House of Lords - Explanatory Note
House of Lords
Session 1999-2000
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Financial Services And Markets Bill


These notes refer to the Financial Services and Markets Bill
as brought from the House of Commons on 10 February 2000 [HL Bill 32]

Financial Services And Markets Bill



1.     These explanatory notes relate to the Financial Services and Markets Bill as brought from the House of Commons on 10 February 2000. They have been prepared by HM 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.


3.     The Bill provides the framework within which a single regulator for the financial services industry, the Financial Services Authority ("the Authority"), will operate. It equips the Authority with a full range of statutory powers and creates the Financial Services and Markets Tribunal ("the Tribunal"). The Bill also establishes the framework for single ombudsman and compensation schemes to provide further protection for consumers.

4.     The Bill makes provision, amongst other things, for:

  • the constitution and accountability of the Authority;

  • the definition of the scope of regulated activities;

  • the control of financial promotion;

  • powers of the Authority to authorise, regulate, investigate and discipline authorised persons;

  • the recognition of investment exchanges and clearing houses;

  • arrangements for the approval of controllers and performance of regulated activities;

  • the provision of financial services by members of the professions;

  • regulation and marketing of collective investment schemes;

  • certain criminal offences;

  • powers to impose penalties for market abuse; and

  • the transfer to the Authority of registration functions in respect of building societies, friendly societies, industrial and provident societies and certain other mutual societies.

5.     An overview of the Bill is set out below. A detailed description of each Part and the clauses is contained in the commentary. Terms used are defined in the text. There is a glossary of certain defined terms which are used throughout these notes.


Financial Services Overview

6.     The UK financial services industry accounts for approximately 7 per cent of GDP, employing over 1 million people in the City of London and across the country.

7.     Businesses to be authorised and regulated under the Bill include:

  • Banks

  • Building societies

  • Insurance companies

  • Friendly societies

  • Credit unions

  • Lloyd's

  • Investment and pensions advisers

  • Stockbrokers

  • Professional firms offering certain types of investment services

  • Fund managers

  • Derivatives traders

Regulatory Framework

8.     Until now, regulation of financial services has been the responsibility of a range of different bodies:

  • the Authority (formerly the Securities and Investment Board);

  • the Self-Regulating Organisations ("SROs"): most recently the Personal Investment Authority, the Investment Management Regulatory Organisation and the Securities and Futures Authority;

  • the former Supervision and Surveillance Branch of the Bank of England;

  • the Building Societies Commission;

  • the Insurance Directorate of the Treasury;

  • the Friendly Societies Commission; and

  • the Registry of Friendly Societies.

9.     Since the Government announced its proposals to introduce legislation to reform the regulation of financial services in May 1997, steps have been taken to transfer responsibility for regulation to the Authority. Certain functions under the Banking Act 1987 ("Banking Act") have been transferred by the Bank of England Act 1998. In other cases, the Authority has entered into contracts with the relevant bodies to perform regulatory functions on their behalf. For example, the Treasury have contracted with the Authority for the performance of certain functions under the Insurance Companies Act 1982 ("ICA 1982"). Many relevant staff have become employees of the Authority in the meantime and relocated to the Authority's headquarters. This process of integration cannot be completed until the Bill is enacted.

10.     The Bill will broadly continue the regime for recognised investment exchanges and clearing houses under the Financial Services Act 1986 ("FS Act 1986"), although the Authority's powers under the Bill will be widened as compared with those under the current legislation. The Authority will have powers to regulate the Lloyd's insurance market, and powers of direction over the Council of Lloyd's, although the latter will retain its responsibilities under Lloyd's Acts for the superintendence and governance of the Society of Lloyd's. The recognised professional bodies regime under the FS Act 1986 will not continue. In future, professional firms (solicitors, accountants and actuaries) carrying on mainstream regulated activities under the Bill will be authorised and regulated directly by the Authority. Certain other categories of professional firm will benefit from an exclusion from the scope of the Bill, subject to arms-length oversight by and certain powers of the FSA. The professional bodies will retain their wider powers to regulate the professional activities of members of their respective professions.

