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Session 2000-01
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Delegated Legislation Committee Debates

Draft Financial Services and Markets Act 2000 (Financial Promotion) Order 2001

Second Standing Committee on Delegated Legislation

Monday 26 March 2001

[Mr. John Butterfill in the Chair]

Draft Financial Services and Markets Act 2000 (Financial Promotion) Order 2001

4.30 pm

The Economic Secretary to the Treasury (Miss Melanie Johnson): I beg to move,

    That the Committee has considered the draft Financial Services and Markets Act 2000 (Financial Promotion) Order 2001.

I welcome you to the Chair, Mr. Butterfill.

I wish to explain the purpose of the order and mention some of its main features, after which I shall draw the Committee's attention to some key exemptions. Its provisions are compatible with the convention rights within the meaning of the Human Rights Act 1998. Section 21 of the Financial Services and Markets Act 2000 restricts the promotion of financial services unless made or approved by a person authorised by the Financial Services Authority.

The order defines which financial services are to be subject to the restriction; they are set out in the list of activities and investments in schedule 1 to the order. It also defines the circumstances in which promotions are exempt from the restriction. There are 60 different exemptions, applying in some cases to those making the promotion—for example, the Government—and, in others, to promotions made to certain persons, such as sophisticated investors. Whether, and to what extent, many of the exemptions apply depends on whether the promotion has been sought by its recipient—in the language of the order, whether it is solicited or unsolicited. It also depends on the immediacy of the promotion—again, in the language of the order, whether it is in real time or non-real time.

First, the order consolidates existing restrictions on financial promotion. There is a single restriction on financial promotion under the Act and a single set of exemptions in the order. The order will therefore do away with three current sets of regulations under the Financial Services Act 1986, and it also replaces regulations under current banking and insurance legislation. Secondly, the order maintains, broadly speaking, the scope of the existing financial promotion regime. In many cases, it has been possible to map exemptions in the previous legislation to exemptions under the order. We have also introduced some new exemptions: for example, for promotions to high net worth and sophisticated investors, and for promotions by passive communication providers—or, in the language of the order, ``mere conduits''.

Thirdly, the order reflects the pace of legislative and technological development. It focuses on the content of a communication rather than on the medium through which it is made, so that it does not become outdated as new methods of communication are used to promote financial services. Moreover, as secondary legislation, the order can be updated relatively easily. The Committee should be clear, however, that any proposal to extend the financial promotion restriction to circumstances to which it did not previously apply will require a statutory instrument subject to the affirmative resolution procedure—a debate and vote in both Houses of Parliament. Unlike what happened under some of the legislation that is being replaced, all the boundaries of the financial promotion restriction will be set by Treasury Ministers accountable to Parliament, not by the regulator.

I turn now to some of the key exemptions under the order. First, our proposed exemption for journalists has been the subject of some comment, and I shall take this opportunity to expand on some aspects of it. We have exempted promotions by journalists, because we do not consider that it is the role of financial services legislation to regulate responsible financial journalism. As the beneficiaries of an exemption, journalists will not be subject to the financial promotion restriction—a point that has often been lost. Particular attention has been paid to the condition that we have set for the exemption to apply: that if a journalist promotes a share in which he or she has an interest, that interest must be declared. That is a condition required for the exemption to apply, not a control on what journalists write.

The condition will not even impinge on a journalist when he or she merely writes about a company, even if he or she has shares in that company. Only if a journalist makes a promotion, invitation or inducement to engage in investment activity and is likely to benefit financially—not merely if he or she may benefit—will the requirement apply. Several commentators have said that the condition is unworkable because so many people are involved in the preparation of, say, an article by a journalist in a newspaper. That is a reasonable concern.

However, the question of who is responsible for a promotion that passes through several hands between its originator and its final publication arises in the case of many promotions, whether by a journalist or anybody else. Responsibility for a promotion lies with the originator of it, provided that it is not materially altered and that due diligence is exercised in passing it on. If a journalist's article was passed through several sub-editors, and the journalist failed to declare an interest when he or she should have done, the sub-editors would not be liable. On the other hand, if a sub-editor changed an article to such an extent that it became a promotion, and the journalist had not written it as such, the journalist would not be liable. Sub-editors who substitute their own text to the extent that an article becomes a promotion have stepped from the role of sub-editor to that of acting in the capacity of a journalist. In those circumstances, and only in those circumstances, they should declare a relevant interest.

