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Clause 869: Information to be made available to public
1496. This new provision gives the Secretary of State the power to make regulations placing an obligation on statutory auditors to make information regarding their ownership, governance, internal controls with respect to quality and independence of audit work, turnover and names of persons for whom the person has acted as statutory auditor, available to the public. Any such obligations are additional to those referred to in clause 868.
CHAPTER 5: REGISTERED THIRD COUNTRY AUDITORS
Clause 870: Meaning of "third country auditor", "registered third country auditor" etc
1497. This is a new provision that sets out the definition of a third country auditor and a registered third country auditor. The clause provides that a third country auditor is an auditor (whether based in the UK or not) of the accounts of a company incorporated or formed in a non-EU country, whose shares are admitted for trading on a UK market such as the London Stock Exchange.
Clause 871: Duties of registered third country auditors
1498. Subsections (1) to (3) require registered third country auditors to be subject to systems of independent monitoring and discipline in the UK in accordance with Schedule 12. These provisions are similar to supervision arrangements for statutory auditors contained in clauses 841(1) (membership of a Recognised Supervisory Body) and clause 846 (Supervisory Bodies) and Schedule 10. Subsection (4) empowers the Secretary of State to disapply the requirements in subsections (1) to (3). For example, he may disapply the requirements if satisfied that the third country auditor is already subject to equivalent supervision arrangements in his home country.
Schedule 12: Arrangements in which registered third country auditors are required to participate
1499. The requirements in this Schedule are new. They describe the independent monitoring and investigation arrangements which third country auditors must participate in.
Clauses 872 and 873: Information
1500. These clauses replicate for registered third country auditors the requirements in clauses 852 and 853 for the notification of information to the Secretary of State. Third country auditors may be required to provide any information that might reasonably be required for the Secretary of State to carry out his functions.
Clauses 874 and 875: Enforcement
1501. The provisions in clause 874 enable the Secretary of State to apply to the court for an order to make a registered third country auditor comply with its obligations under the Part. The provisions in clause 875 empower the Secretary of State to make provision as to the removal of the third country auditors from the register of auditors in certain circumstances. In doing so, regard must be had to whether the third country auditor has complied with his obligations under this Part.
Clause 876: Grants to bodies concerned with arrangements under Schedule 12
1502. This clause amends section 16(2) of the C(AICE) Act 2004. The effect of the amendment is that the body that carries out the delegated functions of the Secretary of State in relation to third country auditors (the functions may be delegated by an order under clause 881) is eligible for grants from the Secretary of State under section 16 of that Act. It also means that the body may be exempt from liability in damages under section 18 of the Act.
CHAPTER 6: SUPPLEMENTARY AND GENERAL
Clauses 877 and 878: Power to require second company audit
1503. These clauses restate section 29 of the 1989 Act empowering the Secretary of State to require a second audit of a company in circumstances where the person appointed as statutory auditor was not eligible for appointment or was not independent of the company audited. Subsection (2) permits the Secretary of State to direct either that a second audit is performed or that a review of the first audit is carried out (which will inform whether a second audit is required). Subsections (5) to (8) set out the criminal sanctions on the company should it fail to comply with that order. Clause 878 allows the audited person to recover the costs of the second audit from the first auditor, if the first auditor knew when he acted that he was not eligible or not independent.
Clause 879: Misleading, false and deceptive statements
1504. This clause is a restatement of the offences in section 41 of the 1989 Act but also extends these offences to third country auditors. Subsection (1) sets out offences in respect of persons who provide information that they know to be misleading, false or deceptive. Subsection (2) makes it an offence for a person to hold himself out as a registered auditor where he is not registered as such in accordance with clause 868. Subsection (3) makes a similar provision for third country auditors. Subsection (4) makes it an offence for either a supervisory or qualifying body to hold itself out as recognised when it is not so recognised. Subsection (8) provides a defence if the person took all reasonable precautions and exercised due diligence to avoid committing the offence.
Clause 880: Fees
1505. This provision is based on section 45 of the 1989 Act and extends the powers of the Secretary of State to make regulations to prescribe periodical fees which must be paid by the Auditors General and registered third country auditors as well as recognised supervisory bodies and recognised qualifying bodies.
Clauses 881 and 882: Delegation of Secretary of State's functions
1506. These provisions replace sections 46 and 46A of the 1989 Act as amended by sections 3 to 5 of the C(AICE) Act 2004 and empower the Secretary of State to establish a body, or appoint an existing body, to exercise his functions relating to statutory auditors and the recognition of bodies that supervise auditors and/or provide professional qualifications. To do so, the Secretary of State must make a delegation order that is in accordance with Schedule 13. However, clause 881(6) provides that some delegated functions must remain exercisable concurrently by the Secretary of State: namely the power to call for information (clauses 853 and 873) and the power to issue directions to comply with international obligations (clause 883). Clause 881(7) also provides that certain delegated functions concerning the approval of overseas qualifications (clause 850) can be exercised only with the consent of the Secretary of State. Clause 881 (3) provides for the appointment of the delegation of the body to have the effect of making it subject to the obligations of the Freedom of Information Act 2000. The Professional Oversight Board is currently appointed under section 46 of the 1989 Act to exercise the Secretary of State's functions.
