Appendix
A
Letter from the Clerk of the Committee to HM Treasury
Proposal for the Regulatory Reform (Financial
Services and Markets Act 2000) Order 2007
Thank you for the presentation which you made yesterday
with your colleagues on the subject of the Treasury's RRO proposals
for reform of the Financial Services and Markets Act 2000 (FSMA).
The Committee considered the proposal and decided
to seek further information from you on a number of points. The
issues which concern the Committee are set out below, together
with an indication of the relevant provisions of the FSMA and
the Committee's Standing Order.
Authorisation requirements: partnerships [section
32 of the FSMA]
Whether the proposal removes or reduces a burden
or the authorisation or requirement of a burden (S.O. 141 (6)(b))
1. The effect of the proposed amendments to s32 is
relatively clear: whether the successor to the business is an
individual or a firm with a significantly changed membership,
FSA authorisation of the successor entity will continue as long
as it succeeds to the whole, or substantially the whole, of the
business of the predecessor firm.
2. However, paragraph 26 of the Minister's Statement
is ambiguous and seems to suggest that the requirement to cease
trading and reapply for authorisation will only be removed where
one of the partners leaves the business and where a sole practitioner
will be carrying on the business.
Q1. Please indicate whether it is the Government's
intention that the successor firm will continue to have FSA authorisation
to carry on the whole, or substantially the whole, of a business,
regardless of changes in membership of the firm and regardless
of whether the successor is a firm or a sole trader.
Q2. (a) What is the current position under
FSMA in relation to limited liability partnerships?
(b) Does the Treasury consider that it
would be sensible to deal in this RRO with the issue of authorisation
of LLPs succeeding to the business of a dissolved firm?
FSA consultation with EEA regulators [section
49(2) of the FSMA]
Whether the proposal requires elucidation,
is not written in plain English or appears to be defectively drafted
(S.O. 141 (6)(h)); whether the proposal appears to be incompatible
with any obligation resulting from membership of the European
Union; (S.O. 141 (6)(i))
3. The Government's position is that the provisions
of s49(2) of the FSMA over-implement the requirements of various
EC Directives by requiring consultation with EEA regulators before
a permission is granted, varied or cancelled. The proposed Order
will require consultation only before a permission is granted
or before a permission is varied to allow activity covered by
a different EC Directive to that in the original permission. It
is proposed that other variations and cancellations will not give
rise to a requirement to consult.
4. The Minister's Statement references Article 39
of the Consolidated Life Assurance Directive, which we believe
should be properly referenced as 2002/83/EC. Article 39 requires
the competent authority of the home Member State to notify the
competent authorities of the other Member States in the event
of the withdrawal or lapse of the authorisation of a life assurance
undertaking. This appears to amount to notification after the
event in order to prevent rogue trading across the EU, rather
than consultation prior to a decision.
Q3. (a) If the Treasury is of the view
that this notification does not constitute consultation within
the meaning of s49(2) of the FSMA, please confirm that Article
39 of the Consolidated Life Assurance Directive is irrelevant
for the purposes of s49(2).
(b) Alternatively, if the Treasury considers
that notification pursuant to Article 39 does fall within the
meaning of consultation under s49(2) of the FSMA, please indicate
how the Treasury intends to incorporate notification in relation
to a withdrawal or lapse of authorisation into the proposed scheme
for amending s49(2).
Cancelling sponsor approval [section 88 of the
FSMA]
Whether the proposal continues any necessary
protection (S.O. 141 (6)(c)); whether the proposal prevents any
person from continuing to exercise any reasonable right or freedom
(S.O. 141 (6)(j))
5. The Government proposes amendments to s88 of the
FSMA in relation to the procedures to be adopted where a sponsor
himself requests that his FSA approval be cancelled. The issues
are similar to those in relation to delisting of securities at
the request of the issuer. In the latter case, the issuer has
recourse to the Tribunal if the FSA refuses to grant its request
for delisting. On the other hand, there is no proposed provision
for recourse to the Tribunal if the FSA refuses the request of
a sponsor for his approval to be cancelled.
Q4. Please explain the justification for not
granting a right to sponsors to petition the Tribunal in cases
where their request for cancellation of approval is refused by
the FSA.
