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Clause 25: Definitions
204. The definition of court in subsection (2) includes the High Court or county court, or in Scotland, the Court of Session. It will therefore be possible to bring proceedings in most courts within the United Kingdom.
Other consumer protection measures
Clause 26: Consumer redress schemes
205. The existing section 404 of FSMA enables the Treasury, subject to Parliamentary approval, to authorise the FSA to require firms to conduct a review of past business and, if liable, to pay compensation to consumers. Clause 26 replaces section 404 with new sections 404 and 404A to 404F, conferring new powers for the FSA to make rules requiring firms to establish and operate consumer redress schemes.
New section 404: Consumer redress schemes
206. Subsections (1) and (3) provide that the FSA may make section 404 rules if it appears to it that (a) there may have been a widespread or regular failure by a relevant firm (defined in subsection (2) as an authorised person or payment service provider) to comply with the requirements for carrying on an activity; (b) as a result, consumers have suffered or may suffer loss for which redress would be available in legal proceedings; and (c) it is desirable to establish a scheme to secure redress for consumers.
207. ‘Consumers’ is defined in new section 404D as persons who have used (or may have contemplated using), or have rights or interests in, services provided by: (a) authorised persons carrying on regulated activities; (b) authorised persons carrying on consumer credit business in connection with the regulated activity of accepting deposits; (c) authorised persons carrying on financial promotion activities; (d) authorised persons who are investment firms or credit institutions providing relevant ancillary services (within the meaning of section 138(1C) of FSMA); (e) persons acting as appointed representatives; or (f) payment service providers providing payment services within the meaning of the Payment Services Regulations 2009.
208. New section 404E(5) provides that references to a relevant firm includes a person who was, but is no longer, an authorised person or payment service provider and a person who has assumed a liability incurred by a relevant firm (section 404E(5)).
209. Subsections (4) to (7) of a new section 404 define ‘consumer redress scheme’ as one in which a firm is required to take one or more of the following steps:
- investigate whether it has failed to comply with its obligations in carrying out a specified activity;
- if it determines that it has failed to comply with an obligation, determine the nature and extent of the failure, and whether the failure has caused or may cause any loss to consumers;
- if it determines that consumers have suffered loss, to make appropriate redress.
New section 404A: Rules under section 404: supplementary
210. Section 404A sets out those matters which section 404 rules may provide for. This includes requiring firms to provide the FSA with information about their investigation and the matters under investigation, and for the FSA (or a competent person appointed by it) to conduct the investigation and other relevant steps instead of the firm, including determining its liability and the redress the firm should make to consumers. Where the rules provide for a scheme to be conducted by someone other than the firm itself, they must also include provision for warning and decision notices and a right of referral to the Tribunal (subsection (8)).
211. Subsection (2) limits the FSA’s power in subsection (1)(b) to define by way of example what amounts to a failure to comply with a requirement to that which a court has found or would find constitutes a failure. Subsection (3) similarly limits the FSA’s power in subsection (1)(c) to set out matters which should be taken into account by firms in assessing evidence or determining causation to those matters which a court has taken, or would take into account. Subsection (4) provides that the FSA may require firms to make such redress as is just in relation to that description of case, having regard (among other things) to the nature and extent of the losses in question. It is not limited to the remedy or relief which would be available in legal proceedings.
New section 404B: Complaints to the ombudsman scheme
212. This section enables a consumer who is not satisfied with any determination by a firm under a scheme to make a complaint to the Financial Ombudsman Service (FOS). It requires the FOS to assess such a complaint (or a complaint about an underlying act or omission which falls to be dealt with by a consumer redress scheme) in accordance with the terms of the consumer redress scheme rather than its ‘fair and reasonable’ jurisdiction under section 226(8) of FSMA. Complaints under this section will form part of the FOS’ compulsory jurisdiction set out in Schedule 17 to FSMA.
