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

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Clause 197: The scheme and the scheme operator

375.     This makes clear that the object of the scheme is to resolve disputes involving consumers quickly and with minimum formality. This is a key characteristic of existing schemes. The operator of the Financial Services Ombudsman Scheme must be a body corporate.

Clause 198: Compulsory jurisdiction

376.     It will be compulsory for firms authorised by the Authority to submit to the jurisdiction of the scheme. The scheme's compulsory jurisdiction may only be applied to persons who were authorised at the time the activity to which the complaint relates was carried out, and the rules must have been in force at that time. The Authority will make rules determining which activities of authorised persons fall within the compulsory jurisdiction. These activities must either be regulated activities as specified by the Treasury under clause 20 or other activities which are not regulated, but could be made regulated activities under that clause. The Authority is expected to include most of the financial services activities of authorised persons. For example in the case of insurance companies the jurisdiction of the scheme is likely to include the marketing of general insurance products even though it is not the Government's current intention that this activity should be regulated. The Authority would on the other hand be free not to include certain activities, for example kinds of professional business where it is unlikely that retail customers would ever be involved.

377.     If an activity is included in the compulsory jurisdiction of the scheme, the ombudsman will be able to consider all disputes which arise from the carrying on of that activity by the authorised person. For example if deposit-taking is specified as an activity covered by the compulsory jurisdiction of the scheme, the ombudsman will be able to consider all disputes arising from the operation of a bank account such as the withdrawal of money from a cash machine, or a stopped cheque.

378.     The clause also sets the circumstances in which a complaint can be dealt with, namely that the complainant meets the relevant eligibility criteria (set by the Authority) and has asked the ombudsman to consider the case. The scheme is not able to deal with complaints made by authorised persons, except in circumstances specified in the rules.

Clause 199: Voluntary jurisdiction

379.     Firms which are not authorised by the Authority will be able to join the scheme on a voluntary basis. Under the voluntary jurisdiction, the ombudsman scheme will be able to deal with complaints which are related to unregulated financial services activities. If an unregulated activity is subject to the compulsory jurisdiction for authorised persons, complaints about that activity when carried on by unauthorised persons can be brought within the scope of the ombudsman scheme (provided that the unauthorised person was a member of the scheme at the time to which the complaint relates, and that the rules were in force at that time). For example, the activities of consumer-credit firms who are not also authorised persons could be dealt with under the voluntary jurisdiction.

380.     The scheme's voluntary jurisdiction rules can only relate to activities which are subject, or could be made subject, to the compulsory jurisdiction rules. The voluntary jurisdiction can be applied to authorised persons where a complaint relates to an activity which could be, but has not been, made subject to compulsory jurisdiction rules.

381.     Voluntary jurisdiction rules can be made by the scheme operator with the approval of the Authority. The rules will also define which complainants are eligible.

Clause 200: Determination under the compulsory jurisdiction

382.     The ombudsman will make a decision about the complaint on the basis of what he considers is fair and reasonable in the circumstances. The scheme operator has the power under paragraph 15 of Schedule 14 to specify what matters can be taken into account when determining what is fair and reasonable. The complainant may accept or reject the award by a date set by the ombudsman. If he accepts the decision the ombudsman's award is binding on the respondent. The clause also sets out the procedures to be followed by the ombudsman.

Clause 201: Awards

383.     If a complaint under the compulsory jurisdiction is determined in favour of the consumer ("the complainant"), the firm ("the respondent") may be ordered to pay compensation up to a maximum limit which may be set by the Authority. The limit may be different for different kinds of complaint. The Authority may specify a separate limit for compensation which can be awarded for losses of a kind for which a court does not have a power to award damages for breach of contract, such as for distress and inconvenience. The ombudsman can only make a binding award up to the limit set by the Authority, but he may recommend a greater amount as fair compensation. The respondent may also be ordered to take steps to rectify the matter complained of, and this can be enforced through the courts by the complainant, if necessary.