11.     The Bill is intended to coordinate and modernise financial regulatory arrangements which are currently established under a number of different enactments:

  • the Credit Unions Act 1979

  • the Insurance Companies Act 1982

  • the Financial Services Act 1986

  • the Building Societies Act 1986

  • the Banking Act 1987

  • the Friendly Societies Act 1992

12.     Those enactments are generally supplemented by secondary legislation or rules. The relevant parts of that legislation, and rules and regulations made under it, will be substantially repealed when the Bill comes into force. Certain other enactments will also be repealed, or substantially repealed, including the Policyholders Protection Acts 1975-97, the Industrial Assurance Acts 1923-48 and the Insurance Brokers (Registration) Act 1977.

13.     The Bill also provides for the transfer of the remaining functions, including for example functions relating to the registration of mutual societies, of the Building Societies Commission, the Friendly Societies Commission and the Registry of Friendly Societies under the Building Societies Act 1986, the Friendly Societies Acts, the Industrial and Provident Societies Acts and the Credit Unions Act 1979.

Consultation and scrutiny

14.     In July 1998, the Treasury published a paper entitled Financial Services and Markets Bill: A Consultation Document which explained its policy in detail and included a draft of the Bill. That consultation exercise attracted comments from over 220 firms and bodies interested in the regulation of financial services, including those representing consumers. The Treasury have since published the following papers:

  • Regulated Activities - A Consultation Document (February 1999) which sets out proposals for the scope of regulation, including a draft Order to be made under clause 20(1) of the Bill;

  • Draft Recognition Requirements for Investment Exchanges and Clearing Houses (February 1999) which sets out proposals as to requirements for the purposes of recognition under Part XVIII;

  • Progress Report (March 1999) which sets out details of the Treasury's revised proposals for the Bill following the consultation exercise;

  • Financial Promotion - A Consultation Document (March 1999) which gives details of the proposed arrangements for the regulation under the Bill of the promotion of investments;

  • Memorandum to the Joint Committee - Additional Provisions Omitted from July 1998 Draft (April 1999) which includes four additional draft Parts which were not published in the July 1998 consultation document;

  • Market Abuse: Prescribed Markets (June 1999) which includes a draft Order under clause 95 designating the markets to which the arrangements under Part VII of the Bill will apply; and

  • Financial Promotion - Second Consultation Document: A New Approach for the Information Age (October 1999) which includes a draft Order to be made under clause 19 of the Bill.

15.     Copies of these documents may be downloaded over the internet from the Treasury's website ( Copies of relevant press notices and other documents issued by the Treasury are also available on the website.

16.     The draft Bill was subject to pre-legislative scrutiny prior to its introduction into the House of Commons. The Treasury Committee published its third report of Session 1998-1999 on Financial Services Regulation in February 1999 (Financial Services Regulation, Volumes I and II; House of Commons 73 I - II). The Government's response was published in March 1999 (Financial Services Regulation: The Government's Response to the Third Report from the Committee of Session 1998-99; House of Commons 347).

17.     A Joint Committee of both Houses of Parliament was also established (pursuant to Standing Order number 137) to consider aspects of the draft Bill. That committee was also able to consider the Treasury's Progress Report published in March. The Joint Committee published its first report on 29 April 1999 (Draft Financial Services and Markets Bill: First Report; House of Lords, 50 I - II; House of Commons, HC328 I - II) and its second report on 2 June 1999 (Draft Financial Services and Markets Bill: Second Report; House of Lords, 66; House of Commons, HC465). The Government response to the reports of the Joint Committee on Financial Services and Markets was published in June 1999.

18.     The Bill was introduced into the House of Commons on 17 June 1999 (and was reintroduced on 18 November 1999 under the 'carry over' procedure) and given its second reading on 28 June 1999. The Bill was scrutinised in Standing Committee A between 6 July 1999 and 9 December 1999 (35 sessions). Report Stage and Third Reading took place on 27 January 2000, 1 February 2000 and 9 February 2000.

