Clause 322: Petitions

546.     Clause 317 reproduces the existing regulators' powers to ask the courts to wind up companies or partnerships doing financial services business. The present clause creates a new power in respect of sole traders doing financial services business. The Authority will be able to petition for the bankruptcy of such persons, or in Scotland, for the sequestration of their estate, if they are or appear unable to pay their debts to consumers. It should be noted, however, that here, as in insolvency law generally, inability to pay debts is the only ground on which a sole trader can be made bankrupt - there is no equivalent to the provision covering companies and partnerships that these may be wound up because the court feels it is "just and equitable" to do so. This is because sole traders' business affairs are not legally distinct from their personal finances.

Clause 324: Authority's powers to participate in proceedings

547.     This clause makes clear that when a creditor, or other third party, asks the court to make a bankruptcy order for, or in Scotland to sequestrate the estate of, an individual who is doing or has done financial services business, then the Authority shall have 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 report sent by an insolvency practitioner to creditors and to attend and speak at any meeting of creditors called to discuss the bankruptcy.

Provisions against debt avoidance

548.     The Insolvency Act 1986 provides creditors, liquidators and administrators of insolvent persons with the right to ask the court to set aside transactions which appear to have been entered into to defraud creditors ie where assets are transferred as a gift, or sold at less than their full value, with the intention of putting them beyond the reach of creditors. This clause provides the Authority with an equivalent right to make an application to the court in relation to transactions entered into in the course of financial services business.

Supplemental provisions concerning insurance companies

549.     This clause reproduces the provisions of existing legislation which provide for the long term insurance business of an insolvent insurance company to be transferred to another company, rather than for the policyholders to receive a share of the assets available on winding up. Policyholders of long term insurers face different problems to most consumers if the company fails. They enter into agreements, for example for pensions, which are designed to last many years, and the benefits they expect to receive build up over time. Also, the terms of the contract (and importantly the premium) are set at the outset. If, for example, during the course of the contract they were to develop an illness they might not then be able to obtain alternative cover. For these reasons, it is desirable, where possible, to maintain the insurance company as a going concern, or to find an alternative insurer to take over its policies, rather than allowing it to be wound up.

Clause 327: Reducing the value of contracts instead of winding up

550.     This clause is intended to facilitate timely payments on, or the transfer of, insurance contracts of a company which has become insolvent, rather than leaving these to be matters to be resolved at the end of an insolvency process, which may take a considerable period of time.

Clause 328: Treatment of assets on winding up

551.     This clause empowers the Treasury to make regulations to allow for the separate treatment in insolvency situations of insurance companies' long term and other business, given the special characteristics of long term business (referred to in the note on clause 326 above).

Clause 329: Winding up rules

552.     This clause enables the making of rules to deal with the winding up of insurance companies, under the powers of the Insolvency Act 1986.

PART XXIII: INJUNCTIONS AND RESTITUTION

553.     This Part is concerned with the Authority's (and in certain cases the Secretary of State's) power to seek injunctions and restitution orders from the High Court, or in Scotland the Court of Session, against both authorised and unauthorised persons where it appears that certain requirements have been, or might be, contravened. Clause 334 also gives the Authority the power to require restitution to be paid without having to apply to the courts for a restitution order but this direct power can only be used against authorised persons.

554.     The powers contained in this Part are based on similar powers under the existing legislation. They may be exercised by the Authority in relation to breaches of any offence under the Bill, or which the Authority has power to prosecute under clause 345, or any breach of any other requirement imposed by or under the Bill, such as a rule made under Part IX. The Secretary of State may exercise the powers in relation to any breach which constitutes an offence which the Bill gives him the power to prosecute under clause 344.

Clause 330: Injunctions

555.     This clause sets out the powers of the court to make injunctive orders on the application of the Authority or Secretary of State and the grounds on which it may exercise those powers. The court may make three types of order: an order restraining the contravention of certain requirements (subsection (1)), an order directing remedial action to be taken when there has been such a contravention (subsection (2)) and an order freezing the assets of someone who has contravened certain requirements or been knowingly involved in a contravention (subsection (3)).

556.     The first of these is a preventative measure: under subsection (1)(a) an order can be restraining a person from contravening a requirement where the court believes they are reasonably likely to do so. Or, where a contravention has already occurred, under subsection (1)(b) the courts can restrain a person from doing so again.

557.     Where there are clear steps that can be taken either by the person who has contravened a requirement or by a person knowingly concerned in the contravention, under subsection (2) the court may order a person to take those steps. This is a corrective power. For example, an order may simply require a person to meet commitments they have entered into but so far failed to discharge. Subsection (5) provides that the remedial action that the court may order under subsection (2) may include orders to mitigate the impact of a contravention even if it is not strictly speaking possible to remedy it. For example where a person has published a misleading advertisement, the Authority could apply to the court for an order requiring the person to publish a correction. This would not be of use to anyone who had taken action on the basis of the original advertisement but would prevent others doing so in the future.

