clause 124: Verification of rules

214.     This clause concerns the procedure whereby the Authority can be required to verify its rules for the purposes of legal proceedings.

Clause 125: Consultation

215.     This clause imposes consultation requirements on the Authority when it proposes to exercise its rule-making powers. Draft rules issued for consultation must, as a result of subsection (2), be accompanied by a cost benefit analysis of the proposals, an explanation of the purpose of the proposed rules and a statement that representations about the Authority's proposals may be made to the Authority within a specified time. They must also be accompanied by a statement of the Authority's reasons for believing that the proposed rules are compatible with the Authority's objectives.

216.     Subsection (4) provides that the Authority must have regard to those representations. Subsections (5) and (6) provide that if the Authority decides to make the rule, it must give a feedback statement on the representations it received. If the rules which are introduced differ significantly from those which the Authority consulted on, the Authority must publish a statement of that fact, together with a cost benefit analysis concerning the new provisions.

217.     Where the Authority proposes to exercise its powers to charge fees, the requirement to produce a cost-benefit analysis does not apply but the Authority is required to consult on the proposed expenditure which would result from the fee raising exercise. Part III of Schedule 1 contains further provisions regarding the Authority's fee raising powers.

218.     Consultation requirements will not apply if the Authority considers that any delay resulting from the consultation would harm consumers. Also, the Authority does not have to consult on a cost-benefit analysis when it considers that its proposals will not result in a material increase in costs. It would, however, still need to consult on the content of the proposed rules.

Clause 126: General supplementary powers

219.     This clause confirms that the Authority's rules may make different provision for different cases and that the rules may make incidental, supplemental, consequential and transitional provisions.

Chapter II: Guidance

220.     Chapter II concerns the Authority's power to issue and charge for guidance on its rules, the legislation and other matters relating to its functions, including its regulatory objectives.

Clause 127: Guidance

221.     This clause enables the Authority to issue and charge for guidance on all the matters listed in subsection (1).

222.     Subsection (2) confirms that the Authority can use its financial resources or its other resources to support the giving of information and advice by third parties where the Authority considers it could have given the advice or information under this clause.

223.     Subsection (3) provides that when giving guidance on its rules which is intended to have broad application, the Authority will need to meet various of the requirements of clause 125, including those requiring consultation and the publication of a cost-benefit analysis. Subsection (4) clarifies that the Authority can charge for its guidance, whether it is offered generally or in response to a specific request.

Clause 128: Notification of guidance to the Treasury

224.     This clause sets out what is meant by "general guidance" and requires the Authority to give copies of any general guidance issued to the Treasury.

Chapter III: Competition Scrutiny

225.     Chapter III provides for competition scrutiny of the Authority's rules, guidance, policy and practice statements, codes and practices. It places a duty on the DGFT to keep these under review, and to report to the Treasury about any rules which may have a significantly anti-competitive effect. On receipt of a report under this Chapter, the Treasury may require changes to be made to the relevant rules, guidance, statements, codes or practices, if it is satisfied that the anti-competitive effect is greater than is necessary.

226.     The Economic Secretary announced to the Standing Committee on 9 November 1999 that changes would be made to Chapter III in due course. In particular, amendments would be made requiring the Director General to report to the Competition Commission as well as to the Treasury. The Competition Commission would then take a final decision on whether the regulating provision or practice was anti-competitive and come to a view on whether, if so, it was nevertheless justified by the permitted purposes set out in clause 132. Treasury Ministers would be able to override this decision in exceptional circumstances.

Clause 130: Reports by the Director General of Fair Trading

227.     Subsection (1) requires the Authority to send the DGFT a copy of any new or modified rule, guidance, statement of policy or principle, or code, immediately it is made. These rules, guidance, statements and codes are referred to collectively as "regulating provisions". Subsection (2) makes clear that the Authority must include with this notification a statement whether, in its opinion, the regulating provision in question will have an effect on competition.

228.     Subsections (4) and (5) require the DGFT to keep the Authority's regulating provisions and practices under continuing review. If, subsequent to receipt of a notification from the Authority, or at any other time, he forms the view that an individual regulating provision or practice has a significant anti-competitive effect, or that this is the combined effect of a number of regulating provisions or practices, then he must report this to the Treasury, giving details. Subsection (3) provides that if the DGFT concludes that a regulating provision notified to him will not have a significant anti-competitive effect, then he has discretion whether or not to report this to the Treasury. Subsection (6) gives the DGFT discretion whether or not to publish a report made under subsection (3).

229.     Subsection (7) requires the Treasury to publish any report which it receives under subsections (4) and (5) - that is any report finding a significant anti-competitive effect. Subsection (8) requires that, if a report is published by the DGFT, under subsection (6), or by the Treasury under subsection (7), any confidential information relating to a particular person must, so far as practicable, be removed from the report prior to publication.

Clause 131: Power of the Director to request information

230.     This clause provides that, in carrying out his functions under clause 130, the DGFT has powers to request relevant documents from any person, and to request relevant information from any business. (Subsection (4) makes clear that these powers do not, however, require anyone to disclose a legally privileged communication.)

231.     Subsections (5) and (6) provide that if a person fails to produce a required document, or piece of information, then the DGFT may report the matter to the court, and if the court is satisfied that there was no reasonable excuse for this failure, that person may be punished as if he had been guilty of contempt of court.