1507. Clause 882 specifies the conditions for delegating functions to an existing body. It ensures that an existing body is not precluded from exercising any delegated function on the basis of its involvement with the monitoring, investigation or disciplinary arrangements that are set out in Schedule 10.
Schedule 13: Supplementary provisions with respect to delegation order
1508. This Schedule restates the provisions of Schedule 13 to the 1989 Act. Paragraph 2 provides that the delegated body is not to be regarded as acting on behalf of the Crown. Paragraphs 7 to 9 provide for the delegated body to exercise any legislative functions by instrument in writing and not by statutory instrument. Instruments must be made available to the public and the Secretary of State may require the body to consult prior to the making of regulations. Paragraph 10 requires the delegated body to report annually to the Secretary of State on the performance of its functions.
Clause 883: Directions to comply with international obligations
1509. This provision restates section 40 of the 1989 Act and empowers the Secretary of State to direct recognised supervisory or qualifying bodies, or any body delegated under clause 881, to comply with Community or other international obligations. If the body fails to comply with a direction, the Secretary of State can apply to the court for his direction to be enforced.
Clauses 884: Offences by bodies corporate, partnerships and unincorporated associations
1510. This provision restates section 42 of the 1989 Act and deals with offences committed by bodies corporate, partnerships and other unincorporated associations. Where an offence committed by such a body is committed with the consent or connivance of, or is attributable to the neglect of, an officer (in the case of a body corporate), a partner (in the case of a partnership) or an officer or member (in the case of an unincorporated association), that officer, partner or member is also guilty of the offence.
Clause 885: Time limits for prosecution of offences
1511. This provision restates section 43 of the 1989 Act and sets a twelve-month time limit for the prosecution of offences within each of the jurisdictions. Subsections (1) to (4) identify that the date on which knowledge of sufficient evidence of the offence becomes known to either the Secretary of State or Director of Public Prosecutions (for England and Wales), the Lord Advocate (for Scotland) or Director of Public Prosecutions for Northern Ireland is taken as the date from which the twelve month time limit commences. In any event, the prosecution may not be commenced if 3 years have passed since the date on which the offence was committed.
Clause 886: Jurisdiction and procedure in respect of offences
1512. This provision restates section 44 of the 1989 Act and deals with the jurisdiction and procedure in respect of offences. It specifies that the jurisdiction is that in which a body corporate or unincorporated association has its place of business or, in the case of an individual, where he is located. It also provides for an unincorporated association to be treated in the same way as a body corporate.
Clause 887: Service of notices
1513. This provision restates section 49 of the 1989 Act and states how notices and other documents may be served under this Part of the Bill on any person other than the Secretary of State. The three permitted methods of service are: delivery to the person, leaving the document at the person's address, or sending it by post to the person's address.
Clause 888: Documents in electronic form
1514. This is a new provision to allow delivery of notices, directions or other documents in electronic form. It allows the use of e-communications where existing provisions in this Part impose requirements on the giving or sending of notices, directions or other documents, provided the recipient indicates he is prepared to accept this form of delivery.
Clause 889: Meaning of "associate"
1515. This provision restates section 52 of the 1989 Act and defines the meaning of 'associate'. This definition is particularly relevant for the independence requirement for statutory auditors set out in clause 843.
Clause 890: Minor definitions
1516. This provision is a restatement of section 53 of the 1989 Act with certain extra definitions. Subsection (3) empowers the Secretary of State, by regulations, to make amendments to this Part which are needed in relation to the application of the Part to a "firm" (as defined by subsection (1)) which is not a partnership or body corporate.
Clause 891: Index of defined expressions
1517. This provision contains an index to the defined terms used in the Part.
Clauses 892: Power to make provision in consequence of changes affecting accountancy bodies
1518. This provision restates section 51 of the 1989 Act. The provision empowers the Secretary of State to amend by regulation legislation (including this Bill) that refers to accountancy bodies in the event of a name change, merger or transfer of engagements affecting the bodies.
Clause 893 and Schedule 14: Consequential amendments
1519. Clause 893 introduces Schedule 14, which contains some amendments consequential on this Part to the C(AICE) Act 2004.
PART 36: TRANSPARENCY OBLIGATIONS AND RELATED MATTERS
Transparency rules
Clause 894: The transparency obligations directive
1520. Clause 894 inserts a definition of the "transparency obligations directive" at the appropriate place in Part 6 of the Financial Services and Markets Act 2000.
