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These notes refer to the Financial Services Bill as introduced in the House of Commons on 19 November 2009 [Bill 6]
FINANCIAL SERVICES BILL
EXPLANATORY NOTES
INTRODUCTION
1. These explanatory notes relate to the Financial Services Bill as introduced in the House of Commons on 19 November 2009. They have been prepared by the 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.
BACKGROUND TO BILL
3. In 1997, the Government proposed a new system of financial regulation in the UK. A structure for overseeing the UK financial system was created, with distinct roles for HM Treasury, the Bank of England and the Financial Services Authority (“the FSA”) (together, “the relevant authorities”) and distinct responsibilities for overall financial stability issues, which are set out in a memorandum of understanding between the relevant authorities.
4. The Bank of England Act 1998 established the arrangements for the Bank’s current monetary policy responsibilities. Under the 1998 Act, the banking supervision function that had previously been undertaken by the Bank was transferred to the FSA.
5. The Financial Services and Markets Act 2000 (“FSMA”) set out the framework within which the FSA operates, as the single regulator for the financial services industry. It also established the framework for the Financial Services Compensation Scheme (“the FSCS”) to provide compensation for consumers in the event that a financial services firm is unable to meet its obligations to them.
Bill 6—EN 54/5
6. The Banking Act 2009 built on this framework to enhance the ability of the relevant authorities to deal with crises in the banking system, to protect depositors and to maintain financial stability. The Act established a new permanent special resolution regime, providing the relevant authorities with a range of tools to deal with banks and building societies that are failing.
7. In July 2009 the Treasury published Reforming financial markets 1, which proposed reforms to financial regulation to enable more effective prudential regulation and supervision of firms, greater emphasis on monitoring and managing system-wide risks, and improved protection and support for consumers. In this document and following a review of consultation responses, the Government announced its intention to bring forward legislation on the following.
SUMMARY AND OVERVIEW OF THE STRUCTURE
Council for Financial Stability
8. The Bill establishes a Council for Financial Stability, which replaces the current Tripartite Standing Committee. The Council will comprise the Chancellor of the Exchequer, the Governor of the Bank of England and the chairman of the FSA. It will be responsible for considering emerging risks to the financial stability of the United Kingdom and co-ordinating the appropriate response.
Objectives of FSA etc
9. FSMA currently sets out four objectives for the FSA. These are: maintaining confidence in the financial system; promoting public understanding of the financial system; securing the appropriate degree of protection for consumers; and reducing financial crime. As maintaining financial stability is a fundamental component of maintaining confidence in the financial system, the Bill provides the FSA with an additional objective, namely an explicit financial stability objective. In considering financial stability, the FSA must have regard to the costs to the economy both of instability and of regulatory actions (taken to reduce instability). The FSA, like the Bank of England, is required to consult the Treasury when determining its strategy for financial stability.
10. The Bill removes the FSA’s regulatory objective of promoting public understanding of the financial system and requires the FSA to establish a new consumer financial education body whose purpose is to raise the understanding and knowledge of members of the public of financial matters (including the financial system) and improve their ability to manage their financial affairs. The new body will therefore take over responsibility for the activity previously undertaken by the FSA as part of the National Strategy for Financial Capability under the ‘public understanding’ objective. In addition the body will implement the recommendations of the Thoresen Review 2 for an impartial generic financial advice or ‘money guidance’ service.
11. The Bill provides that the FSA’s powers, including its general rule-making power, can now be exercised for the purpose of meeting any of its regulatory objectives. Previously, these powers were only exercisable in pursuit of its consumer protection objective.
12. The Bill also provides the FSA with a new duty to promote international regulation and supervision, as part of its obligation to meet its financial stability objective.
Remuneration of executives of authorised persons
13. The Bill gives the Treasury power to make provision for executive remuneration reports, imposes a new duty on the FSA to make general rules requiring authorised persons (or a specified class of authorised persons) to have and implement a remuneration policy and to secure that the remuneration policy satisfies the requirements set out in the Bill. It also provides the FSA with other powers in relation to remuneration.
Recovery and resolution plans
14. The Bill imposes on the FSA a duty to make rules requiring the production of recovery and resolution plans by authorised persons (or certain classes of authorised person), and makes other provision about such plans. A recovery plan aims to reduce the likelihood of failure of a firm by setting out what the authorised person would do in, or prior to it becoming subject to, stressed circumstances (which the FSA may specify in its rules) that would affect the ability of the authorised person to carry on all or a significant part of its business. A resolution plan is a plan covering both action to be taken in the event of failure of all or any part of the business occurring, and action to be taken by a firm where failure is likely. This would include action to be taken by the relevant authorities to resolve the authorised person.
