Clause 284: Authority's general duty

Clause 285: The Society: authorisation and permission

496.     This clause makes the Society an authorised person, without it needing to submit an application. This is needed because, unlike most other current businesses, Lloyd's does not have an authorisation from an existing regulator that can be grandfathered.

497.     Subsection (3) limits the activities for which the Society has permission, at the time it becomes authorised, to arranging deals in insurance contracts, syndicate participation and connected activities. However, subsection (4) gives the Authority a power, where it considers it appropriate, to limit the scope of the permission, at the time the authorisation comes into force, or at any time thereafter. Lloyd's would apply for an extension of that permission in accordance with Part IV.

Clause 286: Direction by Authority

498.     This clause confers on the Authority power to give directions in relation to "insurance market activities". This power can be used in relation to a member of Lloyd's, or members taken together, though they will not, at least at the outset, be authorised persons. Directions under this clause can specify the extent to which the "core provisions" of the Bill, as set out in clause 287, will apply to them and would impose requirements directly on the members which the Authority will be able monitor and enforce. The Authority could, for example, apply to members general rules requiring persons carrying out contracts of insurance to appoint an actuary to assess the extent of their liabilities. It could also require members to be authorised if it considers that appropriate.

Clause 287: The core provisions

499.     The core provisions which the FSA may decide to apply to members of Lloyd's under clause 286 relate to:

• the performance of regulated activities

• rules and guidance

• information gathering and investigations

• control over authorised persons

• auditors and actuaries

• notices

Clause 288: Exercise of powers through the Council

500.     This clause gives the Authority an alternative mechanism to its power of direction under clause 286. Instead of directing the members of Lloyd's themselves, the Authority can direct the Society of Lloyd's, acting through its Council, to impose obligations on its members. The Council of Lloyd's can then implement any requirements using its byelaw making powers under the Lloyd's Act 1982. It would, therefore, be open to the Authority to set solvency requirements for Lloyd's members, perhaps specifying in a direction only the high level requirements required by the EC Directives; the Council would then make byelaws specifying the detailed arrangements in accordance with the requirements of the direction. The Council would then be responsible for enforcing its byelaws and for demonstrating to the Authority that the relevant requirements had been met.

501.     Subsection (2) also allows the Authority to use this power to direct the Council in respect of managing and members' agents, rather than exercising powers against them directly as authorised persons.

502.     Subsection (3) makes it clear that if the Authority chooses to give directions in this way, it is not precluded from using its other regulatory powers under the Bill.

Clause 289: Former underwriting members of Lloyd's

503.     This clause deems former members of Lloyd's, including members who decide to leave in the future, to be authorised for the purposes of this Bill in relation to the insurance business carried on by them while they were members of Lloyd's. This will enable the Authority to exercise its powers to the extent it considers it necessary until all liabilities under any contracts of insurance underwritten by former members have been discharged. The authorisation arrangements under this clause do not prevent a former member of Lloyd's obtaining permission from the Authority to carry on any other regulated activities under the Bill.

PART XIX: MUTUAL SOCIETIES

504.     This Part gives the Treasury powers by order to transfer the functions of the Building Societies Commission, the Friendly Societies Commission and the Chief Registrar of Friendly Societies and functions under the Industrial and Provident Societies Acts. These transfers will be achieved by orders made under clauses 291 to 294.

505.     It is envisaged that the powers will be exercised to ensure that the functions which relate to the registration and regulation of societies under the existing legislation will be transferred to the Authority. For example, the functions to be transferred to the Authority are likely to include the power to require, or approve, a transfer of the business of a mutual society to another society or to a company.

506.     The existing legislation also confers power on the Building Societies Commission, Friendly Societies Commission and the Chief Registrar, often subject to the consent of the Treasury, to set requirements as to the registration and constitution of such societies. Such powers are exercised by statutory instrument. Those powers are different in character from the financial regulatory powers of the Authority under the Bill. It is proposed that such functions will transfer to the Treasury.

507.     These transfer provisions also include power for the Treasury to dissolve the existing bodies, it being envisaged that all their functions will have been transferred. The Treasury will be able to make supplemental provision, for example, to transfer the property, rights and liabilities of bodies which are being dissolved or to amend the existing legislation in the light of the transfer of functions. For example, where the existing legislation divides functions as between the different parts of the United Kingdom, some consolidation may be required to reflect the fact that the Authority is a single corporate entity.

508.     Schedule 15 makes certain amendments to the legislation governing mutuals.

PART XX: AUDITORS AND ACTUARIES

509.     This Part concerns the appointment, on a continuing, periodic or ad-hoc basis, of auditors and actuaries by authorised persons. It imposes certain requirements, including a duty to dislcose to the Authority information relevant to its functions under the Act. These provisions carry forward a number of similar provisions in existing legislation.

