Appendix
B
Letter from HM Treasury to the Clerk of the Committee
Proposal for the Regulatory Reform (Financial
Services and Markets Act 2000) Order 2007: response to request
for information
Thank you for your letter dated 8 February setting
out the issues on which the Committee would like further information.
I will take each questions in the order in which it was presented
in your letter.
Authorisation requirements: partnerships [section
32 of the FSMA]
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.
Yes, this is the case. Not only does the existing
law causing difficulties in relation to a partnership that has
two partners and one of the partners leaves the partnership, similar
problems apply where the business of the partnership remains largely
unchanged but the members of the partnership change substantially,
including if the partnership expands. The proposed amendment seeks
to return to the situation that existed prior to FSMA.
Q2. (a) What is the current position under
FSMA in relation to limited liability partnerships?
Permission to carry on a regulated activity is granted
to specified persons. Section 40 of FSMA sets out a list of persons
who may make an application for permission, these are: an individual,
a body corporate, a partnership and an unincorporated association.
Although sections 44 to 46 provide for a permission to be varied,
those variations are limited to the type of regulated activity
carried on and any requirements which may be imposed on the carrying
out of that activity. The powers to vary a permission do not extend
to a change in the legal status of the firm. Therefore, when a
partnership becomes an LLP, or indeed when an individual wishes
to carry on business as a body corporate, a new application for
permission must be made.
(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?
The need to authorise afresh is a reflection of the
organisational flexibility of an LLP, which potentially allows
for widely differing organisational structures. That flexibility
means that all of the members can be involved in the day-to-day
management and operations of the business (unlike the position
in a traditional partnership). It is this feature which requires
the proposed structure of a particular LLP to be explained fully
by an applicant LLP for Part IV permission.
If a partnership wishes to change its legal status
to an LLP then a change of legal status application would need
to be submitted. The application is assessed in the same way as
a new authorisation and the new LLP will still have to meet the
threshold conditions. However, for change of legal status applications
the FSA operates a fast-track, lower cost authorisation procedure
(on the basis that the FSA will already hold information on the
firm currently authorised)
There may be many issues for the FSA to consider
when a firm changes its legal status. For example:
- As a regulator charged with
ensuring that customers are treated fairly, the FSA must understand
what is happening to those customers' interests when an existing
authorised firm proposes to change its legal status. This is because
those customers could be at risk of losing their existing protection
as a result of that change.
- The firm may be limiting its liability or exposing
itself to greater liability.
- The way the firm can be financed and capitalised
may be changing.
- The new firm may need to take out new professional
indemnity insurance.
- The firm may become subject to new law such as
the Companies Act.
- It is likely that some controlled functions the
existing approved persons perform will change and approvals are
required.
It is for these reasons that the Treasury considers
that the status quo should remain in respect of LLPs.
FSA consultation with EEA regulators [section
49(2) of the FSMA]
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).
The Treasury agrees that Article 39 of the Consolidated
Life Assurance Directive refers only to notification requirements.
Section 49 of FSMA relates to consultation prior to authorisation
and is not relevant for the purposes of Article 39. The reference
in the Explanatory Memorandum to the Consolidated Life Assurance
Directive was included in error. The reference should have been
to Article 12a of the First Non-Life Directive (73/239/EC) as
amended by the Conglomerates Directive (2002/87/EC) which does
contain prior consultation requirements.
(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).
Not applicable. Please see response to question 3(a).
Cancelling sponsor approval [section 88 of the
FSMA]
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.
It is not felt that this protection is necessary
for the cancellation of sponsor approval. A sponsor essentially
carries out a support function. S/he is approved by the FSA to
perform services on behalf of others, as required by the listing
rules. The approval does not relate to a firm's ability to carry
on business, unlike the listing of a security. A sponsor is merely
approved by FSA to act as such. It is the sponsor's choice whether
or not to act.
Taken together, the Government considers it is much
more important for an issuer to be able to challenge a FSA decision
and to protect their rights and freedoms given the impact on their
ability to do business resulting from such a decision.
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?
The FSA currently maintains a list of sponsors on
its website (http://www.fsa.gov.uk/pubs/ukla/SP_register.pdf)
and this is updated to reflect the fact that a firm has been removed
from the list. The FSA is currently considering how best to ensure
that the cancellation of a sponsor's approval is communicated
and publicised; FSA will consult publicly on its proposed approach
on this issue in due course.
Removing restrictions on waivers and modifications
[section 148 of the FSMA]
Q6. Will such waiver or modification apply
to a class of persons, or only to individuals? Please provide
examples to illustrate your answer.
FSMA does not enable the FSA to grant a waiver
which applies to a class of persons without their individual consent.
Typically, a waiver or modification is granted on the application
of an individual firm. However, the FSA sometimes offers what
are termed "waivers by consent". This tends to happen
where it becomes apparent that a waiver given to a particular
firm could apply to a number of firms in the same position. Here,
the FSA informs the firms concerned that a waiver or modification
is available (by publishing details of the availability on the
FSA website). The firms concerned do not have to make a formal
application but instead provide the FSA with their written consent
for the waiver to apply to them.