New section 404C: Enforcement
213. This section provides that the FSA’s disciplinary powers in Part 14 of FSMA (public censure or financial penalty) will apply to relevant firms which are not (or no longer) authorised persons. This ensures that the scheme can be enforced against payment service providers or firms which are no longer authorised.
New section 404F: Power to widen the scope of consumer redress schemes
214. This section gives the Treasury a power to widen the scope of the FSA’s power to establish a consumer redress scheme by amending the definition of relevant firms or consumers.
Clause 27: Restrictions on provision of credit card cheques
215. This clause inserts new sections 51A and 51B into the Consumer Credit Act 1974. New section 51A would make it an offence for a credit card issuer to send credit card cheques to a customer other than in response to a request from that customer.
216. The request may be entirely at the instigation of the customer or the credit card issuer may offer to send cheques (for example via a mail shot). However, the customer cannot be considered to have requested cheques simply because he has not said he does not want them. The credit card issuer may not send more than three cheques to a customer in response to a request. The customer cannot make an ongoing request; he cannot ask for, say, a cheque a month for the next year or indefinitely.
217. Credit card cheques are provided by many credit card issuers to those to whom they have issued credit cards. They are very similar in appearance to ordinary bank current account cheques and can be used in any situation where a current account cheque can be used (but they are not guaranteed by the credit card as a current account cheque is guaranteed by a cheque guarantee card). Once used, the cheque appears on the credit card statement in the same way as an item purchased with the card or a cash withdrawal on the card. In the new section 51A, credit card cheques are defined by reference to the provision of credit under a credit-token agreement. Credit-token agreements (which include credit cards) are defined in section 14 of the Consumer Credit Act 1974.
218. New section 51B provides that new section 51Adoes not apply to credit card cheques issued to business customers.
Financial Services Compensation Scheme
Clause 28: Contribution to costs of special resolution regime
219. This clause inserts new sections 214B, 214C and 214D into the Financial Services and Markets Act 2000 to replace the existing section 214B (inserted by section 171 of the Banking Act 2009).
220. Existing section 214B confers a power on the Treasury to require the Financial Services Compensation Scheme (“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 2009) to a bank that is failing. The amount that the FSCS can be required to contribute is limited to the amount of compensation that the FSCS would have had to pay to depositors if the failing bank had entered into insolvency (i.e. if the SRR powers had not been used), net of any amounts the FSCS would have recovered in that insolvency. The section provides for an independent valuer to be appointed to calculate this likely amount of recovery.
221. New sections 214B to 214D restate the provisions of existing section 214B with corrections and clarifications, and make provision for the calculation of amounts owed by the FSCS. Subsection (2) of clause 28 provides for the amended provisions to apply with retrospective effect from 19 November 2009 (the date of introduction of this Bill) to allow interest to be taken into account in calculating FSCS contributions from that date onwards in cases where a stabilisation power was exercised before the commencement of this section.
222. New section 214B allows the Treasury to include interest costs in the calculation of expenses incurred in connection with the exercise of the stabilisation power. Subsection (6) provides for the Treasury to set the rate at which that interest is to be calculated and the interest rate to be used in calculating the maximum amount the FSCS may be required to contribute.
223. New section 214C provides for the maximum amount that the FSCS may be required to contribute. This is limited to the notional net expenditure, which is the amount that the FSCS would have paid in the hypothetical scenario where the stabilisation power had not been exercised and the bank had entered insolvency proceedings; minus the actual net expenditure (i.e. any actual payments the FSCS has made in respect of the resolution, net of any recoveries made). Subsections (5) and (6) allow for interest to be taken into account in calculating this expenditure.
224. New section 214D makes further provision supplementing new sections 214B and 214C. New provisions include an express obligation on the FSCS to calculate the amount and the timing of compensation payments in the hypothetical scenario; the independent valuer to calculate the timings of recoveries likely to be made by the FSCS in that scenario and the Treasury to specify principles to be taken into account by the independent valuer and the FSCS when making such calculations. Subsection (6) extends the existing subsection 214B(3)(b) by providing for independent verification of other matters as well as the expenses incurred in section 214B(2). Subsections (8) and (9) make revised provision for the situation when the FSCS is required to contribute to the costs of resolution before the end of the resolution.