510.     There are some similarities between the roles of auditors and actuaries, and they are therefore dealt with together in this part of the Bill. However, there are also important differences, and these clauses will give the Authority the power to act in ways which will recognise the difference in the detailed roles and responsibilities of the two professions.

511.     Part X of the Bill gives the Authority various powers to gather information and investigate authorised persons, with clause 136 in particular providing a power to require an authorised person to provide the Authority with a report by an accountant or other expert, on a particular aspect of his business. Part XX deals primarily with the duties and responsibilities of auditors and actuaries, albeit in regard to their work in connection with authorised persons, rather than with authorised persons themselves.

Clause 297: Appointment

512.     Subsection (1) gives the Authority the power to make rules to require authorised persons to appoint an auditor or actuary, where they are not already under a statutory obligation to do so (for example under Companies Act requirements). Subsection (4) allows the Authority to make rules concerning the terms, conditions, qualifications for, and notification of such appointments. The Authority will also be able to make an appointment itself if one is not made or if it has not received any notification.

513.     Subsection (2) allows the Authority to make rules requiring any authorised person to produce periodic financial reports on its business, and to submit these for analysis and comment by an auditor or actuary.

514.     Subsection (5) provides that an auditor or actuary appointed to act on a continuing basis or to produce a periodic report must comply with the relevant rules made by the Authority. These rules may also give the auditor or actuary such powers as the Authority judges necessary for them to carry out their duties.

Clause 299: Information given by auditor or actuary to the Authority

515.     This clause concerns the duties of auditors and actuaries of authorised persons to pass on information of regulatory importance to the Authority.

516.     Auditors and actuaries of authorised persons will be members of professional bodies and will therefore be subject to rules made by their respective bodies as to how they treat confidential information. Subsections (3) and (4) ensure that auditors or actuaries who, in good faith, pass on information or express their opinion to the Authority will not be in breach of any duty of confidentiality to which they might otherwise be subject. This protection applies whether or not the auditor or actuary acts in response to a request from the Authority.

517.     Subsections (5), (6) and (7) give the Treasury a power to set out the circumstances in which auditors and actuaries must pass on information to the Authority. This information may relate to the affairs of either the authorised person concerned, or other persons. So far as auditors are concerned, the Treasury are required by EC directives to set out in broad terms the circumstances in which such reports must be made, and it is intended to use this power to re-enact the rules necessary to comply with this requirement. No such requirement exists in respect of actuaries, and the Treasury are currently discussing with the professional actuarial bodies the case for making similar statutory rules.

Clause 300: Information given by auditor or actuary to the Authority: persons with close links

518.     This clause concerns the duties of auditors and actuaries to pass on information of regulatory significance to the Authority about persons having "close links" with authorised persons, including parents and subsidiaries of an authorised person.

519.     Subsections (2) and (3) ensure that auditors or actuaries of persons with close links to an authorised person, who, in good faith, pass on information or express their opinion to the Authority will not be in breach of any duty of confidentiality to which they might otherwise be subject. This protection applies whether or not the auditor or actuary acts in response to a request from the Authority.

520.     Subsections (5), (6) and (7) give the Treasury a power under which they can make rules setting out the circumstances in which auditors and actuaries must pass on information to the Authority. This information may relate to the affairs of either the authorised person concerned, or other persons.

Clause 301: Duty of auditor or actuary resigning etc. to give notice

521.     This clause places a duty upon all auditors and actuaries of authorised persons appointed as a result of statute to notify the Authority of certain events, for example where they resign before the end of the period for which they were appointed. Subsection (3) also requires an auditor or actuary to pass on any facts connected with his ceasing to act for the authorised person which he thinks ought to be brought to the Authority's attention, or to make a positive statement to the Authority that he is not aware of any such facts.

Clause 302: Disqualification

522.     Where the Authority believes that an auditor or actuary has failed to comply with any obligations under this Bill, it may disqualify that auditor or actuary from acting for any particular authorised person, or class of authorised person. Any such disqualification may be lifted if the Authority is satisfied that the person concerned will in future comply with the obligations.

523.     Subsections (2) and (3) require the Authority to serve a warning notice and decision notice as set out in clauses 338 and 339, whilst subsection (5) confers a right to refer to the Tribunal any decision to disqualify.

Clause 303: Provision of false or misleading information to auditor or actuary

524.     This clause makes it a criminal offence for an authorised person, or an officer, controller or manager of an authorised person knowingly or recklessly to mislead an auditor or actuary appointed under the Bill.

PART XXI: PUBLIC RECORD AND DISCLOSURE OF INFORMATION

525.     This Part requires the Authority to compile and maintain a public record of authorised persons. It also imposes safeguards for the protection of confidential information.

