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Investment Exchanges and Clearing Houses Bill


These notes refer to the Investment Exchanges and Clearing Houses Bill as introduced in the House of Commons on 16th November 2006 [Bill 4]





1.     These explanatory notes relate to the Investment Exchanges and Clearing Houses Bill as introduced in the House of Commons on 16 November 2006. They have been prepared by HM Treasury in order to assist the reader of the Bill and to help inform debate on it. They do not form part of the Bill and have not been endorsed by Parliament.

2.     The notes need to be read in conjunction with the Bill. They are not, and are not meant to be, a comprehensive description of the Bill. So where a clause or part of a clause does not seem to require any explanation or comment, none is given.


3.     The Bill will:

  • enable the Financial Services Authority (FSA) to prevent UK recognised investment exchanges (RIEs) and clearing houses (RCHs) (together referred to as recognised bodies) from making changes to their regulatory provisions (defined as their rules, guidance, arrangements, policy or practice) which are disproportionate to the end they are intended to achieve or which do not pursue a reasonable regulatory objective;

  • apply this restriction on disproportionate regulatory provision to persons applying to the FSA for recognition as an investment exchange or clearing house;

  • make provision for the necessary processes to enable the FSA to carry out this role, such as the notification to the FSA of proposed changes, the calling in by the FSA of some proposals for detailed examination, and, if

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    the proposal is called in, the making of representations to the FSA about the proposal, and for rules or directions to be made by the FSA to identify proposed changes or types of change in respect of which the notification obligation will not apply.


4.     The Bill is intended to meet concerns that UK recognised bodies might introduce regulatory provision (rules, guidance and similar material) which imposes an excessive regulatory burden on the issuers of securities admitted to trading on the markets they provide or support, or on their members or other users of those markets. A regulatory provision will be excessive if it is not required by UK or Community law and either it is out of proportion to the end to be achieved, or it pursues some end which could not be considered to be a reasonable regulatory objective.

5.     Part 18 of the Financial Services and Markets Act 2000 provides for the recognition of UK investment exchanges and clearing houses which meet recognition requirements set out in that Act and in regulations made by the Treasury under powers conferred in that Act 1. (The current recognition requirements will be amended shortly as part of the steps necessary to implement the EC Markets in Financial Instruments Directive (2004/39/EC)).

1 The Financial Services and Markets Act 2000 (Recognition Requirements for Investment Exchanges and Clearing Houses ) Regulations 2001 (S.I.2001/995).

6.     The FSA has no power under existing legislation to prevent a recognised body from changing its rules or guidance, provided that the body continues to meet the recognition requirements. In particular, the FSA cannot currently prevent a UK recognised body from making excessive regulatory provision.

7.     The recognition requirements for UK recognised bodies are currently framed in terms of the objective to be achieved or the minimum standards which the body has to meet. It would be difficult to reformulate the recognition requirements in ways which set both minimum and maximum standards (i.e. the standards beyond which any regulatory provision might be considered to be excessive) without making the recognition requirements much more detailed and specific. Such an approach might be unduly restrictive on the ability of UK recognised bodies to devise regulatory provision appropriate for the markets they serve and which meets the needs of their own customers. In addition, if it were a recognition requirement that a body did not adopt excessive regulatory provision, the only remedies available to the FSA would be withdrawal of the recognition or the making of a direction to the recognised body to take specified steps to secure its compliance with the recognition requirements, whereas the scheme provided for in the Bill allows the FSA to veto excessive provision without a body's recognition status being affected.


8.     The Bill has the same extent as Part 18 of the Financial Services and Markets Act 2000 (which it amends).


Clause 1: Power of FSA to disallow excessive regulatory provision

9.     This Clause inserts new section 300A into the Financial Services and Markets Act 2000.

10.     Section 300A confers the new power on the FSA to disallow excessive regulatory provision of recognised bodies and provides that any regulatory provision made by a recognised body when the FSA has directed it not to do so cannot be enforced.

Clause 2: Procedural and other supplementary provisions

11.     This clause inserts new sections 300B, 300C, 300D and 300E into the Financial Services and Markets Act 2000.

12.     Section 300B imposes a duty on recognised bodies to notify the FSA when they propose to make new regulatory provision. It also extends the FSA's existing power under section 293 of the Financial Services and Markets Act 2000 (power to make rules requiring recognised bodies to notify the FSA of certain events and information) to include a power to specify types of proposed new regulatory provision or circumstances in which proposed new regulatory provision does not need to be notified, and to make procedural provision in relation to the notification of proposed new regulatory provision.