Clause 29: Power to require FSCS manager to act in relation to other schemes
225. The Financial Services Compensation Scheme (FSCS) is the scheme established by the Financial Services Authority (FSA) under Part 15 of the Financial Services and Markets Act (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.
226. This clause, which inserts new Part 15A into FSMA (comprising sections 224B to 224F), extends the scope of the FSCS manager to enable it to make payments on behalf of another compensation scheme or arrangement that pays compensation in respect of institutions that provide financial services, including institutions that are not authorised financial services firms under FSMA.
227. New section 224B defines the terms used, including the kinds of scheme or arrangement the Treasury can require the FSCS manager to act on behalf of (“the relevant scheme”). New section 224C provides that if compensation is payable under a relevant scheme, the Treasury may issue a notice requiring the FSCS manager to act on behalf of the relevant scheme’s manager. The notice will specify the functions to be performed by the FSCS manager on behalf of the manager of the relevant scheme.
228. Section 224D provides that the FSCS manager may decline to act if a ground in section 224E is met, and a notice to this effect is given to the Treasury. Such grounds include: where the FSCS manager is not satisfied that it will be able to obtain the necessary information, advice or assistance from the administrator to comply with the notice; where it is not satisfied that funding is being provided to meet the expenditure that it will incur in acting on behalf of the relevant scheme manager; where it is of the opinion that complying with the notice would detrimentally affect the exercise of its FSCS functions; where the manager of the relevant scheme has not given an undertaking not to bring proceedings against the FSCS manager; or where there are no arrangements for the reimbursement of expenses arising out of claims brought against the FSCS manager by third parties.
229. New section 224F enables the FSA to make rules in connection with FSCS manager acting as a paying agent on behalf of relevant schemes. This includes conferring a power on the FSCS manager to impose levies to cover its expenses under this clause; however if the FSA do impose such a power, it may be exercised only if the FSCS manager has tried and failed to obtain reimbursement of its expenses elsewhere.
Powers to require information
Clause 30: Information relating to financial stability
230. The clause inserts new sections into FSMA providing the FSA with new powers to require a person to provide specified information.
New section 165A: Authority’s power to require information: financial stability
231. Subsection (1) provides that the FSA may, by giving written notice, require that a person covered by the section to provide the FSA with information or documents described in the notice.
232. Subsection (2) sets out the categories of people who may be required to provide information or documents under subsection (1). They include the owners or managers of investment funds, and any persons connected to them. Section 165A(2)(d) confers on the Treasury a power to prescribe further categories of persons in respect of which the power under section 165A(1) may be exercised.
233. Subsection (3) sets out the test which will enable the FSA to require information: the FSA must consider that the information or documents in question are or might be, relevant to the stability of one or more aspects of the financial system.
234. Subsection (4) provides an additional test where a requirement is being imposed on a service provider or a person who is connected with a service provider. In this case, no requirement may be imposed unless the FSA considers that a failure by the provider to provide all or part of the services is likely to pose a serious threat to the stability of the financial system.
235. Subsection (5) gives the FSA power to determine the place at which, and the time within which, the information must be provided. The FSA must allow a reasonable period for the provision of the information.
236. Subsection (6) gives the FSA power to determine the form in which information must be provided to them.
237. Subsection (7) gives the FSA power to require any information provided to be verified or authenticated, by, for example, a firm’s auditors.
238. Subsection (8) and (9) defines “relevant investment fund” for the purposes of this clause, and sets out the other definitions used.
239. Subsection (10) defines “connected person” for the purposes of this clause. .
New section 165B: Safeguards etc in relation to exercise of power under section 165A
240. This section sets out the procedural safeguards which will apply to the exercise of the power. Under subsection (1) the FSA must give a person on whom it proposes to impose a requirement written notice in advance.