The Government's objective in introducing the condition requiring the disclosure of interests by journalists was to ensure that consumers are not misled by promotions by a journalist in which the journalist has an interest. That objective remains. We have also made it clear that we will consult further on how that objective can be achieved. There are other ways of achieving it, in addition to the disclosure requirement in the order. Following consultation with the Press Complaints Commission, the Government are satisfied that new guidance on the PCC's code of practice, which was published on 19 March, will adequately protect consumers from being misled. The order under discussion reflects that view. It also disapplies the condition for any publication that has systems and procedures in place to prevent promotions without a disclosure of interest. I should make it clear that, in the light of our commitment to further consultation, we welcome discussion with other relevant regulatory or self-regulatory bodies on the issue.

Another key set of exemptions are those in relation to the territorial scope of the financial promotion restriction. We seek a regulatory framework that does not introduce unnecessary or over-burdensome barriers to cross-border financial promotions. In the EU context, that means the completion of the single European market in financial services. That will be achieved more quickly if member states move forward on the basis of mutual recognition of national regulatory standards. That means a so-called ``home state'' regime—regulation by the UK of promotions from the UK to overseas, but no additional restrictions on promotions from other member states to the UK. The order and the exemptions under it must reflect that objective while dealing with the world as it is, in which regulation is largely on a host state basis. The Government must therefore manage the transition to the desired outcome of a home state regime in a way that continues to protect consumers, minimises the burden of double regulation on business, and takes into account the position of non-EU countries.

The Government have listened to a large number of representations, but moving to a system of home state regulation in the absence of moves to do so elsewhere would be over-burdensome in imposing dual regulation on UK firms. We have therefore provided an exemption for most promotions from the UK to overseas. I should none the less make it clear that our continuing commitment to a home state regulation regime remains. We will seek the House's approval of legislation to implement a home state regime as and when that is developed. We will, as is necessary, seek approval to amend the order to implement the forthcoming e-commerce directive before it comes into force next year. We will also impose a home state regime if it is clear that that is required for reasons of consumer protection. We would, if necessary, seek approval to amend the order so as to require all promotions to a certain country, or of a certain type, to be approved by an authorised person.

My final point is about new exemptions for promotions to high net worth and sophisticated investors. Individual investors—business angels—are an important source of capital for many start-ups and small companies. However, the cost of raising capital from those individuals is often high, so there has already been a widespread welcome for exemptions from the financial promotion restriction for promotions to such investors. That should make informal capital raising easier. Sufficient safeguards are applied to the exemptions to ensure that consumers continue to receive an appropriate level of protection.

As I mentioned at the outset, there are 60 exemptions to the financial promotion restriction. I do not want to try your patience, Mr. Butterfill, or that of the Committee, in describing all of them. I have mentioned a few, and set out how we have proceeded in respect of the exemptions for journalists and the territorial scope issues. I conclude by commending the order to the Committee.

4.39 pm

Mr. Howard Flight (Arundel and South Downs): I add my welcome to you as Chairman, Mr. Butterfill. Conservative members of the Committee were pleased to note that most of the suggestions that we made in the 45 pages of debate about promotion during the consideration of the Financial Services and Markets Bill have been incorporated in some form or other into the order. We are especially happy that the Government have decided to continue with the position under the previous Act and not to regulate financial promotion communications when the recipient is outside the United Kingdom.

One or two points must be made for clarification, however. We said that we welcomed the Government's decision to drop home state regulation of financial promotion communications when they were received outside the United Kingdom. We accept the need for restrictions on cold calls—now referred to as ``unsolicited real time communications''. However, the exemption for cold calls to overseas recipients still seems to depend on whether the communicator conducts the same business in the United Kingdom. If he does, he cannot make cold calls at all, unless in each single case another exemption applies.

Whether the communicator conducts the same business in the United Kingdom seems irrelevant, because if he does, it is likely to be authorised under the Financial Services and Markets Act 2000, so the financial promotion restrictions would not apply. Widening the exemption is important because the financial services firm making the communication from outside the United Kingdom would not then be subject to the Act's financial promotion rules if the Financial Services Authority did not apply those rules to exempted financial promotion communications, as it has said that it will not. When the recipient is outside the United Kingdom, it would be over-regulation to subject the firm to the FSA's form and content rules.