558.     An order made under subsection 3 to freeze a person's assets is similar to a Mareva injunction apart from its timing: a Mareva injunction may only be applied for where court proceedings have been commenced or are imminent whereas this clause gives the Authority or Secretary of State an independent power to apply to the court for an asset freezing order on the grounds that they believe a breach may have occurred. The power does not prevent separate applications for Mareva injunctions.

559.     Subsection (6) sets out the range of requirements the contravention or likely contravention of which may be grounds for an order under this clause. These are requirements imposed by or under the Bill, including the Authority's rules made under Part IX, plus the various requirements a breach which constitutes an offence under the Bill, such as the general prohibition under Part II. In addition the powers may be exercised for breaches of requirements imposed by other Acts which constitute offences for which the Authority has the power to prosecute under this Bill under clause 345.

Clause 331: Injunctions in cases of market abuse

560.     This clause provides the Authority with the power to apply to the court for injunctive orders in cases of market abuse. The Secretary of State has no powers under this clause in relation to market abuse. The types of orders which the court may make are the same for cases of market abuse under this clause as for contraventions of requirements under the previous clause.

Clause 332: Restitution orders

561.     This clause gives the court the power, on the application of the Authority or the Secretary of State, to order restitution to be paid by a person who has contravened a requirement or been knowingly involved in a contravention. The court must be satisfied that the contravention has led either to the person ordered to pay restitution accruing profits or to others suffering loss or being adversely affected in other ways. It is possible for an application for a restitution order to be combined with an application for an injunction.

562.     Under subsection (2), the court has discretion to decide what is an appropriate sum for a person to have to pay taking into account the size of any profits which have accrued and the extent to which persons have suffered loss or been adversely affected. The restitution is initially paid to the Authority, but the Authority is then required to distribute the money among people chosen by the court. These must be those people who appear to the court to have been directly affected by the contravention, or to whom the profits may be attributed, for example because it was their funds that were used to make a particular investment which gave rise to the profits.

563.     Subsections (5) and (6) give the court powers to require further information from potential recipients of restitution orders to assist the court in determining what profits have accrued to them, to what extent others have been affected by a contravention or how to distribute the money. The court may also require this information to be verified.

564.     Subsection (8) provides that the fact that the Authority or the Secretary of State has made an application under this clause for a restitution order does not prevent someone taking a private action for restitution in respect of the same matter. The court is likely to have regard to the question of whether any payments have already been made by a person in determining whether to order restitution in any particular case.

565.     The range of requirements the contravention of which can give rise to an application to the courts under this clause for a restitution order is the same as for injunctions under clause 330. These are set out again in subsection (9).

Clause 333: Restitution orders in cases of market abuse

566.     This clause provides the Authority with the power to apply to the court for restitution orders against persons who it is satisfied have engaged in market abuse. The Secretary of State has no powers under this clause. The provisions of this clause are equivalent to those in the clause above for restitution orders following the contravention of a requirement. Again the court has discretion to determine the amount of restitution paid and the eventual recipients of that restitution who must be persons directly affected by the market abuse. The court also has similar powers as under clause 332 to require further information from the person who has engaged in market abuse.

Clause 334: Power of Authority to require restitution

567.     This clause gives the Authority the power to require an authorised person to pay restitution directly, without having to go through the court. The Authority can order restitution to be paid by:

• authorised persons who have contravened a requirement under the Bill or who have committed an offence under another Act which the Authority has the power to prosecute under clause 345;

• authorised persons who have been knowingly involved in such a contravention;

• any person, whether authorised or not, who has engaged in market abuse.

568.     The Secretary of State has no direct powers under this Part to require restitution.

569.     The grounds for the Authority using this power are set out in subsections (1) and (2). These are that the Authority is satisfied that the person has done the misdeed and that, because of it, either profits have accrued to that person or one or more people have suffered loss or been adversely affected.

570.     Subsections (3) and (4) define the restitution power. The Authority may require someone to pay restitution of an amount which it considers to be just, taking into account the profits that have accrued and/or the extent of the loss or adverse effect suffered. The money is to be paid to people who have been directly affected by the contravention or offence, or to whom profits are attributable, as under clauses 332 and 333. Where restitution is sought via a court order, the money is paid initially to the Authority, but when the Authority uses its power under this clause to require restitution directly, subsection (3) provides for the money to be paid straight to the final recipients. The Authority may determine the arrangements for payment.

Clause 335: Warning notices

571.     This clause requires the Authority to issue a warning notice informing someone of any proposal to require them to pay restitution under clause 334. A warning notice must comply with the provisions of clause 338. The warning notice must specify the amount of restitution proposed. The Authority must give them, and affected third parties, at least 28 days to make representations.