Short selling
15. The Bill provides the FSA with a new power to prohibit, or require disclosure of, short selling.
FSA’s disciplinary powers
16. The Bill provides the FSA with greater enforcement powers. The FSA has the power to fine authorised persons and approved individuals for misconduct. The Bill extends these powers to enable the FSA to suspend or limit an authorised person’s permission or an approved person’s approval. It also enables the FSA to impose a fine on an individual performing a controlled function without approval, as well as prohibit the individual from working in the industry.
Collective proceedings
17. The Bill enables collective proceedings to be brought in respect of financial services claims. Collective proceedings are court proceedings brought by a representative person, who does not need to have any direct interest in the proceedings, on behalf of a group of persons who have the same, similar or related claims and who would otherwise be entitled to pursue their own individual proceedings.
Other consumer protection measures
18. The Bill enables the FSA to make rules requiring firms to establish consumer redress schemes. Rules can be made if it appears to the FSA that (a) there may have been a widespread or regular failure by a relevant firm to comply with the requirements for carrying on an activity; (b) as a result, consumers have suffered or may suffer loss that would entitle them to redress; and (c) it is desirable to establish a scheme to secure redress for consumers.
19. The Bill makes it an offence for a credit card issuer to provide credit card cheques to a customer, other than in response to a request from that customer, and to restrict the number of credit card cheques that may be provided in response to a request.
Financial Services Compensation Scheme (FSCS)
20. The FSCS is the scheme established by the FSA under Part 15 of FSMA to compensate customers of authorised financial services firms when those firms are in default, that is, unable or likely to be unable to pay claims.
21. Under section 214B of FSMA, which was inserted by the Banking Act 2009, the Treasury may require the FSCS to contribute to the costs incurred in applying the stabilisation powers of the special resolution regime (established in Part 1 of the Banking Act) to a bank that is failing. The Bill provides that the “expenses” to which the FSCS may be required to contribute includes interest, and that the limit up to which the FSCS may be required to contribute (which reflects the amount the FSCS would have had to pay out had no stabilisation power been used and the bank been unable to satisfy claims against it) takes into account the costs that the FSCS would have incurred in funding compensation payments if the stabilisation power had not been exercised.
22. The Bill enables the Treasury to require the FSCS manager to make payments on behalf of another compensation scheme (or a government or other authority) that pays compensation in respect of institutions that provide financial services, including institutions that are not authorised financial services firms under FSMA.
Powers to require information
23. The Bill confers on the FSA a power to require a person to provide specified information, where the FSA considers that the information or documents in question are or might be relevant to the stability of one or more aspects of the financial system.
24. The Bill provides the Treasury with the power to require information or documents from participants or proposed participants in the Asset Protection Scheme or related schemes.
Banking Act 2009
25. The Bill makes some minor and technical amendments to the Banking Act 2009, including amendments that (a) make express that the property transfer power can be used to impose a liability on a residual company in place of liabilities transferred from the residual company; (b) allow compensation orders (see section 49 for the various orders that may be made) to include an independent valuer order in the interests of administrative efficiency.
Director of Savings
26. This clause provides for the Director of Savings to undertake functions on behalf of the Accountant General for England and Wales where appointed to do so under court funds rules.
TERRITORIAL EXTENT
27. The Bill extends to the whole of the UK.
28. At Introduction this Bill contains provisions that trigger the Sewel Convention. The provisions relate to the establishment of a consumer education body. The Sewel Convention provides that Westminster will not normally legislate with regard to devolved matters in Scotland without the consent of the Scottish Parliament. If there are amendments relating to such matters which trigger the Convention, the consent of the Scottish Parliament will be sought for them.
29. The Northern Ireland Assembly’s legislative consent will be sought in relation to collective proceedings; restrictions on the provision of credit card cheques; and the new consumer education body.
ANNEXES
30. Annex A lists the standard abbreviations of enactments and technical terms used in these notes.
COMMENTARY ON CLAUSES AND SCHEDULES
Council for Financial Stability
Clause 1: Council for Financial Stability
31. Subsections (1) and (2) set out the membership of the Council, and that the Chancellor of the Exchequer will chair the Council.
32. Subsections (3) and (4) set out the Council’s role, to review matters affecting UK financial stability both domestically and internationally, and to co-ordinate any action by the relevant authorities in order to protect or enhance that stability. Subsection (5) provides that a statement issued by the Treasury may contain further provision for the Council. This statement is intended to be akin to “terms of reference” for the Council. It can provide greater detail on the Council’s objectives and working practices. The intention is that this document can evolve over time as necessary.
33. Subsection (7) requires the Treasury to keep the statement under review. The Treasury must consult the FSA and Bank of England and lay the initial (and any revised) statement before Parliament.
