Memorandum by HM Treasury
This memorandum sets out the legislative framework
governing the UK authorisation and supervision of financial services
firms. The framework covers both the prudential supervision of
financial services firms and regulation of their conduct of business.
On 20 May 1997, the Government announced major
changes to the structure of financial services regulation in the
UK. The Financial Services and Markets Act 2000, which creates
a new framework for the regulation of financial services, received
Royal Assent on 14 June 2000. The Act establishes the Financial
Services Authority (FSA) as the single regulator of the financial
services industry, operating under a single coherent legislative
The Act replaces nine different sectoral regulators
with a single regulator, the FSA, covering the whole financial
services sector. It also introduces a single ombudsman scheme,
to resolve consumers' complaints, and a single compensation scheme.
The Act gives the FSA clear statutory objectives. The Government
believes the statutory objectives will give the FSA a clear set
of priorities and a benchmark against which its performance can
be measured. The statutory objectives are:
protection of consumers; and
prevention of financial crime.
In pursuing its objectives the FSA will also
have to have regard to certain important principles, which may
be summarised as:
using its resources efficiently and
respecting the responsibility of
senior managers of regulated firms;
ensuring its rules are proportionate,
that it is to say the benefits exceed the economic costs;
respecting the international character
of financial services and the competitive position of the UK;
The Government believes that the Financial Services
and Markets Act 2000 will significantly strengthen the framework
for financial regulation in the UK. This new approach, based on
one regulator, and one body of law, will provide:
and regulatory action by one body on a consistent basis, rather
than by several different regulators;
fair competitiona level playing
field for banks, securities firms and insurance companies operating
in the same markets;
protection for consumersa
single ombudsman to resolve consumers' complaints, and a single
The Government believes these are important
aspects of developing a simple efficient, transparent regulatory
regime, on a statutory rather than self-regulatory basis, independent
In advance of the implementation of the Financial
Services and Markets Act 2000, there have been a number of measures
designed to pave the way for the single regulator. This memorandum
deals with those relevant to the supervision of life insurance
The prudential supervision of insurance companies
is currently governed by the Insurance Companies Act 1982. This
will be superseded by the relevant provisions of the Financial
Services and Markets Act 2000, when it comes into force.
Prudential supervision relates primarily to
the solvency of insurance companies. The scope of the Insurance
Companies Act includes the authorisation of companies wishing
to undertake insurance business, the regulatory requirements which
apply to authorised companies (including capital, financial and
management requirements) as well as special rules for changes
in the corporate structure of insurance companies.
Prudential supervision was under the 1982 Act
the responsibility of the Department of Trade and Industry until
4 January 1998. The DTI were also the department with responsibility
for the relevant legislation and policy. In order to bring together
in the Treasury responsibility for the legislative framework and
policy in relation to banks, building societies, insurance companies
and other financial sector firms, on 5 January 1998 functions
which had formerly been carried out by or on behalf of the Secretary
of State for Trade and Industry were transferred to the Treasury.
The Treasury consequently temporarily also assumed direct responsibility
for prudential supervision of insurance companies. Prudential
supervisors in the former DTI insurance directorate therefore
temporarily joined the Treasury, pending the onward transfer of
supervision to the FSA.
On 1 January 1999, the FSA became the prudential
supervisor, following the approval of Parliament to a draft contracting
out Order under the Deregulation and Contracting Out Act. This
move was an early step towards the integration of financial regulation
and the benefits of a single regulatory culture, to the maximum
extent possible under existing law prior to Parliament's consideration
of the Financial Services and Markets Bill.
Most of the functions transferred were those
carried out under the Insurance Companies Act 1982, although a
small number were under other Acts. Powers to make subordinate
legislation and certain activities that may affect the liberty
of individuals, as well as the power to raise fees, remained with
the Treasury. These arrangements will remain in place until the
implementation of the Financial Services and Markets Act 2000.
Conduct of business regulation in financial
services is currently governed by the Financial Services Act 1986.
This too will in due course be superseded by the relevant provisions
of the Financial Services and Markets Act.
The Financial Services Act 1986 applies to insurance
firms where they are selling long-term investment-based products.
Conduct of business regulation relates primarily to how firms
deal with their customers, particularly in the areas of sales
and marketing. The scope of the Financial Services Act 1986 includes
ensuring that firms authorised to conduct investment business
meet appropriate standards of honesty, solvency and competency,
and that complaints, compensation and disciplinary arrangements
The Financial Services Authority is responsible
for overseeing the system of self-regulation under the 1986 Act,
as was its predecessor, the Securities and Investment Board (SIB),
which was established by that Act.
From 29 April 1988 to 18 July 1994, the immediate
regulator of conduct of business for life companies was the Life
Assurance and Unit Trust Regulatory Organisation (LAUTRO). Since
then this has been the responsibility of its successor body, the
Personal Investment Authority (PIA), a Self-Regulatory Organisation
(SRO) recognised by the FSA, previously SIB.
Since 1 June 1998, FSA staff have carried out
work on behalf of the PIA Board, under contract, in preparation
for the implementation of the Financial Services and Markets Act
2000. From 11 April 2000, the FSA has been a non-voting member
of the PIA. Once the Financial Services and Markets Act is fully
implemented, the PIA will be wound up.
The Government believes that bringing all the
functions together in the FSA will help the FSA carry out all
its responsibilities in a coherent and consistent manner. It will
let it draw on the best supervisory practice in what were different
organisations with different regulatory approaches. And it will
facilitate better communication between supervisors dealing with
similar issues or the same regulated firm. The full benefits will
follow implementation of the Financial Services and Markets Act.
The FSA have set out how they intend to discharge their responsibilities
in a series of publications starting with "a new regulator
for the new millennium" of 21 January 2000.
Questions relating to individual firms are primarily
a matter for the board and management of the firm concerned. Because
of its responsibilities in regard to individual firms, the FSA
are also well placed to comment.
The Government therefore welcomes the decision
of the FSA Board, announced on 22 December, that the FSA would
prepare a report on the events that led to Equitable Life's decision
to close a new business. The report will cover both the FSA's
role as prudential regulator and its exercise of its functions
under the Financial Services Act 1986, including the Personal
Investment Authority's responsibility for conduct of business
regulation of long term investment-linked life insurance. The
report will also set out the background and events leading up
to the point at which responsibility for prudential insurance
regulation moved to the FSA.
The FSA announced that the report is being conducted
by a team led by the FSA's director of internal audit, supported
by external experts in accountancy and law. The report will be
made to the FSA Board, which is made up of 11 non-executive directors
and 3 executive directors. The FSA have said that the report is
likely to take some months and that it will be published.
The Government looks forward to seeing the FSA's