|
New section 131C: Short selling rules: definitions etc
142. This clause defines the terms used in section 131B.
143. Subsection (2) defines short selling for the purposes of these short selling rules. Short selling will include any case in which a person sells a financial instrument which that person does not own, and will make a profit if the price of that instrument falls before the person has to buy the instrument to deliver it to the buyer or to return to the lender (where the sale was settled with borrowed financial instruments). It will also include any case in which a person enters into a transaction in a different financial instrument to the shorted instrument (whether the first-mentioned financial instrument was in existence before the transaction, or was created as a result of the transaction), where the effect of the transaction entered into is that that person will make a profit if there is a fall in value in the shorted instrument. For example, S may buy an equity put option giving S the right to sell 1,000 shares in ABC plc for £10 a share. If the price of the shares falls to £5, S will be able to buy 1,000 shares in the market for £5,000, exercise the option and sell the same shares for £10,000, making a profit of gross £5,000. Alternatively, S may enter into a contract for difference (“CFD”) which provides that S will pay to B the difference between the current value of a financial instrument and its value at the date on which the contract for difference matures if the price increases (if the price falls, B pays the difference to S). The transaction will create a financial instrument (the CFD) and S will have engaged in short selling the financial instrument to which the CFD relates because he will make a profit if the value of the financial instrument falls before that date.
144. Subsections (3) and (4) define “financial instrument” and “relevant financial instrument”. The definition of “relevant financial instrument” ensures that the FSA may make rules regulating short selling in relation to financial instruments admitted to trading in EEA markets, or which have any other connection to EEA markets which may be specified in the rules, as well as financial instruments admitted to trading in the UK.
145. Subsection (7) ensures that where a financial instrument is admitted to trading both on a UK or EEA market and markets elsewhere in the world the FSA may make short selling rules in relation to that instrument on any or all of the markets on which it is admitted to trading. Under subsection (8) the same applies where related financial instruments are admitted respectively to trading on an EEA market and a market elsewhere in the world. An instrument will be related for these purposes if the price or value of one instrument depends on the price or value of the other, as would be the case in relation to an equity share and a depositary receipt issued in relation to that share.
146. Subsection (10) clarifies the meaning of references to a “market” in a particular territory.
New section 131D: Short selling rules: procedure in urgent cases
147. New section 131D provides for the procedure to be followed by the FSA where the FSA is making urgent restrictions on engaging in short selling.
148. Subsection (1) grants the FSA the power to make short selling rules, and subsequently to amend those rules, without going through the normal consultation process, where it is necessary to do so to protect the stability of the financial system, or to maintain confidence in the financial system.
149. Subsection (2) provides that initially these emergency short selling rules may last for no more than three months. However, under subsections (3) and (4) the FSA is given power to direct that emergency restrictions can extend these rules for a further three months provided that it still considers them to be necessary to protect the stability of the financial system or to maintain confidence in the financial system at the time when the direction is given. Under subsection (5), this direction must be published.
150. Subsection (6) states that nothing prevents the FSA from revoking emergency rules before the end of the periods referred to here.
New section 131E: Power to require information
151. This section gives the FSA a power to require the production of information or documents in order to ascertain whether there has been a breach of any short selling rules.
152. Subsection (1) gives the FSA the power to require information or documents to be produced. This applies whether or not the person concerned is an “authorised person” under FSMA. Subsection (2) sets out the scope of this power - the FSA may only impose such a requirement on a person if the information or documents are required in order to enable the FSA to determine whether that person or any person connected to that person, has breached any provision of the short selling rules.
153. Subsections (3) to (5) allow the FSA to specify the time and form in which the information must be provided. They may also require the person providing the information to take reasonable steps specified by the FSA to verify the information provided. Subsection (7) defines what is meant by a “connected person” for the purpose of this section.
New section 131F: Power to impose penalty or issue censure
154. Subsections (1) to (3) set out the penalty for contraventions of short selling rules, or failure to comply with an information requirement imposed under section 131E. The FSA may impose an unlimited fine on any person, whether or not that person is an authorised person, if it is satisfied that the person has contravened any part of the short selling rules or an information requirement. The FSA may alternatively decide not to impose a fine, but to publish a censure to this effect.
155. Subsections (4) to (6) impose a four-year time limit on the FSA’s ability to take such enforcement action against a person, unless, before the end of the four-year period, the FSA has given a warning notice to the person concerned under section 131G. The four-year period within which the FSA can act begins with the first day that the FSA knew that a person contravened any provision of the short selling rules or the information requirement.