Clause 2: Proceedings of the Council
34. Subsection (1) requires the Council to meet quarterly. It may meet more frequently.
35. Subsection (2) requires that when either the FSA or the Bank of England publish a report setting out its view of financial stability, for example the Bank’s Financial Stability Report or the FSA’s Financial Risk Outlook, then the Council must consider the report at its next quarterly meeting. Subsection (3) requires that the Council consider a draft of the Treasury’s annual report on the Council at a quarterly meeting.
36. Subsection (4) requires minutes of quarterly meetings to be published. The confidential or market-sensitive nature of many discussions of the Council will mean that sometimes they will not be appropriate for publication. Accordingly, subsection (5) provides exemptions from publication.
37. Subsections (7) and (8) set out that a member of the Council can nominate a deputy if they are unable to attend the Council, and that the Chancellor of the Exchequer’s deputy would act as chair in the Chancellor’s absence.
Clause 3: Annual report
38. The Treasury must prepare an annual report on the work of the Council and important financial stability issues arising during the year and lay the report before Parliament.
39. As with minutes of proceedings of the Council in the previous clause, matters that are confidential, market-sensitive or inappropriate for publication are not to be published.
Objectives of FSA etc
Clause 5: Financial stability objective
40. This clause amends section 2 of FSMA to give the FSA an additional regulatory objective (or ‘general duty’) concerning financial stability. It inserts a new section 3A which provides that the objective is to contribute to the protection and enhancement of the stability of the UK financial system. This is similar to the financial stability objective of the Bank of England under section 2A of the Bank of England Act 1998 (inserted by section 238 of the Banking Act 2009).
41. New section 3A of FSMA requires the FSA, in considering this objective, to have regard to the economic and fiscal consequences of instability and also to any effects on economic growth of regulatory actions taken for stability reasons.
42. In addition the FSA, in considering this objective, must have regard to the possible impact on UK financial stability of events and circumstances outside the UK.
43. The section also requires the FSA to develop and keep under review a strategy concerning this objective, in consultation with the Treasury.
44. Schedule 2 makes consequential amendments to FSMA. Paragraph 2 of that Schedule, substitutes the term “the UK financial system” for “the financial system” in section 3(1) of FSMA (which deals with the “market confidence” objective) and provides a definition of that term in section 3(2) of FSMA. Similar substitutions are made by paragraphs 3 and 6(2) to sections 4 and 14 of FSMA respectively. Paragraph 30 amends section 417 of FSMA (definitions) to clarify that the definition of “UK financial system” in section 3(2) of FSMA applies for the purposes of that Act.
Clause 6: Enhancing public understanding of financial matters etc
45. Subsections (2) and (3) of this clause remove the FSA’s regulatory objective of promoting public understanding of the financial system.
46. Subsection (4) inserts a new section 6A in FSMA which imposes an obligation on the FSA to establish a body, referred to in this Bill as the consumer financial education body (“the CFEB”). The CFEB’s functions are defined in set out in new section 6A and the main purposes are to help members of the public to:
- better understand financial matters; and
- improve their ability to manage their own financial affairs.
47. Section 6A(2) provides illustrations of the types of activity the CFEB might carry out in delivering a money guidance service and programmes to improve financial capability in the UK.
48. Subsection (5) introduces Schedule 1, which inserts new Schedule 1A to FSMA. Schedule 1A makes further provision for the establishment and operation of the CFEB.
49. Paragraph 1 requires the FSA to ensure that the CFEB can undertake the activities set out in new section 6A(1). The FSA has a number of responsibilities under this schedule, including appointing the board, approving the CFEB’s annual budget and annual plan, and making rules for the collection of amounts from FSA-regulated firms towards the CFEB’s establishment and running costs. Paragraph 1(2) enables the FSA to provide services (such as HR or IT support) to the CFEB.
50. Paragraph 2 provides that the CFEB must have a chair, a chief executive and a board, and that these persons (who are the CFEB’s directors) are appointed by the FSA (in the case of the chair and chief executive, with the agreement of the Treasury). The FSA has the power to remove any member from the board (acting, in the case of the chair and chief executive of the board, with the agreement of the Treasury), but the terms of each board member’s appointment (e.g. length of appointment, the basis on which they may be dismissed) must be sufficient for the director (and the board) to be independent from the FSA.
51. Paragraph 3 provides that the CFEB and its members and employees will not be acting on behalf of the Crown and its employees will not be civil servants.
52. Paragraph 4 makes it clear that the CFEB can arrange for others to act on the CFEB’s behalf as the CFEB’s agent in delivering its consumer financial education function or can support others in undertaking activities which would fall within the CFEB’s functions. This can include providing financial support and payment to others to undertake such activities.
53. Paragraph 5 permits a body to undertake work for the CFEB even where it would otherwise not be able to do so. This would enable bodies (such as those established by royal charter or with limited charitable aims) where otherwise their constitution may not permit them to do so.
