House of Lords - Explanatory Note
Financial Services And Markets Bill - continued          House of Lords

back to previous text


29.     The Bill is in 30 Parts.

Part I, The Regulator. This Part sets out the Authority's general duties and statutory objectives. It also, with Schedule 1, imposes requirements about the Authority's constitution and accountability and about the exercise of certain of its functions.

Part II, Regulated and Prohibited Activities. This Part provides a power for the Treasury to set the scope of regulation by order, within the overall object and purpose of the Bill. It prohibits persons who are not authorised (or exempt) from carrying on a regulated activity in the United Kingdom and from holding themselves out as being authorised or exempt. It also sets out arrangements for the regulation of financial promotion.

Part III, Authorisation and Exemption. This Part sets out which persons are to be authorised for the purposes of the Bill and gives the Treasury power to exempt certain persons from the requirement to be authorised. Authorised persons will include those persons given permission under Part IV and certain persons from other member States who are authorised in accordance with arrangements under the Treaty of Rome (the "Treaty") and the single market directives.

Part IV, Permission to Carry on Regulated Activities. This Part entitles persons to apply for the Authority's permission to carry on particular regulated activities and makes provision about the giving, variation and revocation of such permissions by the Authority.

Part V, Performance of Regulated Activities. This Part requires persons, such as employees and office holders, who perform specified types of function for authorised persons, to be approved by the Authority. It requires such approved persons to comply with any statement of principles of conduct issued by the Authority and gives the Authority certain disciplinary powers. It also gives the Authority powers to prohibit persons from carrying out specified functions.

Part VI, Official Listing. This Part broadly replicates the existing powers and functions of the London Stock Exchange as the competent authority for listing, and gives it new powers to impose penalties for breaches of listing rules. It also gives the Treasury a power to transfer some or all of these functions to another organisation in certain circumstances.

Part VII, Control of Business Transfers. This Part creates a mechanism for the transfer of banking and insurance business, subject to a court procedure and regulatory scrutiny.

Part VIII, Penalties for Market Abuse. This Part confers on the Authority power to impose penalties for market abuse. The Bill sets out the kinds of behaviour which will constitute market abuse and requires the Authority to produce a code which will help to determine whether particular behaviour amounts to market abuse.

Part IX, Hearings and Appeals. This Part establishes the Tribunal and sets out the procedure for referring cases to it where the Authority has decided to take regulatory action under the various powers conferred by the Bill. It gives a right to appeal against a decision of the Tribunal on a point of law.

Part X, Rules and Guidance. This Part confers powers upon the Authority to set regulatory requirements for persons authorised under the Bill. It gives the Authority power to issue guidance on requirements imposed by and under the Bill. It also sets out the procedures that the Authority must follow in exercising those powers.

Part XI, Information Gathering and Investigations. This Part sets out the powers of the Authority to require the production of information and documents, to require reports to be prepared, to conduct investigations and to gain access to premises with a warrant.

Part XII, Control over Authorised Persons. This Part requires persons who propose to acquire control over certain authorised persons to notify and secure the approval of the Authority.

Part XIII, Incoming Firms: Intervention by the Authority. This Part confers powers on the Authority to intervene in the activities of authorised persons from other member States who are authorised in accordance with rights under the Treaty and EC directives. It sets out the grounds on which the powers are exercisable and the procedures for exercising them.

Part XIV, Disciplinary Measures. This Part gives the Authority powers to issue public statements about, or impose penalties on, authorised persons who have failed to comply with requirements imposed by or under the Bill.

Part XV, The Financial Services Compensation Scheme. This Part requires the Authority to create a scheme for the payment of compensation to consumers who suffer financial loss as a consequence of the inability of an authorised person to meet its liabilities. It also confers a certain number of powers on the manager of the scheme.

Part XVI, The Ombudsman Scheme. This Part requires the Authority to establish a single, compulsory ombudsman scheme for the speedy and informal resolution of disputes between members of the public and authorised persons and confers certain powers on the operator of the ombudsman scheme for that purpose. It also provides for the ombudsman to adjudicate on certain other types of dispute, on a voluntary basis.