That interpretation may represent a misunderstanding of the draft. We hoped that article 12 would provide that a communication could be treated as directed only at a person outside the United Kingdom, even if it were directed at investment professionals and persons of high net worth within the United Kingdom. However, the drafting may be read the other way. Alternatively, a person may lawfully conduct a business in the United Kingdom involving controlled activities to which the financial promotion restrictions apply, even if he is not authorised under the Act, because a controlled activity includes not only regulated activities but activities that would be regulated activities apart from any exemption. If an exemption from the need for authorisation applies, the communication may none the less relate to a controlled activity and therefore be subject to the financial promotion restrictions. In simple terms, and taking into account the technical points that I have raised, will the Minister make it clear whether it is intended that the exemption will stand if the measures are directed only at persons outside the United Kingdom?

My second point relates to the drafting of article 12(6). The need to incorporate references in paragraph (5) to the fact that the recipients are in the United Kingdom is made clear by the drafting of paragraph (6)(b). The condition that the communication must not be acted on by people in the United Kingdom is supposed to be amended by paragraph (6) to allow for the fact that permitted recipients in the United Kingdom may none the less act on it. However, sub-paragraph (b) has two alternative definitions of recipients who may not act upon the communication, and as a result, it must be specified that the communication must not be acted on by people who are not permitted recipients, even if those people are outside the United Kingdom. Instead of being extended to cover non-permitted recipients outside the UK, the prohibition should be restricted so that it applies only to non-permitted recipients if they are in the United Kingdom.

Article 12 will be put into practice by the FSA. In responding to the FSA's conduct of business rules, much of the industry firmly pointed out that the territorial provisions in rule 3.4 should be drafted so as to ensure that authorised firms communicating with overseas recipients are in the same position as those who will rely on the exemptions in the order.

The exemption in article 13 applies to communications made by a recipient or potential recipient of an investment or investment service. It seems apt to cover corporate venturing, and accordingly the order could cover communications that advertise the fact that the communicator has money available to invest in start-ups. We believe that the Chancellor is keen to encourage that, and we would obviously agree if he wanted to promote it. However, the exemption is not wide enough to cover corporate venturing, and we would ask for the matter to be interpreted so that it would be covered by the exemption.

Why does the exemption in article 15 for communications that consist of introductions to firms authorised or exempted by the Financial Services and Markets Act apply only to real-time communications? If the exemption is so restricted, a person who writes a letter to effect an introduction will be committing a criminal offence. The previous draft of the order did not include such a restriction. Why is it included, and are the circumstances that I describe intended to be covered?

Article 17 relates to generic promotions. The previous draft has been amended, and the article now states:

    ``The financial promotion restriction does not apply to any communication which ... does not identify (directly or indirectly) a person who provides the controlled investment to which the communication relates; and ... does not identify (directly or indirectly) any person as a person who carries on a controlled activity in relation to that investment.''

That is slightly different. During consultation, the point was made that the exemption from the financial promotion rules should extend to generic information that includes listing of products—that is, funds—that meet selected criteria. Judging from the content of the site, it would seem that the generic promotions exemptions would not be available. The site would be subject to the requirements of section 21 of the Financial Services and Markets Act 2000, which prohibits people from communicating in the course of business invitations or inducements to engage in investment activity, unless the communication is made or approved by an authorised person.

In policing the perimeter, the FSA will determine whether a communication contravenes the financial promotion restrictions. Given the nature of the work of organisations such as the Association of Unit Trusts and Investment Funds, and the content of its website, it is difficult to understand how it could be regarded as not communicating invitations or inducements to engage in investment activity. However, the industry and AUTIF will continue to raise the issue with the FSA and, if section 21 is to be complied with, such bodies will need to ensure that the website has been approved by an authorised person. That is not different from the current situation in which certain members have approved certain fact sheets issued by industry bodies. I ask first for confirmation that that would be required. Secondly, is there an interpretation of article 17 that will cut out what is unnecessary?