Clause 895: Transparency rules
1521. Clause 895 inserts five new sections into Part 6 of the Financial Services and Markets Act 2000 ("FSMA 2000"): sections 89A, 89B, 89C, 89D, and 89E. Part 6 of FSMA 2000 deals with the regulation of securities that are traded on markets in the UK. These new sections enable the "competent authority" (which is the Financial Services Authority ("the Authority")) to make transparency rules.
1522. Transparency rules will require information to be either notified to the Authority or made public by issuers of securities who are regulated in the UK and whose securities are traded on a regulated market. Certain aspects of the rules can also be extended to apply to issuers whose shares are traded on other UK markets. The rules will also require voteholders to notify issuers of shares, and others, of the number of votes attached to shares of such issuers controlled by people who hold a specified proportion of those votes. One of the main purposes of such rules is to ensure that the markets on which securities are traded have sufficient information about the issuers of the securities, and the level of holdings in those securities, to enable the prices of those securities to accurately reflect these matters which affect their value.
New Section 89A: Transparency rules
1523. Subsection (1) of new section 89A of FSMA 2000 enables the Authority to make transparency rules for the purposes of the Transparency Directive (2004/109/EC) to implement the Transparency Directive in the UK.
1524. The power is not limited to implementation of the Directive but also enables the Authority to make rules for the underlying purposes of the Directive. The Transparency Directive itself covers only issuers whose securities are traded on regulated markets and people who hold votes attached to shares in such issuers. The scope is intentionally wide to provide scope for the Authority to develop rules to deal with any matters arising out of the Transparency Directive. This allows the rules to address other matters arising from the Directive's implementation, for example, to ensure that secondary legislation adopted by the Commission can be incorporated into
the transparency rules, and that optional aspects of the Directive can be implemented, where the Authority considers this appropriate.
1525. It is expected that rules made under section 89A(1) will implement the Transparency Directive by requiring issuers to make public their annual accounts and reports, prepared in accordance with the EU International Accounts Standards Regulation (Regulation (EC) 1606/2002), and half-yearly and interim management statements about their business, and that they will require issuers to treat holders of the same securities equally. It is also expected that rules under this section will require holders of votes attached to shares in issuers within the scope of the Transparency Directive to make disclosure about their holdings when the proportion of votes that they hold reaches certain specified levels.
1526. The power under section 89A(4)(a) extends the ability of the Authority to make rules about disclosures of voteholdings to UK markets that are not regulated markets (within the meaning of section 103(1) of FSMA 2000). The power under section 89A(4)(b) extends the ability of the Authority to make rules about disclosure in relation to certain comparable instruments in respect of voting shares. These instruments are ones which give the holder a level of economic, as opposed to legal, control over votes attached to shares. An example of the type of instrument which the rules could extend to cover is a contract for difference, known as a "CFD".
1527. Subsection (5) ensures that the Authority will be able to set up a parallel regime in non-regulated markets in relation to disclosures of voteholdings, to the regime which must be imposed in regulated markets as a result of the Transparency Directive. This means that the Authority will be able to require voteholders to notify issuers when their holdings reach certain specified levels. Subsection (5) also makes clear that transparency rules covering areas outside the scope of the Transparency Directive can specify how the proportion of voting rights, and proportions within classes, are to be determined.
1528. There are three main categories of obligation that are imposed under the Directive and that the Authority's transparency rules will implement in respect of UK markets and issuers:
- requirements for holders of votes attached to securities of issuers to notify the issuers when the number of votes they control reaches a proportion of the total votes available that is specified;
- requirements for issuers to make public, at regular intervals, information about their financial position and the progress and management of the business of the issuer; and
- requirements for issuers to treat the holders of the same securities equally.
New Section 89B: Provision of voteholder information
1529. Section 89B sets out provisions for notifications by voteholders under transparency rules. Subsection (1) clarifies that notification can be required to made to the issuer or the public.
1530. Subsection (5) sets out the circumstances under which voteholders must notify of a change in the proportion of voting rights. (i.e. when a proportion crosses above or below, or reaches, a proportion designated in FSA rules). The remaining subsections clarify the circumstances under which these notifications may be made.
New Section 89C: Provision of information by issuers
1531. Section 89C sets out provisions for issuers to provide information under transparency rules. Subsection (1) clarifies that information can be required to be given to the public or the competent authority.
1532. The rules cover annual financial reports (both financial statements and management reports), half-yearly financial reports and interim management statements, as required by the Transparency Directive. The rules can also require issuers to disclose certain other information relating to voteholder information, information about the different classes of share they have issued and the total number of voting rights attached to each class, their own voteholdings, their capital, and information about new loan issues.
1533. Subsection (5) sets out the circumstances under which issuers must notify of a change in the proportion of voting rights. (i.e. when a proportion crosses above or below, or reaches, a proportion designated in FSA rules).