Part XVII, Collective Investment Schemes. This Part recreates, with modifications, the existing arrangements for the regulation of collective investment schemes under the FS Act 1986, for example by giving the Treasury powers to enable a wider range of open-ended investment companies to be formed.

Part XVIII, Recognised Investment Exchanges and Clearing Houses. This Part sets out the regulatory regime for investment exchanges and clearing houses and provides for competition scrutiny of the regulatory provisions and practices of those bodies.

Part XIX, Lloyd's. This Part makes the Society of Lloyd's an authorised person and gives the Authority certain powers to direct the affairs of the Society, its members and Lloyd's managing and members' agents.

Part XX, Provision of Financial Services by Members of the Professions. This Part creates an exemption for members of the professions providing financial services to clients in particular circumstances and gives the Authority an oversight role and certain powers in relation to firms that benefit from the exemption.

Part XXI, Mutual Societies. This Part confers powers on the Treasury to transfer to the Authority and to the Treasury certain functions relating to the registration and regulation of building societies, friendly societies and industrial and provident societies and certain other mutual societies.

Part XXII, Auditors and Actuaries. This Part concerns the appointment of auditors and actuaries by authorised persons and their responsibilities.

Part XXIII, Public Record and Disclosure of Information. This Part requires the Authority to maintain a public record of authorised (and certain other) persons, and makes provision about the purposes for which confidential information may be disclosed by and to the Authority.

Part XXIV, Insolvency. This Part gives the Authority powers to ask the courts to wind up, or initiate other insolvency procedures against, authorised (and certain other) persons. It also enables the Authority to be heard by the court when such proceedings are commenced by third parties.

Part XXV, Injunctions and Restitution. This Part gives the Authority and the Secretary of State powers to seek injunctions in relation to regulatory contraventions and offences for which the Authority has powers to prosecute. It also provides for restitution to be paid to those who have incurred a loss as a result of such a contravention.

Part XXVI, Notices. This Part sets out the procedures which the Authority must follow when giving notice of proposed actions under various provisions of the Bill. It relates, for example, to decisions not to give permissions or to refuse applications for approvals and to decisions to take regulatory action, such as imposing penalties or making public statements.

Part XXVII, Offences. This Part creates certain offences, including making misleading statements and supplying false information to the Authority. It also makes general provision about offences under the Bill and contains provision about the institution of proceedings, for example under Part V of the Criminal Justice Act 1993 (insider dealing) and the Money Laundering Regulations 1993.

Part XXVIII, Miscellaneous. This Part contains provisions giving the Treasury power to direct the Authority and certain other bodies to comply with the UK's international obligations, including European Union decisions to take reciprocal trade action. It also contains provisions concerning gaming contracts.

Part XXIX, Interpretation.

Part XXX, Supplemental. This Part contains provisions dealing with the commencement of the legislation and its territorial scope. It also makes certain consequential amendments and repeals and confers powers on the Treasury in relation to consequential and transitional provisions.



30.     This Part sets out the Authority's general duties and statutory objectives. Together with Schedule 1, it specifies statutory requirements for the Authority's constitution and status and the exercise of certain of its functions. It sets out arrangements which the Authority is required to make for consulting practitioners and consumers. It provides powers for the Treasury to commission reviews of the economy, efficiency and effectiveness with which the Authority has used its resources and to arrange independent inquiries into regulatory matters of serious concern.

Clause 1: The Financial Services Authority

31.     The Authority is an existing company limited by guarantee formed under the Companies Act and is currently carrying out functions under the FS Act 1986 and the Banking Act. It also exercises functions under the ICA 1982 on behalf of the Treasury.

Clause 2: The Authority's general duties

32.     This clause requires the Authority to discharge its general functions in accordance with its objectives and with regard to a number of principles. The objectives do not in themselves impose specific statutory duties or functions on the Authority. Rather, the clause requires the Authority to carry out its general functions insofar as possible in a way which is compatible with the objectives and which, taking into account any need to balance the objectives as a whole, it considers most appropriate to their fulfilment.