13.     Section 300C provides for an initial period in which the FSA can consider whether to call in a proposal for further scrutiny. A recognised body may not make a change to its regulatory provision before it has notified it to the FSA, or during the initial period (unless the FSA notifies it before the end of the period that it that it is not calling in the proposal). If the FSA decides not to call in the proposal during the initial period, the body may make the change to its regulatory provision.

14.     Section 300D sets out what is to happen if the FSA calls in a proposed change to regulatory provision for examination. It provides that the FSA must publish a notice, giving details of the proposal that it has called in and setting a period for making representations; it sets a period within which the FSA must take a decision about a proposal it has called in; and it provides that the proposed change to a body's regulatory provision cannot be made while any legal proceedings are pending.

15.     Section 300E contains supplementary provision.

Clause 3: Interim power to give directions about notification

16.     This clause gives the FSA a power to give directions to recognised bodies that the obligation to notify proposed new regulatory provision in section 300B(1) is not to apply to specified provisions, provisions of a specified description or provisions made in specified circumstances. This power will cease to have effect 12 months after Royal Assent. Its purpose is to ensure that recognised bodies can be relieved of the notification obligation in appropriate circumstances from the passing of the Act until the FSA is able to make rules under section 300B.

Clause 4: Consequential amendment of grounds for refusing recognition

17.     This clause inserts new section 290A into the Financial Services and Markets Act 2000. This section ensures that an applicant for recognition as a UK recognised body is subject to the same requirement not to have excessive regulatory provision.


18.     The main persons likely to be affected by the measure are the UK RIEs and RCHs themselves, issuers of securities traded on UK markets, investors and other users of the markets which UK RIEs and RCHs provide or support.

19.     The main benefit arises from the prevention of excessive regulatory provision by RIEs and RCHs. Excessive regulatory provision would raise the costs of doing business on financial markets but this cannot be estimated precisely.

20.     The main costs of the proposed measure are the additional costs for UK RIEs and RCHs in complying with the new requirements and additional administrative costs for the FSA. Based on an estimate that (after allowing for the effect of the rules made under section 300B or the directions given under the temporary power in clause 4) 25 proposed changes to regulatory provision a year will be notified by UK recognised bodies to the FSA, of which the FSA will call in on average one proposal a year for further scrutiny, the additional compliance costs for UK recognised bodies are expected to be about £6,000 a year while the additional administrative costs for the FSA are expected to be about £26,000 a year. The costs are expected to be higher in the first year as the new arrangements are put in place and the UK recognised bodies and the FSA gain experience of operating under the new requirements. The measure is not expected to have any significant impact on small firms or on competition.


21.     Article 1 of the Protocol to the Convention (Protection of property) and Article 6 of the Convention (Right to a fair trial) are likely to be engaged. Article 1 of Protocol 1 is likely to be engaged because the veto power and associated power to turn down applications for recognition by a body seeking to be recognised under Part 18 affect the ability of the bodies freely to dispose of their property rights in the markets and clearing systems they operate or are seeking to operate. The businesses operate through a network of contracts with those using their services including issuers of securities, brokers, professional investors, commodity dealers and others. Their business model allows them to change the terms on which users use their facilities through the making of new rules and other regulatory provisions. The FSA's veto power allows the FSA to assess whether a proposed regulatory provision is excessive and to balance the interests of the RIE or RCH with the interests of the issuers, users and investors and will be subject to the process laid down in the Bill. Article 6 is engaged because of the ability of the veto to prevent alterations to the operation of the business of the recognised body or to take up the business of a recognised body. The procedures allow for the persons affected by the veto or a decision to consider whether to exercise it to make representations to the FSA. The FSA's decisions in these cases can be challenged by judicial review in open court. Judicial review is already the main mechanism for challenging the FSA's decisions in relation to RIEs and RCHs and the remedies available under judicial review are also considered to be appropriate in cases arising from this extension of the FSA's powers. It will be open to the court, as in other judicial review claims, to remit the matter to the FSA for the decision to be taken again in the light of the guidance on the law given by the court or to substitute its own decision for that of the FSA.


22.     The provisions of the Bill (including the amendments made to the Financial Services and Markets Act 2000) will come into force the day after it receives Royal Assent.

23.     The new provisions will not apply to any regulatory provision which has been made by a UK recognised body at the time the legislation comes into force. Where a recognised body has proposed but not made any changes to its regulatory provision at that time, the new provisions will apply to the proposals and the new procedures will apply.

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Prepared: 16 November 2006