Clause 132: Powers and duties of the Treasury

232.     Subsection (1) provides that when the Treasury receive a report identifying regulating provisions or practices which the DGFT believes cause a significant anti-competitive effect, they must decide whether they agree with the DGFT's conclusions. If the Treasury do so, then they must take a further decision as to whether these provisions or practices are nevertheless justifiable. They may decide that they are justifiable if, in their opinion, the anti-competitive effect they have is no greater than is necessary to achieve one of the "permitted purposes" listed in subsection (2). If this is the case, then the Treasury need take no further action.

233.     If, however, the Treasury decide that the regulating provisions or practices concerned are not justifiable, subsection (3) provides that they may either tell the Authority what changes it must make to rectify this, or, in the case of rules only, the Treasury may make changes. Subsection (4) provides that if the Treasury are considering taking action under subsection (3), they must first invite the Authority, and any other interested parties, to make representations, both on the contents of the DGFT's report, and on what steps, if any, the Treasury might take in response. The Treasury must have regard to any representations they receive.

Clause 133: The Fair Trading Act 1973

234.     This clause provides that in carrying out investigations of possible monopoly situations, the Competition Commission shall not take into account the effects of any regulating provisions or practices of the Authority, nor of any actions which other persons may have taken in compliance with these.

Clause 134: The Competition Act 1998

235.     This clause makes clear that neither the prohibition in Chapter I (of agreements preventing, restricting or distorting competition within the United Kingdom) or the prohibition in Chapter II (of abuse of a dominant position in a market which may effect trade in the United Kingdom) of the Competition Act 1998 shall apply to any action taken by a person in order to comply with the Authority's regulating provisions or practices.


236.     This Part sets out the powers of the Authority to require the production of information and documents, to require reports to be compiled, to conduct investigations and to obtain access to premises. Many of these powers are also held concurrently by the Secretary of State in recognition of his wider responsibilities in relation to company law.

237.     The powers provided for in this Part are in addition to the specific powers conferred on the Authority by other provisions of the Bill to request information from unauthorised persons in particular circumstances, such as in connection with an application for authorisation or recognition. They enable the Authority to require information on an ad hoc basis and therefore supplement the Authority's ability to make rules requiring authorised persons to provide it with information on a routine basis under its general rule-making power (clause 110).

238.     Failure to comply with any requirement imposed using any of the powers in this Part is a criminal offence under clause 147 (see below).

Clause 135: Authority's power to require information

239.     This clause gives the Authority a general power to require information or documents (see note on clause 146 below) which may reasonably be required in connection with the discharge of its functions under the Act. The information or documents may be required from any person, including a legal person, who is any of the following:

  • an authorised person,

  • a formerly authorised person,

  • a person connected with an authorised person, as defined in subsection (11),

  • a recognised investment exchange,

  • a recognised clearing house.

240.     Either the Authority can write to the person asking for the production of the information or documents within a reasonable timescale, or it can send an officer to whom it has given written authorisation. The person is required to provide the information or documents without delay, and he may also be required to take any reasonable steps the Authority may specify to verify the information provided.

Clause 136: Reports by skilled persons

241.     This gives the Authority the power to require an authorised person or a formerly authorised person to commission and provide the Authority with a report into any relevant matter the Authority may specify. This must be a matter about which the Authority could require information under the preceding clause, that is the report must reasonably be required in connection with the discharge of the Authority's functions.

242.     The power also enables the Authority to require such reports from other persons carrying on a business who are, or were, connected to the authorised or formerly authorised person in the ways specified in subsection (2). Essentially these are members of the same group of companies, or companies closely linked through a common shareholder, or any partnership of which the authorised or formerly authorised person is or was a member. This is a more limited set of persons than under the preceding clause and Schedule 11.

243.     The person making the report must be nominated by the Authority, or their appointment must be approved by it. The Authority has to be satisfied that they have the relevant skills to report on the matter concerned. In many cases this person may be an accountant, or they may be a person with some other suitable professional qualification, such as a lawyer or an actuary, or they may be a person with particular commercial or professional experience, such as a banker. The Authority may also specify the form of the report.

244.     Subsection (4) imposes an obligation on any in-house expert working for the authorised or connected person to cooperate with the person appointed to produce the report. Thus, if the report is to be produced by an actuary then the in-house actuary who works for the firm is obliged by subsection (5) to cooperate in the production of the report. This duty is enforceable by the Authority through an injunction, or a comparable order in Scotland.

Clause 137: Appointment of persons to carry out general investigations

245.     Under this clause either the Authority or the Secretary of State (the "investigating authority") may, where there are good reasons for doing so, appoint competent people to conduct an investigation on their behalf into the business of an authorised person or appointed representative, or into the ownership or control of an authorised person. An "appointed representative" is a person who is exempt from the general prohibition in relation to particular regulated activities by virtue of a contract with an authorised person as described under clause 35 - see above. An appointed representative and the authorised person who is their principal as a result of the contract may be investigated at the same time. An investigation may also be made into a formerly authorised person or a former appointed representative, although the scope of such investigations is limited by subsection (4) to the business they conducted while they were authorised or appointed or the control or ownership of the former authorised person at that time. Written notice must be given to the person under investigation under clause 140(2).

246.     The people appointed to conduct the investigation may be employees of the investigating authority (under clause 140(5)), or other people engaged specifically for the purpose. If they judge it necessary for the purposes of the investigation, they may also inquire into the business of other connected companies or partnerships, including those which were connected at some relevant time in the past (this extends to the same classes of connected company or partnership as under the preceding clause). The investigator(s) must give written notice to any other company or partnership whose business they intend to inquire into in this way.

previous Section contents continue
House of Commons home page Houses of Parliament home page House of Lords home page search Page enquiries

© Parliamentary copyright 1999
Prepared: 19 November 1999