33.     Subsection (2) lists the Authority's objectives, which are elaborated in clauses 3 to 6.

34.     Subsection (4) then applies those objectives to the Authority's functions in two distinct ways:

  • they apply directly to the exercise of the Authority's rule-making, code issuing and general guidance functions taken as a whole;

  • they apply to the policy and principles by which it exercises its other functions.

35.     Subsection (3) lists the matters to which the Authority must also have regard in making its rules and guidance and determining the policy and principles by which it exercises its other functions.

Clause 4: Public awareness

36.     The Authority published in November 1998 a consultation paper (Promoting Public Understanding of Financial Services: A Strategy for Consumer Education; CP15). In May 1999 it issued a policy statement setting out how it intends to meet this objective (Consumer Education: A Strategy for Promoting Public Understanding of the Financial System).

Clause 5: The protection of consumers

37.     Subsection (2) sets out factors to which the Authority must have regard when considering the appropriate degree of protection. These are, briefly, the degree of risk involved, the sophistication and experience of the parties to the transaction, the need of customers for advice and information and the general principle that consumers should take responsibility for their decisions. There is no obligation on the Authority to place particular weight on any one of these factors.

Clause 6: The reduction of financial crime

38.     This provision does not by itself impose any duties on firms. The Authority is expected to pursue this objective in cooperation with various law enforcement agencies.

Clause 7: The Authority's general duty to consult

39.     This clause requires the Authority to make and maintain effective arrangements for consulting practitioners and consumers. These arrangements must include, but are not limited to, the establishment of Practitioner and Consumer Panels.

40.     The statutory obligation for the Authority to maintain a panel to represent the interests of practitioners was not present in previous financial services, banking or insurance legislation. The Authority has already established a panel of practitioners on a non-statutory basis. In October 1997, the Authority issued a consultation paper on practitioner involvement (Practitioner Involvement; CP2).

41.     The statutory obligation for the Authority to maintain a panel of consumers was not present in previous financial services, banking or insurance legislation. The Authority has already established a panel of consumers on a non-statutory basis. In October 1997, the Authority issued a consultation paper on the representation of consumer views (Consumer Involvement; CP1).

Clause 10: Reviews

42.     This clause provides that the Treasury can commission independent reviews of the economy, efficiency and effectiveness with which the Authority has used its resources.

Clause 11: Right to obtain documents and information

43.     The person appointed by the Treasury to perform a review has a right of access to documents held by the Authority.

Clause 12: Cases in which the Treasury may arrange independent inquiries

44.     This clause, together with clauses 13 to 16, provides the mechanism for the Treasury to appoint a person to hold an independent inquiry into the circumstances surrounding regulatory events which give rise to serious questions or public concern about the regulatory framework or the effectiveness of regulation in practice. They provide a statutory basis for launching the type of inquiry which has been conducted in the past into the failures of the Bank of Credit & Commerce International (BCCI) in 1991 and Barings in 1995. The Bingham Inquiry into BCCI was conducted on a non-statutory basis and therefore had no powers to require witnesses to attend or give evidence. The Barings Inquiry was conducted by the Board of Banking Supervision, an advisory body within the Bank of England using powers under the Banking Act.

45.     The types of events into which an inquiry may be held are set out in this clause. There are two cases. The first case, set out in subsection (2), relates to events concerning persons carrying on regulated activities or collective investment schemes. To trigger the power, it must appear to the Treasury that two conditions are met. The first of these is that the events posed, or could have posed, a grave risk to the financial system, or caused, or could have caused, significant damage to the interests of consumers. The second condition is that a serious failure in the regulatory system, or in the operation of that system, might have caused or exacerbated the risk or damage, or potential risk or damage.

46.     The second case, set out in subsection (3), relates to the listing function under Part VI. Here the Treasury must be concerned with the damage, or potential damage, that might have been caused by a serious failure in the listing regime or its operation.

47.     Subsection (4) provides that in either case the Treasury may initiate an inquiry only where it considers that it is in the public interest to do so.