New section 131G: Procedure and right to refer to Tribunal
156. Subsections (1) to (3) provide that a person must be given a warning notice detailing the amount of the fine or the terms of the public censure (as applicable) if the FSA proposes to take action against them.
157. Subsections (4) to (6) provide that a person must be given a decision notice detailing the amount of the fine or the terms of the public censure (as applicable) if the FSA decides to take action against them.
158. Subsection (7) provides that a person may refer the matter to the Tribunal if the FSA decides to take action against them.
New section 131H: Duty on publication of statement
159. This section requires the FSA to send a copy of any public censure to the person concerned and to any other person who was given a copy of the decision notice.
New section 131I: Imposition of penalties under section 131F: statement of policy
160. This section requires the FSA to issue a statement of its policy in relation to the imposition and amount of penalties. The policy set out in the statement must take account of the factors set out in subsection (2).
161. Under subsection (3) the FSA is given power to alter or replace the statement of policy. If it does so, it must, under subsection (4), the FSA must issue the revised statement.
162. Subsections (5) and (6) require the FSA to give the Treasury a copy of any statement of policy it publishes, and to publish the statement so as to ensure that it is brought to public attention.
163. Subsection (7) enables the FSA to charge a fee for providing a copy of the statement of policy.
164. Subsection (8) requires the FSA to have regard to the statement in force at the time of the misconduct when imposing penalties under section 131E.
New section 131J: Statement of policy: procedure
165. This section sets out the procedure for issuing a statement under section 131I. Before deciding on its policies in these areas, or changing those policies, the FSA will be required to consult the public on its proposals.
FSA’s disciplinary powers
Clause 14: Suspending permission to carry on regulated activities etc
166. Sections 205 and 206 of FSMA set out the disciplinary measures available to the FSA in respect of a contravention by an authorised person of a requirement imposed by or under FSMA or a directly applicable EC regulation made under the markets in financial instruments directive.
167. This clause inserts a new section 206A into FSMA providing the FSA with additional sanctions to deal with such breaches. Those additional sanctions are the power to suspend, limit or otherwise restrict an authorised person’s permission for up to a maximum of 12 months.
168. The clause permits the FSA to impose one or more of the available sanctions in respect of the same contravention.
169. Sections 207 and 208 of FSMA set out the procedure for taking disciplinary measures, namely a warning notice followed by a decision notice and right of referral to the Tribunal. Paragraphs 18 and 19 of Schedule 2 make consequential amendments to those sections to apply the same procedure to the imposition of the new sanctions.
170. Section 210 of FSMA requires the FSA to issue a statement of policy regarding the imposition of a financial penalty under section 206. Paragraph 20 of Schedule 2 makes a consequential amendment to that section so that the statement of policy must also cover the length of any suspensions or restrictions imposed under the new s206A.
Clause 15: Removal of restriction on imposing a penalty and cancelling authorisation
171. Section 206(2) of FSMA prohibits the FSA from both imposing a penalty on an authorised firm under that section and withdrawing a person’s authorisation under section 33 in respect of the same contravention. This clause repeals this prohibition thus enabling the FSA to stop an authorised person from continuing to carry on a regulated activity at the same time as imposing a financial penalty on that person.
Clause 16: Performance of controlled function without approval
172. Section 59 of FSMA requires authorised persons (‘A’) to take reasonable care to ensure that no person (‘P’) performs a controlled function under an arrangement entered into by A or A’s contractor in relation to the carrying on by A of a regulated activity, unless P has been approved by the FSA to do so. There is currently no prohibition on a person performing a controlled function without FSA approval.
173. This clause inserts new sections 63A to 63D of FSMA. New section 63A(1) enables the FSA to impose a financial penalty on a person if it is satisfied that that person has performed a controlled function without approval.
174. New section 63A(2) provides that the FSA may not impose a penalty if there are reasonable grounds for it to be satisfied that the person did not know or could not reasonably be expected to have known that he or she was performing a controlled function without approval.
175. New section 63B sets out the procedure for imposing a financial penalty, namely issuing a warning notice followed by a decision notice. There is a right of referral to the Tribunal.
176. New section 63C requires the FSA is required to consult on and publish a statement of its policy on the imposition of penalties and the amount of such penalties.
177. Section 168 of FSMA enables the FSA to carry out investigations in particular cases, including the circumstances listed in subsection (4). Paragraph 16 of Schedule 2 makes a consequential amendment to subsection (4) to provide for the FSA to appoint an investigator if it thinks that a person may have performed a controlled function without approval.
