Select Committee on International Development Appendices to the Minutes of Evidence


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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