526.     The Authority, together with the Competent Authority for listing and the Secretary of State, will necessarily require access to a great deal of confidential information. The Bill provides them with powers to obtain this. It also contains safeguards to ensure that this information remains confidential, subject to allowing information to pass between them and other regulatory authorities where this is necessary for the performance of specific functions (for example, to assist in the investigation and prosecution of crime). The passage of information between authorities is subject to conditions relating to the purpose of disclosure and, in some cases, the identity of the person to whom the information is disclosed. These conditions are often referred to as "gateways". This area is already subject to detailed constraints under EC law. The Bill, together with the regulations to be made under the powers conferred by these provisions, will create a confidentiality regime very similar to those which exist at present in the different areas of banking, insurance etc, which are themselves very similar to each other. The creation of a single regulator will however allow some rationalisation of the existing structure.

Clause 304: The record of authorised persons etc.

527.     This clause places an obligation on the Authority to maintain a record of certain details about authorised persons and other categories of specified persons. The record must include details of the services provided by authorised persons, the addresses of authorised persons and other categories of specified persons, and any other information the Authority thinks is appropriate. The record must be available for inspection by members of the public, at a place and at times determined by the Authority. The Authority must allow members of the public to purchase a copy of the record, or a copy of part of it.

Clause 305: Restrictions on disclosure of confidential information by Authority etc.

528.     Subsections (2), (3) and (4) define what is, and what is not, to be regarded as confidential information. Subsection (1) then makes clear that this information is not to be disclosed by a "primary recipient", or a person who has received the information from a primary recipient, without the consent of the person to whom it relates. Subsection (5) lists primary recipients.

Clause 306: Exceptions from section 305

529.     This clause makes clear that, notwithstanding the restrictions in clause 305, confidential information may be disclosed if this is in accordance with regulations made by the Treasury. It also gives the Treasury the power to make such regulations. This power will be used to create various "gateway" between the primary recipients and other organisations for various specified purposes.

Clause 307: Offences

530.     This clause makes clear that unauthorised disclosure or use of confidential information is a criminal offence, subject to the defences provided for in subsection (5), and sets out the penalties for these offences. These provisions reproduce the existing offences in this area.

Clause 308: Removal of other restrictions on disclosure

531.     This clause enables the Treasury to make regulations permitting disclosure of information held by third parties to the Authority to assist it in carrying out its functions. It also enables regulations to be made to allow the disclosure of information by various other entities carrying out functions under this Bill, for example the compensation scheme manager, in order to assist with these functions. The purpose of this clause is to enable the Treasury to create gateways, for example overriding confidentiality obligations to which the prescribed persons are subject, if it is appropriate that such persons should be able to disclose information either to the Authority or to third parties for the purposes of functions connected to the Bill.

PART XXII: INSOLVENCY

532.     Insolvency and winding up are relevant to regulation for two reasons. First, there are implications for existing customers if a financial service business becomes insolvent. Second, winding up may itself be part of the appropriate regulatory response to events. Thus it may be desirable to wind up a company not just to protect the interests of customers who have entered into contracts with it, but also those who might do business with it in future, if it continued to trade. Subject to the particular provisions of Part VII of the Companies Act for transactions carried out on regulated markets, the general law of insolvency applies, and will continue to apply, to most financial services businesses, as it does to other businesses. However, it is supplemented by provisions which allow the various existing regulators, alongside creditors, to petition the court for the winding up of an authorised business on the grounds of insolvency, and, alongside the Secretary of State, to petition the court to wind up an authorised business on the grounds that this would be just and equitable.

533.     Different arrangements apply to certain mutual societies. These arrangements under the relevant legislation, for example the Building Societies Act 1986, will continue to apply to relevant societies, with functions transferred in that case from the Building Societies Commission in accordance with the provisions of Part XIX.

534.     The insolvency provisions of the Bill are intended to build upon these existing arrangements, establishing, so far as is practicable, a common approach across all sectors. Clauses 310, 311, 317, 322 and 325 provide the Authority with the power to ask the court to initiate various insolvency procedures. Clauses 310, 314, 315, 321, and 324 make clear that the Authority has the right to be heard by the court in insolvency proceedings instigated by third parties. Clauses 319, 320, 325, 327, 328 and 329 carry forward provisions of existing legislation dealing with the insolvency of insurance companies (which because of the particular nature of insurance business, must in some respects be dealt with in a different way to other authorised persons).

535.     At the same time, the new legislation will fill a number of gaps in the coverage of the existing regime. Clause 311 will allow the Authority to ask the court to make an administration order in respect of authorised businesses, as an alternative to winding up. Clause 322 will give the Authority powers to petition the court to declare bankrupt an insolvent sole trader providing financial services. And clauses 312 and 316 make changes to the insolvency regime for insurance companies.

536.     Part XIV (Financial Services and Markets Compensation Scheme) is also relevant to customers of authorised firms in financial difficulties.