Clause 202: Costs

384.     This clause allows the scheme operator to make rules concerning the costs which can be awarded by the scheme. These rules are subject to some constraints. Where a complaint is settled in favour of the consumer, the rules could allow the firm concerned to be required to meet the costs of both the consumer and the scheme. A consumer could only ever be required to meet the costs of the scheme, and then only if the ombudsman believes that their conduct has been improper or unreasonable, if they have been responsible for an unreasonable delay, or if their complaint was considered to be vexatious or frivolous. The clause also makes provision for recovery of costs by the scheme operator.

Clause 203: Ombudsman's power to require information

385.     The efficient settlement of complaints under the compulsory jurisdiction will sometimes require the scheme to obtain information from the parties to the dispute. This clause provides the scheme operator with powers to require parties to the complaint to provide specified information which it considers necessary for the fair determination of the complaint. It is not expected that these powers will be used on a routine basis. The Authority will also have powers to make rules requiring authorised persons to cooperate with the scheme. It will be in the interests of the complainant to cooperate.

Clause 204: Powers of court where information required

386.     This clause provides that a failure to comply with a requirement to provide information made under clause 203 may be dealt with as if it were a contempt of court.

Clause 205: Industry funding

387.     This clause provides for the Authority to be able to levy fees on authorised persons to meet both the costs of establishing the scheme, and the costs of running the compulsory jurisdiction. The costs of the voluntary jurisdiction will be met by fees set as part of the voluntary jurisdiction rules.


388.     This Part comprises six chapters concerning collective investment schemes, including unit trusts, open-ended investment companies and overseas schemes. It includes provisions relating to the authorisation of schemes, their trustees, managers and operators and also to the rules applicable to them. The Part also makes provision for overseas collective investment schemes which may be promoted in the UK:

  • Chapter I provides the relevant definitions for this Part. It also gives the Treasury the power to specify by order that certain arrangements will not constitute a collective investment scheme. A draft of an order proposed to be made under this clause was published by the Treasury for consultation in February 1999 (Financial Services and Markets Bill: Regulated Activities - A Consultation Document).

  • Chapter II prohibits authorised persons from promoting participation in a collective investment scheme unless an exemption applies. Whilst the provisions broadly continue the basic prohibition on authorised persons promoting collective investment schemes contained in the FS Act 1986, changes have been made to reflect the new financial promotion regime set out in clause 19.

  • Chapter III contains the provisions relating to authorised unit trust schemes. These broadly follow the provisions of the FS Act 1986, although the Authority is to be given the power to approve changes to an authorised unit trust's investment and borrowing powers. New provisions are also included to deal with rule waivers and modifications, and to grant operators and trustees of authorised unit trust schemes the right to refer matters to the Tribunal in certain circumstances.

  • Chapter IV contains provisions which not only enable the Treasury broadly to continue the current regime concerning oeics, but also to make regulations concerning the establishment and regulation of other forms of oeic in the UK. At present, oeics which are incorporated and authorised in the UK must invest solely in transferable securities. The new provisions in the Bill will allow the Treasury to make regulations concerning the creation and operation of a wider range of authorised oeics, so that they can invest in assets other than simply transferable securities. Should the demand exist, the Treasury may also, under the new provisions, make regulations concerning the incorporation of unauthorised oeics. This might, for example, be done in order to allow the formation of common investment funds for charitable purposes, or in the context of ethical investments.

  • Chapter V broadly carries forward the existing provisions of the Financial Services Act and allows three kinds of overseas scheme to be "recognised" and marketed in the UK. First, schemes constituted in other member states which meet particular requirements, second, schemes authorised in designated territories, and third, schemes constituted in other territories, but which are individually recognised.

  • Chapter VI sets out the powers of investigation which will apply in relation to authorised unit trust and overseas schemes. It is intended that the principal provisions concerning investigations of oeics will be set out in the proposed Treasury regulations under Chapter IV.

Chapter II: Restrictions on promotion

Clause 208: Restrictions on promotion

389.     This clause contains the basic marketing prohibition and some exemptions from it. The main exemption is for schemes which are marketed other than to the general public. Other exemptions include promotions made in respect of authorised unit trust schemes, authorised oeics and recognised overseas schemes. The marketing prohibition applies to communications which originate outside the UK if the communication is capable of having an effect in the UK.