572.     Subsection (3) modifies clause 338 so that the Authority does not have to notify an affected third party if it is also proposing to take action against that person directly.

Clause 336: Decision notices

573.     This clause provides that if the Authority decides to require restitution to be paid, it must send a decision notice to those people who were sent a warning notice. A decision notice must comply with the provisions set out in clause 339. The clause also provides a right to refer the Authority's decision to the Tribunal.

Clause 337: Notice for payment

574.     This clause requires the Authority to serve a notice for payment on a person whom it has decided should pay restitution where either no reference to the Tribunal has been made or where the Tribunal has upheld that decision to require restitution. Any amount which is required to be paid by the notice for payment must be paid within a period specified by the Authority in the notice. That period cannot be less than 14 days from the date the notice for payment is given.

PART XXIV: NOTICES

575.     Various provisions of the Bill relate to the Authority taking decisions for example as to whether to grant, or to withdraw, authorisations and approvals, or whether to take other regulatory action, such as the imposing financial penalties or making public statements. The provisions in this Part require the Authority to serve a warning notice when it proposes to take action and then a decision notice once it has decided whether or not to take the action proposed. This Part is concerned with the Authority's procedures prior to, and the process of, serving these notices as well as the information which they are to include. In particular, the Part requires the Authority to act in accordance with a published set of procedures unless it considers there are good reasons not to.

Clause 338: Warning notices

576.     This clause provides that a warning notice must be in writing and must set out the reasons for the proposed course of action. It may be that the reason for the action relates to a matter involving a third party and, consequently, that third party may be identified in the notice. If the Authority considers that the matter mentioned in the notice might prejudice the third party in any office or employment, subsection (2) provides that it must, where practicable, give a copy of the notice to them.

577.     Subsection (3) gives any person who receives a warning notice, including third parties, an opportunity to make representations to the Authority. The Authority may specify the period available for representations, provided it allows a minimum of 28 days from the date of the notice.

578.     Subsection (5) gives a person who has been issued with a warning notice the right to see the evidence on the basis of which the Authority proposes to take action, thereby enabling them to take that evidence into account when making representations to the Authority under subsection (3).

Clause 339: Decision notices

579.     This clause is concerned with the serving of decision notices and the arrangements for interested parties to refer the matter to the Tribunal.

580.     Subsection (1) provides that a decision notice must be in writing and must set out the reasons for the course of action. It also requires the Authority to explain any rights to refer the case to the Tribunal and the procedure for doing so. Where appropriate, the Authority must confirm the date on which the notice takes effect, which cannot be a date earlier than the date of the notice.

581.     Subsection (2), as for a warning notice under clause 338, requires copies of the decision notice to be given, where practicable, to third parties who might be prejudiced if matters relating to them are mentioned. Any rights to refer the case to the Tribunal apply to all recipients of the decision notice, including third parties. Subsection (3) also provides a right of referral for a person on whom it was not practicable for the Authority to serve a copy of the decision notice, but who within the time allowed for referrals to the Tribunal, becomes aware of the notice and considers it to be prejudicial to them.

582.     Subsections (5), (6) and (7) concern the publication of information relating to a decision. The Authority is required to publish appropriate information about a decision but not until after the period for a referral to Tribunal, any Tribunal proceedings, or any appeal of the Tribunal's decision on a point of law, have come to an end. Subsection (6)(b) also provides that the Authority should not publicise matters relating to the decision where this might be unfair to the person concerned or prejudice the interests of consumers. For example, where the Authority decides not to take action against an individual through lack of evidence against them, publicising that decision may in itself damage their reputation.

Clause 340: The Authority's procedures

583.     This clause concerns the Authority's decision making procedures. It is for the Authority to decide on its procedures but subsection (2) requires that, to avoid prejudice, they should include that the tasks of deciding whether to issue a warning notice and of collecting the information on which that decision is based should be carried out by different people.

584.     The Authority is required by subsection (3) to publish a statement describing its procedures. It must also publish a revised statement if it decides to change them. Under subsection (5) the Authority must act in accordance with its published procedures. Subsection (7) ensures that the validity of any notices given in such a case is not affected.

585.     The Authority has indicated how it intends to comply with the requirements of this clause and has already begun the process of establishing and publishing its procedures. It published a consultation paper (Financial Services regulation - enforcing the new regime; CP17) was published in December 1998 and a further consultation paper outlining the Authority's proposals on the exercise of its powers in relation persons who carry on regulated activities without authorisation is due to be published shortly. This consultation process will lead to the publication of an Enforcement Manual.