19.     The Authority has been consulting widely on the way it proposes to use its powers and carry out functions under the Bill. By January 2000 it had issued 41 consultation papers, and in some cases feedback statements, covering a range of relevant topics. The commentary on the Bill below gives details of relevant consultation papers in the context of the appropriate provisions. A full list of the Authority's consultation papers are available on its website ( from where copies can be downloaded.


20.     There are many defined words and expressions in the Bill.

21.     Most of the definitions are for the purpose only of the clause or Schedule in which they are used. So, for example, the three words defined in subsections (10), (11) and (12) of clause 19 are defined only for the purposes of that clause.

22.     Where there is no indication that a definition is intended to apply to a group of provisions, a Part of the Bill or the Bill as a whole, it applies only for the purposes of the clause or Schedule in which it appears.

23.     Many of these single-provision definitions are just drafting devices to avoid clumsy repetition which would make an already long Bill even longer. For example, in clause 36 the word "specified" is used on its own on five occasions. The definition in subsection (4) is there just to save repeating the words "in an exemption order" five times.

24.     Some of the words and expressions that are defined just for the purposes of the particular provision in which the definition occurs are used (and defined separately) in other provisions — where they may have a different meaning. For example "consumers" is defined separately for the purposes of clauses 5(3), 9(7) and 12(5) (the definition in 9(7) differing from the others).

25.     The Bill consists of a large number of separate Parts. Where a particular Part deals with a self-contained subject there may be a separate interpretation clause at the beginning of the Part (for example clause 184, which deals with the interpretation of Part XIII).

26.     For the Bill as a whole, Part XXIX contains a group of ten clauses which deal with expressions used in a number of provisions and other matters which bear on the interpretation of provisions of the Bill.

27.     The purpose of this glossary is to provide the reader with a guide to words or expressions which are defined generally and so liable to be met in provisions which do not themselves contain the definition.



Where defined

the 1982 Act


appointed representative


auditors and actuaries rules




authorised person


authorisation offence


authorised open-ended investment company


body corporate


chief executive


collective investment scheme




compensation scheme


contract of insurance




decision notice






EEA authorisation


EEA firm


EEA right


EEA State


exempt person


financial promotion rules


first banking co-ordination directive

Sch 3, para 2(1)

first life insurance directive


first non-life insurance directive


friendly society


investment services directive

Sch 3, para 4

general guidance


general insurance business


general prohibition


general rules




home state authorisation


home state regulator

400(1), (2)

host state regulator

Sch 3, para 11

incorporated friendly society


industrial and provident society


insurance business


insurance company


insurance directives


investment services directive


listed securities


long-term insurance business


main agent




market abuse


Minister of the Crown


money laundering rules


notice of control


non-regulated activity rules


ombudsman scheme


open-ended investment company


parent undertaking


Part IV permission






price stabilising rules


private company


privileged communication


prohibition order


recognised clearing house


recognised investment exchange


registered friendly society


regulated activity


regulating provisions


regulatory objectives


regulatory provisions




rule-making instrument


scheme manager


scheme operator


scheme particulars rules


second banking co-ordination directive


second life insurance directive

Sch 3, para 3(6)

second non-life insurance directive

Sch 3, para 3(3)

seventh company law directive


single market directives


Stock Exchange


subsidiary undertaking


third life insurance directive

Sch 3, para 3(7)

third non-life insurance directive

Sch 3, para 3(4)

threshold conditions




Treaty firm


trust scheme rules


UK authorised person


UK firm

Sch 3, para 10

unit trust scheme


warning notice



28.     In addition to the defined terms above, for convenience, these explanatory notes use certain abbreviated terms as set out below.

Term used in these notes


Banking Act

Banking Act 1987

CC Act 1974

Consumer Credit Act 1974

Companies Act

Companies Act 1985

Competent Authority

the competent authority for listing,


Director General of Fair Trading

EC directives

Directives adopted by the European Commission

FS Act 1986

Financial Services Act 1986

ICA 1982

Insurance Companies Act 1982


open-ended investment company


Self-Regulating Organisations, which are responsible for the regulation of investment business under the FS Act 1986


Financial Services and Markets Tribunal

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Prepared: 15 February 2000