Article 18 deals with ``mere conduits''. It is clearly sensible to provide an exemption for people who merely publish communications and newspapers that are written by others. However, surely the exemption should apply even if the principal purpose of the business carried on by the conduit is not that of transmitting or receiving material provided by others. For example, Reuters communicates both its own news items and information supplied by others. Surely, two of the other conditions attached to the exemption are too restrictive. The communications should be devised mainly by someone other than the conduit. To say that they must be devised wholly by the other person may mean that the exemption could be challenged if the conduit, for reasons of space, changes one or two words when finalising the article.

While it is right to provide that the conduit should exercise control only over the contents of the communication, surely it is inappropriate in certain specific cases to provide that acting at the request of a regulator should provide an exemption only when the regulator is empowered to make the request. That would present the risk of the regulator acting beyond its powers. Surely that it unfair and not intended.

The Minister commented in particular on article 20. The disclosure requirements have not changed from the previous draft. The change is that the Government intended the FSA to be the regulator but, after a little pressure from Lord Wakeham, it now seems that the Press Complaints Commission will monitor journalists. This is tricky territory. I accept that in practical terms it is probably impossible for journalists to be monitored under the financial services regime. Equally, however, they are far and away the most powerful advisers to investors, so perhaps there is some irony in the degree to which other financial advisers are regulated.

Be that as it may, why did the Government make that change at the last minute? Was it because of fears that such a provision would be out of order under section 10 of the Human Rights Act 1998, or was it because of pressure by the press? I do not think that the FSA wanted the job, although the Treasury had insisted initially that it did have such a responsibility. My second question is whether the disclosure requirements are meant to cover broadcasters on television or radio, as well as journalists. On many financial programmes, broadcasters provide advice.

Worry has been expressed that stockbroker communications to clients are not covered because they were already subject to separate regulation and it did not make much sense to double-regulate them. There is a lot of cross-reference here, so I hope that I understand the drafting correctly, but broadly, article 28 reflects article 26 of the previous order. One criterion for testing whether a communication was one-off was that if it was part of a co-ordinated promotional strategy, it was not one-off. Those words have been replaced by the words ``organised marketing campaign''. There had been criticism of the previous terminology. The new phrase is somewhat clearer, but the issue has been taken up with the FSA. It has been asked to ensure that, because of the need to define one-off communications, the definition of what constitutes an organised marketing campaign is also clear.

Article 30 deals with overseas communicators and solicited real-time communications. It seems right that there should be an exemption allowing persons outside the UK to respond by telephone or other real-time communication to persons in the UK who have asked to be contacted. As drafted, however, the exemption does not apply if the overseas communicator carries on the same investment activities from a UK branch. That has already been touched on in part. The individual concerned cannot carry on a conversation with a person who has telephoned from the UK if the person in, say, the United States has a UK branch, even if the financial promotion relates to non-UK business. If that is a correct interpretation of article 30, it is somewhat illogical, especially given the increasingly international nature of such operations. I cannot see why someone who is outside the UK cannot talk to someone who is in the UK, just because the person outside the UK is carrying on the same activity within the UK.

Article 48 provides an exemption, to which the Minister referred, for certified high net worth individuals. Does it cover communications to recipients whom the communicator reasonably believes meet the financial tests for high net worth? Could it be interpreted as covering such communications? The restriction to certified high net worth individuals should apply in the sense that only such individuals can buy the investment. It seems a little top-heavy if that is the only way to make sure that the communicator does not commit a criminal offence when he tries to find out whether the recipient falls within the exemption. Under the United States rules on accredited investors, which are similar, there is no problem with talking to such individuals; certification must be obtained only when they invest. If the exemption applies only if the individual is certified as of high net worth, the communicator could be committing a criminal offence if he gets that wrong. It is likely that most high net worth individuals will not want to indicate that they are properly certified unless they know the nature of the investment opportunity—so there is a chicken and egg problem in the drafting.

The provision in relation to the certificate has rightly been amended so that it relates to future promotions rather than to promotions that have already been received. The change has not been made throughout the certificate, however, and the last sentence indicates that a particular kind of investment has been promoted to the individual before he signs the certificate. I shall not give the relevant wording, but a change to it, or a different interpretation, might make things clearer and more sensible.

I have referred to detailed points, which the FSA may be able to resolve by the way in which it interprets the order. I have also put on the record potential problems of interpretation in the drafting of the order, which I suspect may not have been part of the Government's intention.

4.59 pm


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Prepared 26 March 2001