New Section 89D: Transparency rules: interpretation etc
1534. New section 89D of FSMA 2000 defines a number of terms used in the preceding three sections.
New Section 89E: Transparency rules: other provisions
1535. New section 89E of FSMA 2000 sets out further provisions on the requirements which transparency rules may impose. Subsection (1) will enable the Authority to make public information that voteholders or issuers are required to make public, where they fail to do so themselves. Subsection (2) will enable the Authority to make public any notification in accordance with transparency rules.
1536. There is some overlap between notifications required by the Panel on Takeovers and Mergers in the rules made under Part 22, and notifications required by the Transparency Directive. Subsection (3) enables transparency rules to cross-refer to the City Code on Takeovers and Mergers, which will enable greater alignment between the two sets of rules.
Clause 896: Competent Authority's Power to call for information
1537. Clause 896 inserts three new sections into Part 6 of FSMA 2000: sections 89F to 89H.
1538. New section 89F of FSMA 2000 permits the Authority to call for information from specified persons, set out in subsection (2), including issuers of shares, voteholders and their auditors, directors and persons controlling or controlled by voteholders.
1539. Subsection (3) limits the Authority to requesting information and documents reasonably required in connection with the transparency rules. Subsection (4) enables the Authority to determine the timeframe for production and provision of information, and the location for the information to be provided. Subsection (5) makes it clear that the production of the material as required by this clause does not affect any lien on a document.
1540. New section 89G sets outs the requirements connected with the competent authority's power to call for information. The Authority will be empowered to request specific information or documents, or information or documentation of a nature it describes (subsection (1)), and may require its authentication or verification (Subsection (2)). The Authority is permitted, under subsection (3), to take copies of and extracts from the documentation provided, and may also require the persons providing the information, or any "relevant person" within the meaning of subsection (4), to submit an explanation of any documentation produced.
1541. If a person fails to comply with the requirement to produce a document, the Authority is permitted under subsection (5) to require a person to state where the document is.
1542. New section 89H sets out the supplementary provisions in relation to the competent authority's power to call for information in sections 89F and 89G.
Clause 897: Powers exercisable in case of infringement of transparency obligation
1543. Clause 897 inserts four new sections into Part 6 of FSMA 2000: sections 89I to 89L.
1544. The four new sections set out the competent authority's powers in case of infringement of transparency obligations. Section 89I enables the competent authority to make a public statement if an issuer is failing or has failed to comply with its obligations. It may only do so after it has issued a warning notice to the issuer (subsection (2)), and after any representations from the issuer, it has provided the issuer with a decision notice (subsection (3)). Subsection (4) requires the Authority to provide the issuer with notice that it has a right to refer the matter to the Tribunal.
1545. New section 89I of FSMA 2000 enables the competent authority to make a public statement if an issuer is failing or has failed to comply with its obligations. It may only do so after it has issued a warning notice to the issuer (subsection (2)), and after any representations from the issuer, it has provided the issuer with a decision notice (subsection (3)). Subsection (4) requires the Authority to provide the issuer with notice that it has a right to refer the matter to the Tribunal.
1546. New Section 89J of FSMA 2000 gives the Authority the power to require the market operator to suspend trading of issuers where they suspect an applicable transparency obligation has been infringed (subsection (2)), or prohibit trading of issuers where they find such an infringement (subsection (4)). Subsection (3) gives the Authority powers to require the market operator to prohibit trading where the UK is not the home member state of the issuer. This enables the Authority to take action to maintain market confidence in UK markets.
1547. Section 89K of FSMA 2000 sets out the procedures relating to the suspension and prohibition powers of the Authority set out in section 89J.
1548. New section 89L sets out the right for those who receive a decision notice or a notice under 89K to refer matters to the Tribunal.
Clause 898: Corporate Governance Rules
1549. New section 89M of FSMA 2000 gives the competent authority (ie the FSA) a power (under part 6 of FSMA) to make rules implementing, enabling the implementation of and dealing with matters arising out of Community obligations on corporate governance for issuers on a regulated market.
1550. This rule-making power will enable the Authority to make corporate governance rules to cover issuers for whom the UK is the home member state, and whose securities are traded on a regulated market in the UK or elsewhere in the EEA.
1551. Subsection (2) sets out the type of corporate governance provision covered by this rule making power. These include:
- the nature, constitution or functions of the organs of issuers;
- the manner in which organs of the issuer conduct themselves;
- the requirements imposed on organs of the issuer;
- the relationship between the different organs of the issuer;
- the relationship between the organs of the issuer and the members of the issuer (or holders of the issuer's securities).
1552. Subsection (3) provides that greater burdens must not be imposed on issuers whose securities are traded outside the UK than those imposed on issuers with securities on UK markets.
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