6. The Minister's Statement does not characterise
as a necessary protection announcements to the market that a sponsor's
approval has been cancelled. Clearly, it is important that the
market should have up to date information about approved sponsors.
One respondent to the consultation suggested that the market should
be informed by a clear statement on the FSA website and that the
sponsor should be informed of the cancellation of its approval.
Q5. What assurances can the Treasury provide
that, in the absence of any proposals in the RRO about announcements
to the market, the market will receive clear and up to date information
about approved sponsors?
Removing restrictions on waivers and modifications
[section 148 of the FSMA]
Whether the proposal removes or reduces a burden
or the authorisation or requirement of a burden (S.O. 141 (6)(b))
7. The proposed Order will amend s148 so that the
FSA will be able to waive or modify all of its rules, subject
to certain conditions.
Q6. Will such waiver or modification apply
to a class of persons, or only to individuals? Please provide
examples to illustrate your answer.
Q7. To the extent that a rule is being modified,
how will the FSA decide the appropriate level of modification
of that rule? Please provide examples to illustrate your answer.
Lighter consultation on guidance [section 157
of the FSMA]
Whether the proposal has been the subject of,
and takes appropriate account of, adequate consultation (S.O.
141 (6)(d)); whether the proposal requires elucidation, is not
written in plain English or appears to be defectively drafted
(S.O. 141 (6)(h))
8. Respondents to the proposals about lighter consultation
on guidance have raised concerns that firms tend to treat compliance
with guidance on the rules almost as seriously as compliance with
the rules themselves, an approach which is likely to continue
as rules become more principle-based. The Government counters
that the guidance is not binding and has no 'evidential' effect
in terms of whether or not a person has complied with the rules:
guidance is merely intended to throw light on the rules.
9. Whilst the FSA issues guidance on many different
issues, the proposals in relation to s157 of the FSMA relate specifically
to guidance on the rules. It is by no means obvious that,
in the modern compliance climate, guidance on the rules is likely
to be treated as having much less force than the rules themselves,
particularly when it is the rule-making body issuing that guidance.
On the assumption that compliance officers cannot easily pick
and choose which guidance to follow and which they may safely
ignore, it would be reasonable to consider guidance to be indicative
of the way in which the rules are likely to be interpreted by
the FSA.
Q8. (a) Please explain with reference
to the text of the FSMA the legal status which the Treasury considers
applies to guidance issued by the FSA acting under powers given
in s. 157(1)?
(b) On what basis does the Treasury claim
that a Tribunal or court would not use the guidance as at least
indicative of the way in which the rules should be applied, given
that that guidance is issued by the rule-making body?
(c) Please provide some examples to illustrate
the Treasury's responses.
10. The Minister's Statement states that s157(3)
of the FSMA already allows for a 'lighter-touch consultation process',
including in relation to minor changes. Yet the Minister's Statement
also makes the case for lighter-touch consultation on guidance
on the basis that full consultation is currently required in relation
to minor changes.
11. It is clear that s157(3) requires consultation
only on guidance addressed to "regulated persons generally"
or to a "class of regulated persons". It is also clear
that there is a limited exception to the requirement to consult
on guidance derived from s155(7). However, these provisions relate
only to whether the FSA is required to consult or not, they do
not relate to the level of consultation required.
Q9. Please explain how s157(3) currently allows
for a lighter-touch consultation process.
Delegating the issue of guidance [Sch 1, para
5 of the FSMA]
Whether the proposal continues any necessary
protection (S.O. 141 (6)(c))
12. The proposed Order would allow delegation of
the issuing of guidance to a committee or sub-committee. The Treasury
has stated that the FSA would issue a policy statement explaining
the operation of the new arrangements and, in particular, how
consistency, quality and publication of guidelines is to be assured.
The statement would also explain membership of the committee or
sub-committee and how it would be held accountable. Clearly, this
would be an important document.
Q10. What assurances can the Treasury give
that the FSA will issue a policy statement dealing with these
issues?
In providing your answers, please bear in mind that
the Committee will require an explanation of the points of principle
raised by each question. However, given that the issues are in
many cases quite technical, it would be helpful if you could provide
examples to illustrate the points of principle. These may assist
the Committee in understanding the scope and application of the
proposals.
I should be grateful to receive your response to
these questions, together with any additional information which
the Department believes would be helpful to the Committee, not
later than 19 February 2007.
8 February 2007
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