APPENDIX 7
Memorandum submitted by the Financial
Services Authority (FSA)
INTRODUCTION
1. This Memorandum is submitted to the International
Development Committee by the Financial Services Authority (FSA)
in the context of its inquiry into the future of sanctions. The
Memorandum:
— outlines the current and future responsibilities
of the FSA (paragraphs 2-3);
— summarises Government's responsibilties
in relation to sanctions (paragraphs 4-6); and
— describes the regulators interest
in authorised firms' compliance with financial sanctions (paragraphs
7-9).
2. The FSA is an independent non-governmental
body exercising statutory powers for the regulation of investment
business and the supervisions of banks, under the Financial Services
Act 1986 and the Banking Act 1987 respectively, and, on behalf
of HM Treasury, for the supervision of insurance under the Insurance
Companies Act 1982. Further powers for the regulation of other
financial sectors (for example, building societies and insurance,
including Lloyd's of London) are to be transferred to the FSA
by the Financial Services and Markets Bill, which the Government
has said it will introduce into Parliament during this session.
3. The new legislation will, it is proposed,
give the FSA four statutory objectives:
— to maintain confidence in the UK
financial system;
— to promote public understanding of
the financial system;
— to secure an appropriate degree of
protection for consumers; and
— to contribute to reducing financial
crime.
Subject to progress of the legislation through
Parliament, we expect the FSA to acquire its full range of powers
as the single regulator for all financial business in the course
of the Year 2000.
FINANCIAL SANCTIONS
4. Policy on, and enforcement of, all sanctions,
including financial sanctions, is a matter for Government. Under
the Maastricht Treaty, policy on EU financial sanctions, and implementation
of those introduced by UN Security Council Resolution, falls within
EU competence, although penalties for breaching sanctions are
a matter for national governments. Financial sanctions are implemented
by EC Regulation. The Bank of England acts, through its Sanctions
Emergency Unit, as the Treasury's agent in enforcing UK financial
sanctions. This function did not transfer from the Bank to the
FSA at the same time as responsibility for supervising banks,
in June 1998. The FSA itself therefore has no direct role in the
enforcement of financial sanctions.
5. However, the FSA has agreed a Memorandum
of Understanding with HM Treasury and the Bank explaning how the
three authorities work together towards the common objective of
financial stability. In this context, the FSA has established
information-sharing arrangements with the Bank, aimed at ensuring
that, as far as possible within the limits imposed by the statutory
restrictions on disclosure, information which is or may be relevant
to the Bank's functions is passed on by the FSA.
6. We also understand that the Department
of Trade and Industry has responsibility for licensing and granting
permission for exports and certain services to destinations affected
by sanctions, which includes insurance and reinsurance services.
Some insurance services have been banned under sanctions orders.
7. The FSA and the other regulators are
responsible for ensuring that financial institutions authorised
under the various statutes—the Banking Act 1987, the Financial
Services Act 1986, the Insurance Companies Act 1982 and the Building
Societies Act 1986—remain "fit and proper". It
is in this context that the regulators have an interest in institutions'
compliance with sanctions which have been imposed. For example:
— As banking supervisor, the FSA would
treat any evidence of breach of sanctions (which is a criminal
offence) by an authorised bank as a matter for serious prudential
concern. Any such conduct by a bank would call into question its
compliance with the minimum criteria for authorisation in the
Banking Act, which, among other things, require a bank to have
adequate systems of controls and to carry on its business with
integrity and skill.
— The Building Societies Act 1986 requires
systems of business control to be maintained and directors and
management of building societies to be fit and proper persons
acting with prudence and integrity. Adherence to sanctions legislation
is relevant in this context; protective action in the interests
of borrowers or depositors could be taken in the event of any
breach posing a threat.
— The self-regulating organisations
established under the Financial Services Act (that is, the Securities
and Futures Authority, the Investment Management Regulatory Organisation,
and the Personal Investment Authority) require managers and controllers
of authorised firms to be fit and proper and require firms to
adhere to any relevant financial sanctions legislation. Moreover,
firms are required to have adequate "know your customer"
procedures in place.
— In the insurance sector, any breach
of sanctions legislation would, equally, raise fit and propoer
considerations. Where reinsurance is concerned, here too difficulties
can arise from the international nature of the business. It is
sometimes difficult to establish which specific risks are being
reinsured and in which countries they arose, particularly if the
risk arrives through a third country insurer or reinsurer.
8. Given the international nature of UK-based
firms' business, the UK regulators necessarily rely to a degree
on the co-operation of other countries in relation to firms' compliance
with financial sanctions worldwide. Here too, the FSA shares information
where the relevant statutes provides a gateway.
9. When financial sanctions are imposed,
some authorised institutions are likely to be prevented from meeting
some of their normal legal obligations (eg repaying certain deposits
when they fall due). Regulators need to consider the supervisory
implications and decide whether any action is needed to enable
the FSA to fulfil its normal supervisory responsibilities. For
example, in 1991 the Iraqi-owned Rafidain Bank was put into provisional
liquidation in response to various factors related to sanctions,
and the UK Deposit Protection Scheme subsequently met appropriate
requests for compensation.
Financial Services Authority
6 May 1999
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