Clause 13: Power to appoint person to hold inquiry

48.     Under subsection (1), the Treasury may appoint a person whom it considers appropriate to conduct an investigation and, under subsection (2), may give directions to that person concerning the scope of the inquiry, how it is to be conducted, when it is to be completed by, and the form of any report of the inquiry. The power to direct the inquiry enables the Treasury to ensure that it focuses on the important questions, and is concluded in a manner and on a timescale that is appropriate in light of any public concern there might be.

Clause 14: Powers of appointed person and procedure

49.     This clause gives the person holding the inquiry discretion as to how the inquiry is conducted, and provides that person with powers to obtain evidence, both in the form of documents and through the examination of witnesses. These powers are the same as those exercisable by the High Court, or the Court of Session in Scotland.

Clause 15: Conclusion of inquiry

50.     This clause requires a written report setting out the results of the inquiry and, where appropriate, making recommendations. The Treasury then have discretion whether to publish all or part of the report. However, the Treasury must make sure that they do not publish any material contained in the report which, if published, they consider would seriously prejudice the interests of a particular person, for example because there was a likelihood of subsequent court action in relation to the events covered, or publication would be incompatible with the UK's international obligations, such as those under the confidentiality provisions of one of the single market directives. A copy of any part of the report which is published must be laid before Parliament by the Treasury.

Clause 16: Obstruction and contempt

51.     The powers of the person appointed to conduct an inquiry are enforceable through certification to the High Court or Court of Session. The person conducting the inquiry must provide the court with a certificate stating the requirement that was imposed and the nature and facts of the alleged failure to comply. The court may then enquire into the matter, hearing witnesses and seeing documents as necessary. If it finds that a person has failed to comply with requirements placed upon him by the person holding the investigation, the court may deal with them as it would with a person in contempt of court.


52.     This Part provides the basic mechanism for defining the scope of regulation under the Bill and for establishing the extent of the prohibition on issuing unapproved financial promotions.

Clause 17: The general prohibition

53.     This clause contains the basic prohibition on unauthorised persons carrying on regulated activities in the UK. It is referred to in the Bill as "the general prohibition" and prohibits persons who are not authorised or exempt under Part III from carrying on any regulated activity in the UK. Clause 393 elaborates on when regulated activities will be considered to be carried on in the UK. Contravention of the general prohibition is a criminal offence (see clause 21). Agreements made in the course of carrying on an activity in contravention of the general prohibition may be unenforceable (see clauses 24, 25 and 27).

Clause 18: Authorised persons acting without permission

54.     Authorised persons may only carry on in the UK those regulated activities for which they have been given permission by the Authority under Part IV or by or under any other provision of the Bill, for example under Schedule 3, 4 or 5.

55.     If an authorised person carries on regulated activities for which he does not have permission the consequences may include any of the sanctions available under Parts IV (Permission to Carry on Regulated Activities), XIII (Incoming Firms: Intervention by Authority) or XIV (Disciplinary Measures). However, if an authorised person acts outside the scope of his permission, he will not commit a criminal offence, and any contract which a person enters into when acting outside the scope of his permission will not be made unenforceable simply by virtue of that fact.

Clause 19: Restrictions on financial promotion

56.     This clause prohibits unauthorised persons from issuing financial promotions, unless the content of the promotion is approved by an authorised person (who will be subject to rules made by the Authority), or unless an exemption applies. The regulation of financial promotions under the Bill is similar to the regulation of investment advertisements and cold-calling under the FS Act 1986. However, clause 19 reflects changing technologies and the fact that the borderline between advertisements and unsolicited calls has become blurred. Clauses 231 to 234 contain additional provisions relating to the promotion of collective investment schemes.

57.     The prohibition applies to "invitations or inducements" to engage in investment activity, which are made in the course of business. The Treasury will have power to determine the meaning of "in the course of business" although it indicated in Financial Promotion - A Second Consultation Document (October 1999) that it had no plans to give the phrase a special meaning. The prohibition will potentially catch communications whether they are made in the UK, into the UK from elsewhere, or from the UK to another country. Communications from outside the UK can potentially be caught only if they can have an effect in the UK (subsection (3)). It is expected that the exemption order which the Treasury intends to make under subsection (5) will further limit the territorial application of the financial promotion regime, so that communications issuing from overseas will generally only be caught if they are directed at the UK. This will be of particular significance in the context of internet communications.