Clause 17: Approved persons guilty of misconduct
178. Section 66 of FSMA sets out the FSA’s disciplinary powers in respect of misconduct by approved persons. Approved persons are persons who have approval from the FSA to carry out controlled functions. Controlled functions are set out in FSA rules and include, for example, having responsibility for compliance with FSA rules or being a director.
179. This clause amends section 66 of FSMA to add to the current sanctions (financial penalty and public statement of misconduct) that the FSA can impose for misconduct. It enables the FSA to suspend an approved person from carrying on certain functions, and / or impose restrictions on that person’s performance of certain functions, for a maximum period of 2 years.
180. Paragraphs 9 and 10 of Schedule 2 make consequential amendments to sections 67 (procedures for disciplinary measures) and 69 (the issue of statements of policy with respect to the imposition of disciplinary measures) so that they apply to the new sanctions.
181. Subsection (4) amends section 66(4) to increase the limitation period on the FSA taking disciplinary action against an approved person from two to four years.
Collective proceedings
Clause 18: Collective proceedings orders
182. This clause provides that the court can authorise collective proceedings to be brought on behalf of a group of financial services claims that share the same, similar or related issues of fact or law. Collective proceedings may be brought by a representative body with no direct interest in the proceedings, such as a consumer group, or by a person who would be able to bring their own claim directly. Regulations or rules of court may require the court, when considering whether to authorise the bringing of collective proceedings, to consider matters set out in the regulations or rules.
Clause 19: Collective proceedings: “opt-in” and “opt-out” bases
183. Subsection (2) provides that the court must determine whether collective proceedings should take place on an opt-in basis or an opt-out basis.
184. In opt-in proceedings it is necessary for any person who wishes their claim to be represented in the collective proceedings to identify themselves to the representative by a certain time which will be set by the court. In opt-out proceedings everyone with a suitable claim will be comprised in the represented group without any need to identify themselves. They will, however, be able to opt out of the group within a certain period of time which will also be set by the court. A full definition of the opt-in and opt-out bases is contained in subsections (5) and (6).
185. Subsection (3) enables issues in opt-out proceedings to be determined on an opt-in basis.
186. Persons who are not domiciled in the United Kingdom at a time specified by the court may have their claims included in collective proceedings. The effect of subsection (6)(b) is, however, that where proceedings are to take place on an opt-out basis for other group members non-domiciled persons will instead be required to opt-in by a time specified by the court. This ensures that persons who are not domiciled in the United Kingdom, who are less likely to be aware of notices given in respect of collective proceedings, will not be prejudiced. Subsection (8) defines “domicile” for the purposes of subsection (6)(b).
Clause 20: Judgments and orders: effect on represented persons in collective proceedings
187. When giving a judgment or making an order in collective proceedings the court will need to determine in accordance with subsection (1) whether it will bind represented persons and if so whether it will bind all represented persons. While judgments and orders in respect of any issues ought normally to be binding on represented persons, because their claims are being conducted collectively by the representative, there may be orders that should not be binding in this way, for example, where orders relate to obligations that should be borne only by one of the parties or by individual group members.
Clause 21: Meaning of “financial services claim”
188. Financial services claims are defined by reference to the description of the defendant and the type of activities giving rise to the claim. Potential defendants include authorised persons, appointed representatives, payment service providers and those engaged in consumer credit activities such as those with a standard credit licence. Claims may arise from regulated activities, consumer credit activities mentioned in section 226A(3) of FSMA, payment services and a relevant ancillary service set out in the financial instruments directive. By virtue of subsection (5) the Treasury may provide that additional claims relating to financial services or ancillary activities can be represented in collective proceedings. It may also provide, by virtue of subsection (2), that claims of a specified description are not financial services claims for these purposes and therefore can not be included in collective proceedings. In accordance with subsection (4) financial services claims, including those that may be included or excluded by Treasury order, include claims that arose before the commencement of these provisions.
Clause 22: Regulations about collective proceedings
189. The Treasury has a general power by virtue of subsection (1) to make regulations about collective proceedings. This power includes particular powers, examples of which are set out in subsection (2).
190. There is a particular power to require that the FSA, the OFT and the Ombudsman scheme operator may be heard on an application for authorisation of collective proceedings. This will enable the court to consider representations from these bodies including, if necessary, whether there are more appropriate ways for the claims to be dealt with.