390.     The term "promotion otherwise than to the general public" is amplified in subsection (6) and includes promotions which are designed, so far as possible, to reduce the risk of participation by persons for whom it would be unsuitable. The prohibition on marketing to the general public will not therefore necessarily be breached if a promotion is inadvertently received by a member of the general public.

Clause 209: Single property schemes

391.     A single property scheme is, broadly, a collective investment scheme which relates to a single building or a group of buildings managed as a single enterprise. The clause gives the Treasury power to make regulations exempting the promotion of participation in single property schemes to the general public. If the Treasury make regulations under this clause, the Authority may then make rules imposing duties on the operator and trustee or depositary of schemes exempted under the regulations.

Clause 210: Restriction on approval of promotion

392.     This is a new provision designed to prevent an authorised person from approving a financial promotion under clause 19 if the authorised person would not himself be permitted to make the communication under clause208.

Clause 211: Actions for damages

393.     If an authorised person contravenes a requirement under clause208 or 210, a private person who suffers loss as a result may claim damages.

Chapter III: Authorised unit trust schemes

Clause 212: Applications for authorisation of unit trust schemes

394.     Applications for an order declaring a unit trust scheme to be authorised must be made to the Authority by the manager and trustee of the scheme. The manager and trustee must be different persons. The clause gives the Authority broad scope to determine the form and content of the application, including further information to be contained in it.

Clause 213: Authorisation orders

395.     If the conditions referred to in the clause are met, the Authority may make an authorisation order declaring a unit trust scheme to be authorised. The conditions reflect certain requirements specified UCITS Directive which establishes a passporting regime whereby certain types of authorised collective investment scheme established in one EEA State may generally be entitled to equivalent authorisation in others. The clauses include requirements that:

  • the manager and trustee must be bodies corporate which are independent of each other and incorporated in the UK or another EEA State;

  • if the manager and trustee are incorporated in the UK, they must be authorised persons holding the appropriate permissions;

  • the scheme must comply with the requirements of the trust scheme rules (referred to at clause 217, below); and

  • participants must be able to have their units redeemed at a price related to net asset value of the scheme property or be able to sell their units on an exchange at a similar price.

Clause 214: Determination of applications

396.     This clause sets out the time limits within which applications should be determined (and specifies that completed applications shall be determined within six months). Applicants may withdraw their application at any time before the Authority makes a determination.

Clause 215: Procedure when refusing an application

397.     If the Authority wishes to refuse an application, it must issue each of the manager and trustee with a warning notice. The warning and decision notice procedures contained in clauses 338 and 339 will then apply. Either of the manager or the trustee may refer a refusal to the Tribunal.

Clause 216: Certificates

398.     If an authorised unit trust scheme meets with the requirements of the UCITS Directive, the manager or trustee of the scheme can request the Authority to issue a certificate to that effect. The certificate will be needed if the authorised unit trust scheme is to "passport" into other European jurisdictions.

Clause 217: Rules

399.     This clause permits the Authority to make rules (known as the "trust scheme rules") concerning the constitution, management and operation of authorised unit trust schemes. These cover broadly the same matters as constitution and management regulations under section 81 of the FS Act 1986, although the arrangements under the present legislation whereby the Treasury retain a degree of control over certain constitution and management matters (such as the investment and borrowing powers of authorised unit trusts) are to be departed from, so that the Authority now has direct responsibility for these matters.

400.     The trust scheme rules are binding on the manager, trustee and participants independently of any provisions contained in the trust deed. Participants can seek to enforce the trust scheme rules against the manager or trustee as if the rules were provisions contained directly in the trust deed.

401.     The Treasury have power to modify the Authority's rule-making powers if there is a change in the company law relating to the rights of beneficial, but not legal, owners of shares. This would enable the rights of nominee holders in authorised unit trusts to be aligned to those of shareholders in companies should the need arise.

Clause 218: Scheme particulars rules

402.     These are rules which the Authority may make requiring the manager of an authorised unit trust scheme to give details of the scheme to the Authority and to publish or make available to the public on request certain particulars, including changes, concerning the scheme.