An example of one such modification currently
available is the change to the way
clients are contacted, for providers of Revenue-allocated Child
Trust Funds (CTF). CTF Regulations (the Regulations) make provisions
for CTF accounts under the Child Trust Funds Act 2004. 'Regulation
6' provides for the opening of accounts by HM Revenue & Customs
(HMRC). The vast majority of these accounts will be opened by
HMRC on behalf of children whose parents have failed to use their
CTF voucher before it expired.
Regulation 6 requires account providers to open a
stakeholder account in the name of the child as soon as they receive
instructions from HMRC. Under its process, HMRC should tell the
responsible person (for example, the parent) that the Revenue-allocated
CTF has been opened, before the account provider contacts that
person.
The modification will enable firms to provide safe
custody services in respect of Revenue-allocated CTFs, before
obtaining written agreement or giving notice as required by the
FSA's rules CASS 2.3.4R and 2.3.2R. It will be available only
to those firms that provide Revenue-allocated CTFs.
In relation to this particular modification, the
FSA also intends to consult shortly on amendments to these rules
to make these changes permanent. As a result, the modification
will end if and when new rules come into force. Any rule changes
will be subject to the FSA's consultation process.
Further examples are available on the FSA's website
at http://www.fsa.gov.uk/Pages/Doing/Regulated/Notify/Waiver/Consent/index.shtml
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.
The FSA judges applications for waivers or modifications
against criteria set out in section 148(4) of FSMA. This states
that it can only direct that a rule should not apply (or should
apply) in a modified way only if the FSA is satisfied that:
a) compliance with the rules, or with the rules
as unmodified, would be unduly burdensome or would not achieve
the purpose for which the rules were made;
and
(b) the direction would not result in undue
risk to persons whose interests the rules are intended to protect.
Ordinarily it is up to a firm to apply to the FSA,
explaining why it believes that a particular rule (or group of
rules) is unduly burdensome, etc. - and the arguments advanced
are often specific to that firm's circumstances. Of course, the
FSA can only waive or modify rules to the extent that this would
be compatible with European law including Directive requirements.
An example of how the FSA uses this power is as follows.
Under FSA rules a firm may not include in its calculation of capital
resources economic reserves known as "implicit items"
(in relation to long-term insurance business this could be economic
reserves arising in respect of future profits, zillmerising[75]
or hidden reserves), except subject to a waiver under FSMA s.148.
The Consolidated Life Directive provides that implicit items can
be included in the calculation of a firm's capital resources,
within limits, provided that the supervisory authority agrees.
Firms may apply to the FSA using the s.148 mechanism to obtain
its agreement. A firm applies stating the nature and the amounts
of the implicit items that it wishes to count against its capital
resources requirement. The amount of the implicit item that the
FSA will permit a firm to count depends on the firm's particular
financial circumstances. The firm will submit quite detailed financial
data to support its application and, on a case by case basis,
the FSA will decide whether to grant the waiver requested and
if it does so the amount of the implicit item that can be included.
The FSA will not necessarily grant a waiver for the full amount
of the implicit item which could be granted. Rather, it will decide
each application according to whether - and the extent to which
- it considers that a firm has met the FSMA s.148(4) tests in
its individual circumstances.
Lighter consultation on guidance [section 157
of the FSMA]
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)?
The Treasury is not reducing the requirement to consult.
Representations relating to draft guidance may still be made to
the FSA. The Treasury is also retaining the existing requirement
that the FSA must have regard to any representations before it
makes the proposed guidance.
The Treasury's proposal is limited to removing the
additional requirements which apply to the issue of proposed guidance.
These additional requirements are the need to provide:
- a cost benefit analysis;
- an explanation of the purpose
of the guidance;
- an explanation of the FSA's reasons for believing
that the proposed guidance is compatible with its general duties;
- an account of representations made and the FSA's
response to them; and
- an account of any difference between the proposed
guidance and the guidance made, including a cost benefit analysis
where the difference in cost is more than minimal.
There is no requirement in FSMA which provides that
guidance is binding on an authorised person to which it applies.
This is in direct contrast to statements of principle relating
to conduct of business, for example, issued by the Bank of England
under the Financial Services Act 1986. Failure to comply with
a statement of principle was specified as a ground for taking
disciplinary action. This is not the case with guidance issued
under FSMA. The FSA has stated that although a person acting in
accordance with guidance will be treated as if they have complied
with the relevant rule, guidance need not be followed in order
to achieve compliance. Instead, guidance is intended to help persons
to whom the rules apply to understand them and to comply with
them. The FSA's reader's guide to the handbook states that "whatever
guidance is used for, it is not binding on those to whom
the Act and rules apply, nor does it have 'evidential' effect.