241. Under subsection (2) the written notice must give the FSA’s reasons for proposing to impose the requirement; and specify a reasonable timescale within which the person may make representations to the FSA. Once this period has expired, the FSA must, under subsection (3) decide within a reasonable period whether the requirement should be imposed.
242. Subsection (4) provides that subsections (1), (2) and (3) do not apply where the FSA is satisfied that it is necessary for the information to be provided urgently.
243. Subsection (5) requires the FSA to give its reasons when it imposes a requirement under this clause.
244. Subsection (6) requires the FSA to prepare a statement of its policy with respect to the exercise of the power conferred by section 165A. Under subsections (7) and (8) this statement requires the approval of the Treasury, and must be published. Under subsection (9), this power may not be exercised before the statement has been approved and published.
New section 165C: Orders under section 165A(2)(d)
245. Section 165C sets out the conditions under which the Treasury may exercise the power given in section 165A(2)(d) to add a further category of persons who may be required to provide information under section 165A, and the procedure to be followed. Under subsection (1) the Treasury may only make such an order if it considers that the activities carried on by the prescribed person or the failure to carry on those activities (or any part of them), might pose a serious threat to the stability of the financial system.
246. Subsection (2) provides the general rule that an order made under section 165A(2)(d) will be subject to the normal affirmative resolution procedure, being laid in draft and approved by a resolution of each House.
247. Subsections (3) to (7) provide, as an exception to this rule, that where the Treasury considers that it is necessary, an order under clause 165A(2)(d) will be subject to a modified form of the affirmative resolution procedure under which it must be laid before Parliament after being made and ceases to have effect at the end of a period of 28 days unless it is approved by a resolution of each House before the end of that period.
248. Subsection (8) ensures that no order under clause 165A(2)(d) will be treated as a hybrid instrument for the purposes of the Standing Orders of either House of Parliament.
New section 169A: Support of overseas regulator with respect to financial stability
249. Subsection (1) provides that the FSA may exercise a corresponding section 165A power at the request of an overseas regulator.
250. Subsection (2) defines “overseas regulator” for the purposes of this section.
251. Subsection (3) defines “corresponding section 165A power” as a modified form of the power given in section 165A, with references to the stability of the financial system referring to the financial system operating in the country or territory of the overseas regulator, and the reference to the UK in section 165A being replaced by a reference to that country or territory.
252. Subsection (4) sets out which provisions of section 165A are to apply to the corresponding section 165A power given in relation to overseas regulators.
Clause 31: Asset protection scheme etc
253. This clause gives the Treasury the power to require information or documents it reasonably requires from participants or proposed participants in the asset protection scheme or related schemes (‘qualifying schemes’).
254. Subsection (2) defines the asset protection scheme as the scheme which was subject to a statement made by the Chancellor of the Exchequer to Parliament on 26 February 2009.
255. Subsections (3) and (8) enable the Treasury to specify in an order that this clause applies to schemes that the Treasury considers correspond to, or are connected with, the asset protection scheme. The clause also applies to information or documents required in relation to the agreements entered into with participants in connection with the asset protection scheme or a qualifying scheme (subsection (4)).
256. Subsections (5) and (6) allow the Treasury to specify when and where the information and documents should be provided, and the form the information should take.
257. The Treasury can seek to enforce the requirements under this clause by way of an injunction, or in Scotland, by way of an order for specific performance.
Banking Act 2009
Clause 32: Services forming part of recognised inter-bank payment systems
258. This clause inserts a new section 206A into Part 5 of the Banking Act 2009 (the Act) (inter-bank payment systems).
New section 206A: Services forming part of recognised inter-bank payment systems
259. Subsection (1) confers a power on the Treasury to make order(s) applying (and modifying (subsection (7)) any sections under Part 5 of the Act to “service providers”. “Service providers” are defined in subsection (2) as persons who supply services (such as telecommunication and IT systems) that form part of the arrangements of an inter-bank payment system that is specified by the Treasury as a recognised system under section 184(1) of the Act. The Bank of England may not be regarded as a service provider (subsection (5)).