403.     The scheme particulars rules can provide for compensation to be paid to certain people (described as "qualifying persons") if they have suffered loss because of an untrue or misleading statement in the particulars or because of an omission from them. Qualifying persons include people who may have a beneficial, but not legal, interest in the scheme (for example, beneficiaries of a trust where the trustees hold units in the scheme).

Clause 219: Disqualification of auditor for breach of constitution and management rules

404.     The Authority may disqualify an auditor from auditing authorised unit trust schemes or authorised oeics if the auditor does not comply with the trust scheme rules. Warning and decision notice procedures will apply, as well as rights to refer a decision to the Tribunal.

Clause 220: Modification or waiver of rules

405.     This allows the Authority to modify or waive the application of any of the trust scheme rules or scheme particulars rules in respect of authorised unit trusts. If there is a modification or waiver of rules under this clause, certain of the provisions of clause118 (relating to the modification or waiver of various other of the Authority's rules and providing for the circumstances in which waivers or modifications will be granted) will apply.

Clause 221: Alteration of schemes and changes of manager or trustee

406.     Alterations to an authorised unit trust scheme or a change in the manager or trustee may not take place without the Authority's approval, or the Authority not notifying its disapproval. If the Authority proposes to refuse to approve changes to the scheme, warning and decision notice procedures will apply and the matter can be referred to the Tribunal. New managers or trustees must satisfy the requirements specified in clause 213.

Clause 222: Procedure when refusing approval or change of manager or trustee

407.     If the Authority proposes to refuse to approve the replacement of the trustee or manager, a warning notice must be given. The clause then makes provision for decision notices to be given and for reference to the Tribunal.

Clause 223: Avoidance of exclusion clauses

408.     This clause means that if a trust deed for an authorised unit trust scheme seeks to avoid the manager's or trustee's duty to exercise due care, the deed will be ineffective.

Clause 224: Revocation of authorisation order otherwise than by consent

409.     The Authority may revoke an order authorising a unit trust in the circumstances specified in the clause. These include any of the following situations:

  • the manager or trustee has contravened a requirement imposed by the Bill or the Authority's rules;

  • either of them has given the Authority misleading information;

  • the requirements for making an authorisation order (referred to in clause 213) are no longer met;

  • the scheme has been inactive for 12 months or more; or

  • it is desirable in the interests of participants to revoke the scheme's authorisation.

Clause 225: Procedure

410.     If the Authority wishes to revoke an authorisation order, it must go through the warning and decision notice procedure, giving notice to both the manager and trustee. Either of them may refer the decision to the Tribunal.

Clause 226: Requests for revocation of authorisation order

411.     The Authority can revoke an authorisation order where the manager or trustee requests it to, but it can also refuse to revoke authorisation where it considers that refusal would be in the interests of participants, or that the public interest requires an investigation before authorisation is revoked. Warning and decision notice procedures will apply as well and the decision may be referred to the Tribunal.

Clause 227: Directions

412.     The Authority may give directions requiring the manager of the scheme to cease the issue or redemption of units, or to require the manager and trustee of the scheme to wind it up by a particular date in the circumstances specified in the clause (which are broadly similar to those specified as grounds for revoking a scheme's authorisation under clause 224). If a person contravenes a direction under this clause, private persons who suffer loss as a result may be able to bring an action. Once a direction has been given, the Authority may revoke or vary that direction, either of its own accord, or on the application of the manager or trustee.

Clause 228: Applications to the court

413.     If the Authority is able to give a direction under clause227, it may apply to the court for an order removing and replacing the manager or the trustee, or simply removing them and appointing an authorised person to wind up the scheme.

Clause 229: Procedure: giving directions and varying them otherwise than as requested

414.     If the Authority wishes to give a direction under clause 227, or to vary that direction other than in accordance with an application from the manager or trustee, or in the case of urgency, it must first go through the warning and decision notice procedure, giving notice to each of the manager and the trustee. Either the manager or the trustee of the scheme may refer a decision to give a direction or to vary it to the Tribunal.