54. Paragraph 6 requires the CFEB when exercising its functions to have regard to the importance of maintaining confidence in the financial system and the stability of the financial system.
55. Paragraph 7 requires the CFEB to prepare a budget before the beginning of each financial year (or in its first year, as quickly as is reasonably practicable) and for the budget to be approved by the FSA. When preparing the budget or planning to vary it the CFEB must consult the FSA and the persons listed in sub-paragraph (4). The CFEB may subsequently vary this budget with the agreement of the FSA. It is anticipated that, in addition to the sums received by exercising the powers given to the FSA under paragraph 12 and the OFT under paragraph 13, the CFEB may receive public funds under paragraph 14. It is also possible that sums may be provided to the CFEB pursuant to directions issued under section 22(3) of the Dormant Bank and Building Society Accounts Act 2008. As provision in paragraphs 12 and 13 make clear, the FSA and the OFT respectively are required to take into account other anticipated sources of funding when fixing a levy on FSA-regulated and OFT-licensed firms. The CFEB is also required to publish each budget or variation of the budget, in a way the CFEB considers appropriate.
56. Paragraph 8 requires the CFEB to prepare an annual plan before the beginning of each financial year (or in its first year as quickly as is reasonably possible) setting out its objectives, the priority to be given to each objective, and how it intends to allocate its resources. It may vary its plan at any point during that year. The annual plan and any variation of it must be approved by the FSA. When preparing the annual plan or planning to vary it the CFEB must consult the persons listed in sub-paragraph (5). The CFEB is also required to publish each annual plan or variation of the annual plan, in a way the CFEB considers appropriate.
57. Paragraph 9 requires the CFEB to prepare a report, at least annually, into its activities, setting out how it has met the objectives and priorities set out in the annual plan for the period covered by the report and annexing its latest accounts. The CFEB has to publish each report in the way it considers appropriate.
58. Paragraph 10 exempts the CFEB and those acting on its behalf from the requirement to obtain a licence in Part III of the Consumer Credit Act 1974 (“CCA”). A licence is required under Part III for businesses (with certain exceptions) to carry on consumer credit, consumer hire or ancillary credit business. Sub-paragraph (2) disapplies Parts IV and X of the CCA to the CFEB and those acting on its behalf. Part IV of the CCA relates to advertising and other aspects of seeking credit business and Part X relates to ancillary credit business. These provisions are included because the CFEB may on occasion engage in activities which could fall within the ambit of these Parts of the CCA.
59. Paragraph 11 defines “relevant costs” for the purpose of Part 2 of Schedule 1A, to mean the expenses the FSA incurs in establishing the CFEB, and the costs incurred or to be incurred by the CFEB.
60. Paragraph 12 gives the FSA the power to levy sums from persons authorised under FSMA to meet part of the “relevant costs”. The FSA levies by way of making rules to required authorised persons specified in the rules to pay sums to the FSA to meet the “relevant costs”. The FSA will determine the amount to be levied but under sub-paragraph (2) must take into account other anticipated funding for the CFEB before making rules. The FSA is required to pay sums it collects under these notices to the CFEB, but can deduct from such sums the costs of collecting the money.
61. Paragraph 13 gives the OFT power to levy Consumer Credit Act licence holders and applicants for such licences to meet part of the “relevant costs”. Sub-paragraph (3) defines the type of consumer credit licences and applicants who can be included in a levy, by referring to those persons specified in an order made under section 226A(2)(e) (which specifies types of business to be included in the consumer credit jurisdiction of the Financial Ombudsman Scheme). The OFT levies by way of a general notice to such licence holders or applicants as it specifies. Under sub-paragraph (4), the OFT must take into account other anticipated funding for the CFEB before issuing a notice. Sub-paragraph (5) sets out that the OFT must consult the FSA, the CFEB and any other relevant persons before issuing a general notice. The OFT is also required to pay sums it collects under these notices to the CFEB, but can deduct from such sums the costs of collecting the money. Sub-paragraph (8) makes it clear that a particular notice can impose different requirements on different licence holders or applicants and can exempt persons from a requirement to pay sums.
62. Paragraph 14 gives the Treasury and the Secretary of State the power to make grants, loans or other financial assistance to the CFEB.
63. Paragraph 15 enables the FSA to appoint an independent reviewer to review the CFEB’s efficient use of its resources. The FSA must consult the Treasury before making such an appointment. The reviewer, when the review has been competed, must set out the results and any recommendations in a written report. The FSA must publish the report in the way it considers appropriate and must meet the expenses of the review.
64. Paragraph 16 provides the independent reviewer appointed under paragraph 15 with the right of access to documents and information held by the CFEB and reasonably required for the review.
65. Subsection (6) provides that if staff of the FSA are transferred to the CFEB the Transfer of Undertakings (Protection of Employment) Regulations 2006 will apply to such a transfer.
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