Company voluntary arrangements

537.     Current insolvency legislation allows companies in financial difficulties to propose a voluntary arrangement with creditors ie for creditors to agree to take a proportion of what they were owed as a final settlement of their debts. If agreed, such an arrangement is binding on all creditors who were aware of the proposal, subject to their right to ask the court to intervene if the arrangement seems improper or unfair. This clause gives the Authority the right to apply to the court in the same way as a creditor, and also makes clear that the Authority may be represented in any such proceedings initiated by a creditor.

Administration orders

538.     General insolvency law provides for the court to place a company or partnership into administration, that is to allow it to continue in business, under the supervision of an administrator, as an alternative to winding it up. This clause allows the Authority to ask the court to do this in respect of present or former financial services businesses and appointed representatives, where it would be in consumers' interests for the business to remain in being, rather than be wound up. It also provides that for such persons failure to pay money due to consumers on time shall count as sufficient evidence to allow the initiation of administration proceedings.

Clause 312: Insurance companies

539.     At present, the law prohibits insurance companies from being put into administration. When insolvency law first made provisions for administration in 1985, it was not clear whether this procedure would be appropriate for insurance companies, given the special nature of insurance business. Experience has shown that it may be helpful to make this option available, so this clause gives the Treasury the power to make an order removing the prohibition. It is intended to make use of this power, but before doing so the Treasury will consult on the details of the order.

Clause 314: Authority's powers to participate in proceedings

540.     This clause makes clear that when a creditor or other third party asks the court to place in administration a person who is doing or has done financial services business, or an appointed representative, then the Authority shall have the right to be represented at the hearing. It also gives the Authority the right to receive any information or proposals sent by the administrator to creditors, to attend and speak at any meeting of creditors called to discuss the administration, and to have the same rights as creditors to ask the court to intervene, if it considers that the administration is being carried out improperly or unfairly. It also gives the Authority the same power that creditors have, under section 425 of the Companies Act to draw up a scheme to settle some or all of the debts of a company in administration, and to ask the court that this be put to a vote of creditors.

Voluntary winding-up

541.     This clause gives the Authority the right to be represented at any court proceedings to wind up voluntarily a financial services company, other than an insurance company carrying on long term business. It also provides the Authority with the same powers that creditors have to ask the court to decide any questions arising out of the winding up, or to draw up a scheme, under section 425 of the Companies Act, to settle some or all of the debts of the company, and to ask the court that this be put to a vote of creditors.

Clause 316: Insurance companies carrying on long term business

542.     At present, legislation prohibits absolutely the voluntary winding up of insurance companies carrying on long term, or life assurance, business. The reason is that if such companies went into voluntary liquidation the rights of endowment policyholders would accrue, so that they would be entitled only to the current value of their policy, and not to the terminal bonuses they would expect if their policies ran on to the end of their term. This clause removes this absolute prohibition, but provides that voluntary winding up can only take place with the Authority's prior permission. This will allow the Authority to ensure that winding up will only proceed subject to arrangements being made to meet the legitimate expectations of policyholders.

Winding-up by the court

543.     This clause provides that the Authority may ask the court compulsorily to wind up any company or partnership which is doing or has done financial services business, or any appointed representative. As with the other provisions in this part which empower the Authority to initiate proceedings, this enables the Authority to act on behalf of consumers, who could in theory take action themselves, but may in practice lack the resources and expertise to do so. The court may agree to this in cases where the business cannot pay its debts, or where it decides that it would be "just and equitable" to wind up the business. The Authority might make an application under the latter ground if, for example, a business had been guilty of such serious rule breaches that the Authority had found it necessary to cancel its permission in order to protect the public. This clause also provides that for such businesses failure to pay money due to consumers on time can count as sufficient evidence to allow the initiation of insolvency proceedings.

Clause 318: Winding-up petitions: EEA and Treaty firms

544.     This makes clear that the Authority can only petition for the winding up of a business which is authorised in another EEA state, and is entitled to provide financial services in the UK because of that authorisation, when it has been asked to do so by the home State regulator concerned. This is because the issues that generally arise in relation to the winding up of a business are issues which are primarily the concern of the home State regulator, rather than of the host State where the business is being carried on.

Clause 321: Authority's powers to participate in proceedings

545.     This clause makes clear that when a creditor, or other third party, asks the court to wind up a person who is doing or has done financial services business, or an appointed representative, then the Authority has the right to be represented at the hearing, and at any subsequent hearing. It also provides that the Authority has the right to receive any information or proposals sent by the liquidator to creditors and to attend and speak at any meeting of creditors called to discuss the winding up, and to have the same rights as creditors to ask the court to intervene. It also gives the Authority the same power that creditors have, under section 425 of the Companies Act to draw up a scheme to settle some or all of the debts of a company being wound up, and to ask the court that this be put to a vote of creditors.