1. The Financial Services Authority ("the
FSA") submits this memorandum in response to the Committee's
call for evidence on its inquiry into the draft Gambling Bill,
and its specific request for information on spread betting under
the Financial Services and Markets Act 2000 ("FSMA").
— the general legal basis and statutory
objectives of the FSA;— the statutory basis for the
regulation of spread betting under FSMA; and— the current
regime for FSA regulation of spread betting.THE
FSA
3. The FSA is the single, statutory regulator
for the great majority of financial services in the UK, and is
the competent authority under the European single market directives
for banking, insurance, investments, listing and other financial
services matters. Its powers are conferred primarily by FSMA.
4. The FSA aims to maintain efficient, orderly
and clean financial markets and help retail consumers achieve
a fair deal.
5. The scope of regulation under FSMA is determined
by HM Treasury primarily through the specification by order of
regulated activities under section 22 of FSMA. The Treasury also
specify the scope of activities and investments covered by the
statutory restriction on financial promotions and the scope of
the misleading statements offence under section 397. Also, the
Treasury specify the markets and qualifying investments for which
the FSA has civil powers to tackle market abuse.
6. In respect of regulated activities, the FSA
has functions including:— Determining applications for
permission to carry on regulated activities, ensuring that firms
meet statutory "threshold" conditions which cover the
firm's legal status, integrity, financial standing, management
and links with others;— Making rules and specifying
categories of key employees who require FSA approval;— Monitoring
and enforcing compliance with requirements under FSMA including
FSA rules;— Oversight of the Financial Services Compensation
Scheme ("FSCS") and the Financial Ombudsman Scheme ("FOS");
and— The provision of advice and information.
7. In discharging its general rule making and
policy-making functions, FSMA requires the FSA to pursue four
objectives:— maintaining public confidence in the financial
system in the UK, including regulated activities;— promoting
public understanding of the financial system, including awareness
of the benefits and risks of different kinds of investment or
other financial dealing;— securing the appropriate degree
of protection for consumers, while having regard to the general
principle that consumers should take responsibility for their
decisions;— reducing the extent to which it is possible
for a regulated business to be used for a purpose connected with
financial crime, such as money laundering, fraud and insider dealing.
8. In discharging its general rule making and
policy-making functions, FSMA requires the FSA to have regard
to a number of matters, which we refer to as "the principles
of good regulation". These are:— the need to use
its resources in the most economic and efficient way;— recognising
the responsibilities of regulated firms' own management;— the
principle that the burdens and restrictions imposed by regulation
should be proportionate to the benefits;— the desirability
of facilitating innovation;— the international character
of financial services and the desirability of maintaining the
UK's competitive position;— the need to minimise the
adverse effects of regulation on competition; and.— the
desirability of facilitating competitionTHE
STATUTORY BASIS
FOR THE
REGULATION OF
SPREAD BETTING
UNDER FSMA
9. FSMA restricts the carrying on of regulated
activities by way of business to persons who are authorised or
exempt under FSMA. Regulated activities include dealing as principal
or agent in securities and "contractually based investments",
such as life policies and derivatives. Other regulated activities
include arranging deals in, advising on, managing, safeguarding
and administering such investments.
10. Whilst the term "spread bet" has
no formal status in FSMA or it subordinate legislation, the products
commonly referred to as spread bets are a type of contract for
differences. As such, spread bets are regulated under FSMA as
a category of "contractually based investment" by virtue
of being included as a specified kind of investment under Article
85 (contracts for differences etc) of the Regulated Activities
Order[8].
These include financial spread bets and, by virtue of Article
85(1)(b)(ii), spread bets on other factors more generally.
11. Contracts for differences (and therefore
spread bets for these purposes) have also been specified by Treasury
order as a relevant kind of investment for the purposes[9]
of the financial promotion restriction in section 21 and the misleading
statements offence in section 397. Section 118(6)(a) of FSMA ensures
that spread bets are subject to the market abuse regime under
FSMA by including behaviour which occurs "in relation to
anything . . . whose price or value is expressed by reference
to the price or value of those qualifying investments."
12. The FSA is also able to prosecute offenders
engaging in insider dealing in respect of spread bets relating
to securities[10].
13. Unauthorised firms which carry on regulated
activities involving spread betting in breach of FSMA will commit
an offence and the resulting contracts will not normally be enforceable
against their customers However, section 412 of FSMA ensures that
such contracts, along with other securities and contractually
based investments, are not made void or unenforceable by virtue
of the law relating to gaming.
14. We note that Clause 7 of the draft Bill defines
spread bet as a bet which constitutes a contract to which section
412 of FSMA applies. However, the rationale behind section 412
is to ensure that gaming law does not make financial services
contracts unenforceable.[11]
It is unclear what will happen if the relevant provisions of the
law relating to gambling are repealed.
15. Spread betting on financial markets is a
large and growing industry and the FSA expends time and resource
in monitoring trading on spread bets. Spread bets are similar
to other financial instruments such as contracts for differences
and futures and it is possible to construct synthetic options
positions using spread bets. Spread bets on financial instruments
such as shares or bonds are reported to the FSA on a daily basis
in the same way that cash market trading and other derivatives
trading are reported.
16. Some 3,500 firms (out of a total of 11,000)
are currently authorised with permission which includes carry
on regulated activities, eg dealing, arranging and advising, in
respect of spread betting. However, it is worth noting that only
a handful of these specialise in spread betting. A breakdown by
regulated activity is attached at Annex B.
17. Most of the FSA's Handbook of rules and guidance
relating to investment business by authorised firms also covers
spread betting. These rules include high level principles, conduct
of business, prudential and reporting rules. The FSA's Code of
Market Conduct, which sets out the kinds of behaviour that the
FSA considers will or will not amount to market abuse, also covers
spread bets.
18. Complaints about an act or omission by an
authorised person carrying on a regulated activity involving spread
betting are subject to the FSA's complaints sourcebook, which
sets out complaints handling procedures for firms. Consumers who
are dissatisfied with the firm's response may refer their complaint
to the FOS. The FOS dealt with 35 complaints about spread betting
in the year to 31 March 2003.
19. The FSA has established a scheme (operated
independently by the FSCS) for paying compensation to eligible
clients if an authorised person is unable to pay claims against
it. The FSCS covers investments including spread betting up to
a maximum of £48,000.
20. Trading activity involving spread bets
is monitored and, where appropriate, suspicious trades are referred
to the FSA's Enforcement Division. The FSA has not, since FSMA
came into force on 1 December 2001, published an enforcement decision
in relation to activities involving spread betting although it
has announced investigations into the use of spread bets in some
cases, particularly in the context of the FSMA provisions on market
abuse. [12]
January 2004
Annex A
ARTICLE 85 OF THE FINANCIAL SERVICES AND
MARKETS ACT 2000 (REGULATED ACTIVITIES) ORDER 2001
SI 2001/544
"85 Contracts for differences etc
(1) Subject to paragraph (2), rights under—
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