Clause 230: Procedure: refusal to revoke or vary direction

415.     If the manager or trustee applies to the Authority for it to revoke or vary a direction given under clause 227, but the Authority proposes to refuse to do so, the warning and decision notice procedures will apply. The decision may be referred to the Tribunal.

Clause 231: Procedure: revocation of direction and grant of request for variation

416.     If the Authority decides to revoke a direction under clause 227, or to vary a direction in accordance with a request, it must give written notice of that fact. The Authority may publish information about the revocation or variation of the direction.

Clause 232: Procedure in cases of urgency

417.     This clause gives the Authority an emergency intervention power to issue or vary directions. It avoids the requirement for a warning notice and provides simply for a decision notice to be issued instead (the decision notice can take immediate, but not retrospective, effect). The person to whom the decision notice has been issued may make representations to the Authority, following which the Authority must decide its course of action.

418.     If the Authority confirms or rescinds its original decision, it must give written notice to the manager and the trustee. If, however, the Authority decides to give a different direction or make a different variation, it must give a further decision notice. The recipient of the notice may then refer the decision to the Tribunal.

Chapter IV: Open-ended investment companies

Clause 233: Open-ended investment companies

419.     This clause creates the broad framework for Treasury regulations relating to the establishment, carrying on, and regulation, of oeics. It provides a wide-ranging and non-exhaustive list of matters which the regulations may provide for. These include imposing criminal liability, conferring functions on the Authority (including rule-making powers and power to waive or modify rules) and power to modify or exclude any statute or rule of law. In particular, the regulations may revoke the current regulations governing oeics and provide for transitional arrangements for "grandfathering" under those regulations.

Clause 234: Amendment of section 716 Companies Act 1985

420.     This clause amends the Companies Act 1985 ("Companies Act"), so that the prohibition on formation of companies with more than 20members other than under the Companies Act will not apply to oeics incorporated by virtue of the proposed Treasury regulations.

Chapter V: Recognised overseas schemes

Clause 235: Schemes constituted in other EEA States

421.     This clause relates to the ability of collective investment schemes constituted in other EEA States to "passport" into the UK. EEA schemes will be recognised if:

  • they satisfy requirements prescribed by Treasury regulations;

  • the operator of the scheme gives notice to the Authority of the proposal to invite UK persons to participate in the scheme; and

  • the Authority does not give notice that the way in which the invitation is to be made does not comply with the relevant UK law.

Clause 236: Representations and references to the Tribunal

422.     This clause sets out the procedure if the Authority gives notice that it does not consider that the proposed invitations will comply with UK law, and representations are made to the Authority in response. The procedures allow for rights of reference to the Tribunal where the Authority issues a decision notice confirming that the way in which the proposed invitations are to be made does not comply with UK law.

Clause 237: Disapplication of rules

423.     Rules made by the Authority will not generally apply to the operator, trustee or depositary of a recognised scheme under clause 235. The exceptions are financial promotion rules, and rules relating to the maintenance of facilities in the UK (under clause 254(1)).

Clause 238: Power of authority to suspend promotion of scheme

424.     Although it cannot suspend an EEA scheme's recognition, the Authority can suspend its promotion to the public if it appears that the operator has contravened financial promotion rules. Warning and decision notice procedures will apply and the Authority will be required to notify the scheme's home State authority if it decides to make a direction under this clause. The operator will have a right to refer the decision to the Tribunal. If a direction is given under this clause, the Authority must publish it.

Clause 239: Schemes authorised in designated countries or territories

425.     Schemes managed in, and authorised under, the law of non-EEA territories can be recognised under this clause. In order to be recognised, the relevant territory needs to be designated by an order made by the Treasury, and the Authority must give its approval to the scheme being recognised. The Treasury may not make an order designating a territory unless it is satisfied that the relevant overseas law under which the scheme is authorised and supervised affords at least equivalent protection to that provided by the UK law on collective investment schemes.

426.     In considering whether to make an order designating a country or territory under this clause, the Treasury must ask the Authority for a report on the law in question.

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Prepared: 19 November 1999