It need not be followed in order to achieve compliance with the
relevant rule or other requirement. So a firm cannot incur disciplinary
liability merely because it has not followed guidance. Nor is
there any presumption that departing from guidance is indicative
of a breach of the relevant rule".
The status of guidance issued under FSMA contrasts
also with the status of both planning and health and safety guidance.
With regard to planning guidance, the Planning and Compulsory
Purchase Act 2004 provides that a local planning authority must
have regard to guidance issued by the Secretary of State. Under
the Health and Safety at Work Act 1974, a local authority, or
other body responsible for the enforcement of the Act's provisions
must perform its duties in accordance with guidance. Thus for
an applicant for planning permission or an employer responsible
for compliance with the 1974 Act, the planning policy guidance
or health and safety guidance has a far more immediate and direct
effect on their actions than any guidance issued by the FSA would
have on an authorised person.
(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?
The Treasury would expect a court or Tribunal to
be made aware of guidance relating to particular rules and to
view such guidance as describing the FSA's expectations. But this
does not mean that the Tribunal would accept that the FSA's view
was the right construction of what the rule required or consider
that the person subject to disciplinary action was required to
act in the manner suggested by the FSA. For example, in the context
of assessing a person's "fitness" to perform a regulated
activity, the Financial Services and Markets Tribunal has described
the FSA's guidance about the relevant test as being "very
helpful" but not "legally binding" (Manchanda -v-
FSA, May 2006).
The FSA is consulting on text to go into its proposed
Enforcement Guide which explains what it regards as the relevance
of guidance, especially in the context of enforcing the FSA's
Principles for Businesses, as follows:
"Guidance (whether it takes the form of guidance
in the Handbook or the form, for example, of a case study or generic
letters written by the FSA to Chief Executives in particular sectors)
is, however, potentially relevant to an enforcement case and is
material that a decision maker may take into account in considering
the matter. The sorts of ways in which guidance is likely to be
relevant include the following:
(1) To the question of predictability, where it illuminates
the FSA's view of the application of the Principle.
(2) To explain the regulatory context.
(3) To inform a view of the overall seriousness of
the breaches e.g. the decision maker could decide that the breach
warranted a higher penalty in circumstances where the FSA had
written to Chief Executives in the sector in question to reiterate
the importance of ensuring a particular aspect of its business
complied with relevant regulatory standards.
(4) To inform the consideration of a firm's defence
that it could not have appreciated the FSA's expectations in the
area in question and/or that the FSA was judging the firm on the
basis of retrospective standards.
(5) To be considered as part of expert or supervisory
statements in relation to the relevant standards at the time.
The relevance and appropriate weight to attach to
guidance will depend on all the circumstances of the case, including
the nature of the firm's defence. It is for the decision maker
- whether the Regulatory Decisions Committee, Tribunal or an executive
decision maker - to determine this on a case-by-case basis."
The link below, to the draft Enforcement Guide (see paragraph
2.21), sets out the abovementioned position http://www.fsa.gov.uk/pubs/cp/cp07_02.pdf.
(c) Please provide some examples to illustrate
the Treasury's responses.
Please see the answers to questions (a) and (b) above.
Q9. Please explain how s157(3) currently allows
for a lighter-touch consultation process
Section 157(3) of FSMA states that the FSA is only
required to consult on guidance in relation to rules to which
regulated persons generally or a class of regulated persons are
subject. This means that information or advice to consumers which
relates to rules to which regulated persons are not subject may
be issued without consultation.
In providing guidance in relation to rules to which
regulated persons generally or a class of regulated persons are
subject, elements of section 155 apply. A lighter touch consultation
procedure can already be accommodated within these existing powers.
Crucially, section 155 makes no requirement as to the length of
a consultation period and it is entirely possible for the FSA
to carry out a short consultation of 28 days for minor matters
or matters of urgency.
Additionally, section 155(1) requires the FSA to
publish a draft of proposed rules in the way appearing to it to
be best calculated to bring them to the attention of the public.
This does not preclude the FSA from limiting the publication of
proposed rules/guidance on its website.
Delegating the issue of guidance [Sch 1, para
5 of the FSMA]
Q10. What assurances can the Treasury give that
the FSA will issue a policy statement dealing with [the operation
of the new arrangements, in particular, how consistency, quality
and publication of guidelines is to be assured as well as explain
the membership of the committee or sub-committee and how it would
be held accountable]?
The FSA sees the consultation document as giving
it a clear steer in this area and is currently considering how
best to operate the arrangements permitted under the RRO. The
FSA will publish a statement of how this will work - including
the aspects the committee has raised - before making any guidance
using this process.
I hope that this answers the committee's questions.
Please contact me if there is any further information that the
committee requires.
19 February 2007
75 The method known by that name for modifying the
net premium reserve method of valuing a long-term insurance contract
by increasing the part of the future premiums for which credit
is taken so as to allow for initial expenses. Back
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