PART XXV: OFFENCES

586.     This Part contains provisions which make it an offence to make misleading statements or engage in a misleading practice in order to induce someone to enter into an investment contract. It also creates an offence of misleading the Authority. The first of these offences is carried over from sections 47 and 133 of the FS Act 1986 and section 35 of the Banking Act. It also provides that where a corporate body (or partnership) has committed an offence then, in certain circumstances, its officers may also be guilty of that offence. In addition, this Part contains general provisions on the institution of proceedings for offences under this Bill. It gives the Authority new powers to prosecute insider dealing under the Criminal Justice Act 1993, to prosecute under the Money Laundering Regulations 1993, and to prosecute the offences of misleading statements and practices.

Clause 341: Misleading statements and practices

587.     This clause provides for two criminal offences concerning misleading statements and practices.

588.     The first, set out in subsections (1) and (2), applies where a person deliberately makes a misleading statement, promise or forecast, or dishonestly conceals facts from someone with the intention of inducing any other person to do or refrain from doing something in relation to an investment. It is also an offence to make the misleading statement, promise or forecast recklessly and to be reckless as to whether another person was so induced. A possible example of this offence would be someone lying about a company's financial position at a time when he was seeking to dispose of shares in that company.

589.     The second offence, set out in subsection (3), is the creation of a misleading impression about an investment with the intention of inducing another person to do or not do something in relation to that investment. This covers such things as market manipulation, for example engaging in artificial trades in a particular investment in order to create the impression that there is more interest in the investment than really exists.

590.     Subsection (4) provides two defences against the offence in subsection (3). The first is that the person concerned reasonably believed that his conduct would not create a misleading impression. The second defence is where the person is engaged in price stabilisation in circumstances where this is permitted.

591.     Subsection (5) makes clear that the offence in subsections (1) and (2) is not committed unless the person making the statement, promise or forecast is in the United Kingdom, the person this is directed towards is in the United Kingdom, or the agreement would be made in the United Kingdom.

592.     Subsection (6) provides the offence in subsection (3) is not committed unless the action done takes place in the United Kingdom, or the misleading impression this creates arises in the United Kingdom.

593.     Subsection (8) gives the Treasury the power to prescribe those agreements and investments to which this clause applies.

Clause 342: Misleading the Authority: residual cases

594.     This clause makes it an offence to give false or misleading information to the Authority in purported compliance with requirements under the Bill in cases where this is not already an offence under other provisions (for example under clause 147(4) regarding the provision of information to investigators). The penalty for this offence is an unlimited fine on indictment or a fine of up to the statutory maximum (£5,000) on summary conviction.

Clause 343: Offences by bodies corporate etc.

595.     This clause makes provision as to the circumstances in which partners in a partnership and directors and officers of bodies corporate and unincorporated associations may be found guilty of an offence in a case in which an offence has been committed by the relevant partnership, body or association.

596.     Subsection (7) gives the Treasury the power to make regulations applying the provisions of this clause, with any appropriate modifications, to equivalent undertakings established under the laws of other countries.

Clause 344: Proceedings for offences

597.     This clause confers powers to prosecute offences under this Bill. The Secretary of State and the Authority can prosecute any offence. Others can only prosecute with the consent of the Director of Public Prosecutions in England and Wales or, in Northern Ireland, with the consent of the Director of Public Prosecutions for Northern Ireland. The DGFT can prosecute for breaches of any prohibition on carrying on any CCA 1974 business he has imposed under clause 174.

598.     Subsections (4) and (5) give the Treasury the power to set conditions relating to the way in which the Authority can bring proceedings for offences under this Bill. For example, the Treasury could require the Authority to comply with the Code for Crown Prosecutors.

Clause 345: Power of the Authority to institute proceedings for certain other offences

599.     This clause allows the Authority to prosecute two criminal offences which are not in this Bill. These are the offences of insider dealing (Part V of the Criminal Justice Act 1993) and breach of the Money Laundering Regulations 1993 (regulation 5).

600.     Subsections (2) and (3) give the Treasury the power to set conditions relating to the way in which the Authority can bring proceedings for these offences. For example, the Treasury could require the Authority to comply with the Code for Crown Prosecutors.

PART XXVI: MISCELLANEOUS

601.     Clauses 346 to 349 concern reciprocity powers. Under certain EC directives a decision can be taken by the European Council or European Commission to require individual member states' regulators to take reciprocal action to deprive subsidiaries of firms from a country outside the European Economic Area (EEA) of access to their markets. This is referred to in the Bill as a 'third country decision'. Such a decision may be taken where it appears to the European Commission that EEA firms wishing to establish themselves or provide financial services in third countries are not being treated on the same basis and offered the same competitive opportunities as domestic firms.

602.     The potential for reciprocity action has diminished following World Trade Organisation ("WTO") negotiations on financial services which resulted in the EU, along with many other WTO member countries, making a commitment to offer Most Favoured Nation treatment to other WTO members on a permanent basis. This commitment came into force on 1 March 1999 and means that EC reciprocity powers can now only be used against countries outside the WTO.