260. An order under subsection (1) may be made only after consultation (subsection (6)) and only if a draft has been approved by each House of Parliament (subsection (8)).
261. It is envisaged that any order made applying Part 5 to service providers would make provision for the role of the FSA and the Bank of England in relation to persons who are subject to the oversight of the FSA, either as a person who has a permission under Part 4 of FSMA, or is a recognised persons under Part 18 of that Act.
262. In the event an order is made applying provisions of Part 5 to service providers, the Treasury must specify in any recognition orders made under section 184 of the Act the service providers who are to be subject to the Bank of England’s oversight under Part 5 of the Act (as applied) (subsection (2(b)). Before specifying any person as a service provider, the Treasury must consult with various parties, including the person whom the Treasury proposes to specify (subsection (4)).
Clause 33: Minor amendments of provision made by Banking Act 2009
263. Parts 1 to 3 of the Banking Act 2009 (the Act) establish a permanent special resolution regime (SRR), providing the Authorities with tools to deal with banks and building societies that are failing to meet the conditions for authorisation to perform deposit-taking activities (and credit unions if applied by section 89 of that Act). This clause makes technical amendments to certain provisions in Parts 1 to 3 and to a provision in Part 15 of FSMA (which was inserted by Part 4 of the Banking Act 2009).
264. The Act includes property transfer powers, which may used to effect a transfer of some or all of the property, rights or liabilities of a failing institution; and to make provision for the purposes of, in connection with, or in consequence of such a transfer. Subsection (2) inserts a new section 48A (creation of liabilities) in the Act, expressly stating that this includes the power to create liabilities. This could be used, for example, where more liabilities than assets are transferred from a failing institution to a commercial purchaser and public funds are provided to make the transfer commercially viable. A liability may then be imposed on the residual of the failing institution in respect of these monies. New section 48A(2) makes clear that this liability can be determined by reference to another instrument such as an agreement with the transferee, which may make provision for the calculation of the amount of the liability.
265. The Act confers various powers on the Treasury to put in place compensation measures following an exercise of the stabilisation powers (see section 49), which may include provision for the appointment of independent valuers. These orders are subject to the draft affirmative procedure. The Treasury may make also additional provision for valuers, for example, their remuneration and procedure in separate orders, subject to the negative procedure. Subsection (3) allows for orders, subject to the draft affirmative procedure, that provide for the appointment of a valuer to contain this supplementary provision.
266. Subsection (4) makes a minor amendment to section 56 of the Act (independent valuer: money) providing for a power for the Treasury to make provision for the payment of remuneration and allowances of persons appointed to remove an independent valuer from office, correcting an oversight in the Act.
267. Subsection (5) provides that the Treasury can make a third party compensation order where a building society has been taken into temporary public ownership by way of a subscription to new deferred shares in the society, correcting an oversight in the Act.
268. Part 3 of the Act establishes a new bank administration procedure, which incorporates provisions of the Insolvency Act 1986 through a table listing all relevant sections, schedule and paragraphs that need to be included. Subsection (6) substitutes an entry relating to paragraph 79 of Schedule B1 of the Insolvency Act for the one relating to paragraph 80 of that Schedule. Paragraph 79 provides for the discharge of an administrator appointed by the court, and therefore is more apt for bank administration than paragraph 80, which provides for the discharge of an administrator appointed in other ways. Subsection (7) makes consequential changes to section 153 of the Act.
269. The Act inserts new sections into FSMA requiring the FSCS to contribute to special resolution regime costs and providing for information to be given to the FSCS in that case. Section 219(3A) of FSMA refers only to a “bank”, although it is intended to refer to all the institutions subject to the special resolution regime i.e. banks, building societies and credit unions. Subsection (8) amends the provision so it refers to all of these institutions.
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