191. The power includes a power to require the court, when making a collective proceedings order, to have regard to prescribed matters, and only to make an order when prescribed criteria or circumstances exist. This will enable the Treasury to make provision relating to particular features of financial services claims that are unlikely to be mentioned in court rules. For example, it enables the Treasury to identify, where appropriate, any circumstances relating to actual or contemplated regulatory intervention that ought to be taken into account. The power will also allow the Treasury to stipulate any specific tests that should be applied by the court when considering whether to authorise collective proceedings.
192. The power mentioned in subsection (2)(d) will enable the Treasury to exclude financial services claims of certain persons or against certain persons or provide that claims can only be included in certain circumstances. This power might be exercised to ensure that certain persons such as, say, certain public authorities are not within the scope of these provisions or are within the scope only in prescribed circumstances. Provision can also be made affecting the position of prescribed classes of person.
193. Subsections (2)(e) and (3) confer powers to change the effect of limitation provisions. The powers could be used, for example, to stop time running in respect of claims made in collective proceedings and in respect of any other periods. The Treasury may confer on the court a power to direct that periods are to be disregarded for limitation purposes.
194. There is a power to make provision about damages. This includes the powers mentioned in clause 23.
195. The Treasury may make provision about notices that may need to be given in relation to collective proceedings and in particular, in accordance with subsection (4), must secure that notices are given to group members is a way that is appropriate for bringing them to the attention of group members. Where the notice is given in accordance with any direction of the court the court will be able to determine the appropriateness of the notice for these purposes.
Clause 23: Regulations under section 22(1): damages
196. In accordance with subsection (2) the court may be empowered to make an award of damages without undertaking an assessment of the amount of damages recoverable in respect of each financial services claim. It would therefore, as mentioned in subsection (3), be able to award a lump sum based on its estimate of the damages that would be likely to be recoverable in each claim. The court will therefore not be required to hear evidence in respect of the individual losses incurred in respect of each claim comprised in the proceedings. The court will also be able to order that group members should be able to share in the damages in accordance with a formula that will apply to the calculation of individual group members’ entitlements. A person may therefore receive a greater or lesser amount that they might receive were their losses to be assessed individually.
197. The Treasury must make provision, by virtue of subsection (4), that the damages are to be paid to the representative or to such other person as the court directs. There can also be provision about the way that damages can be held and dealt with including, for example, that the damages are to be held on trust and that the court can give directions about payments to represented persons. Subsection (5)(b) enables provision to be made for the court to direct the payment of any surplus be applied for charitable or other purposes.
Clause 24: Rules of court about collective proceedings
198. Subsection (1) provides that rules of court may make provision about collective proceedings. This power specifically includes powers, mentioned in subsection (2), to make provision about applications for collective proceedings orders, to set out the criteria to be applied by the court in making a collective proceedings order and to provide that in specified circumstances a person is to be treated as having opted-out or not having opted in. Additionally, the court can make provision about representatives, costs, counterclaims, evidence, appeals and notices.
199. Among the purposes for which this power can be used is therefore the restriction of any appeal procedures that may be available to group members by virtue of their claims being affected by judgments or orders in collective proceedings. It may be regarded as unnecessary and counter productive for group members to have the right to appeal judgments and orders. This is because they are being represented for these purposes by a person who will make such decisions on their behalf.
200. The provision that may be made about costs includes a power for court rules to be made in relation to costs incurred by the representative in connection with holding and dealing with any payment of damages, including costs incurred in determining whether to make payments to represented persons. Provision may also be made requiring any specified costs to be met out of the payment of damages received by the representative. This provision therefore ensures that the costs of holding and distributing the damages may be met by the defendants, the fund of damages or in any other way that is appropriate.
201. Provision may be made about counterclaims so that they can be defended by the representative in collective proceedings. The rules could for example set out the kinds of counterclaims that may be made (for example, any requirement that they raise similar or related issues of fact or law).
202. Court rules may also provide in relation, for example, to the stay or dismissal of collective proceedings and what should then happen to represented claims. Court rules may make provision in relation to represented claims proceeding separately.
203. Additionally court rules must secure that any notice given under the rules to represented persons is given in a way that is appropriate for bringing the notice to the attention of represented persons. Where the notice is given in accordance with a direction of the court, the court will itself ensure that notice is given in a way that is appropriate. This ensures that the represented persons can get proper notice of represented proceedings so that, for example, they can exercise their rights to opt-out or opt-in to the collective proceedings.
| 