58.     Subsection (5) confers a power on the Treasury to make exemptions from the prohibition, similar to the power to make exemptions from the investment advertisement prohibition under the FS Act 1986. It is possible for these exemptions to be made conditional on compliance with rules made by the Authority under clause 137.

59.     What constitutes "engaging in investment activity" will be determined under subsections (6) and (7), which give the Treasury power to determine the scope of the basic prohibition on financial promotion. It is expected that "controlled activities" will be the activities which are regulated under the Bill, together with activities which would be regulated, but for an exclusion in an order made under clause 20(1). This broad approach, set out in the draft Order referred to above, reflects the position under the FS Act 1986.

Clause 20: The classes of activity and categories of investment

60.     This clause makes provsion as to the classes of regulated activity, if carried on by way of business, and types of investment which are to be regulated under the Bill; these are to be prescribed by the Treasury by Order to be made under subsection (1). A draft Order, setting out in detail the activities to be regulated under the Bill, was published by the Treasury for consultation in February 1999 (Financial Services and Markets Bill: Regulated Activities - A Consultation Document). An activity will only be a regulated activity if it is carried on by way of business and is specified in the order under subsection (1). The Treasury will have the power under clause 394 to specify circumstances in which an activity shall or shall not be regarded as being carried on by way of business.

61.     Schedule 2 indicates the general range of activities and investments that the Treasury may include within the order defining the scope of regulation, but it does not exhaustively list them. It is therefore possible that other activities or investments may be brought within the scope of the regulation under the Bill. However, the general nature of the activities set out in Schedule 2 serves as a limitation on the extent of the Treasury's power to bring further activities within the scope of the Bill.

Clause 21: Contravention of the general prohibition

62.     This makes carrying on a regulated activity in breach of the general prohibition in clause 17 a criminal offence. It is a defence for a person to prove that he exercised due diligence and took all reasonable precautions to avoid committing the offence.

63.     A person convicted of this offence, which is referred to as an "authorisation offence", may be subject to a term of imprisonment of up to 2 years on indictment (6 months on summary conviction) and/or a fine (the statutory maximum for a fine on summary conviction is £5,000).

Clause 22: False claims to be authorised or exempt

64.     This creates an offence of falsely describing oneself, or holding oneself out, as authorised or exempt in relation to a particular regulated activity. It is a defence for a person accused of this offence to prove that he exercised due diligence and took all reasonable precautions to avoid committing the offence.

65.     Under subsection (3) a person found guilty of this offence is liable on summary conviction to a maximum of 6 months imprisonment and/or a fine not exceeding level 5 on the standard scale (currently £5,000). If the offence results from the public display of material, subsection (4) permits a fine of up to the statutory maximum (currently £5,000), to be multiplied by the number of days for which any material giving rise to the offence was on public display.

Clause 23: Contravention of section 19

66.     This clause provides that it is an offence to breach the financial promotion prohibition. The sanctions are the same as those which apply under clause 21 for a breach of the general prohibition.

67.     Subsection (2) provides a defence for a person accused of the offence if they can prove either that they believed on reasonable grounds that the content of the communication was prepared or approved by an authorised person, or that they exercised due diligence and took reasonable precautions to avoid committing the offence.

Clause 24: Agreements made by unauthorised persons

68.     Under this clause, agreements concluded in the course of carrying on business in breach of the general prohibition will generally be unenforceable by the authorised person against the customer. However, the customer can still recover any money paid or property transferred and compensation for any loss.

Clause 25: Agreements made through unauthorised persons

69.     Under this clause, agreements made by an authorised person in the course of his authorised business may also be unenforceable by that person if the agreement was entered into as a result of a third party's unauthorised regulated activities. This might arise if, for example, a contract was entered into as a result of investment advice given by an unauthorised third party.

previous Section contents continue
House of Commons home page Houses of Parliament home page House of Lords home page search Page enquiries

© Parliamentary copyright 2000
Prepared: 15 February 2000