Select Committee on Delegated Powers and Deregulation Seventh Report



General approach

1.  In order to ensure that regulation is able to be kept up to date and is capable of being responsive to developments in the market, the Treasury have taken the view that the most effective way to impose regulatory requirements on relevant persons is by giving the Authority rule making powers. This is consistent with arrangements under a number of enactments that the Bill will, to a greater or lesser extent, replace. Under the Insurance Companies Act 1982, requirements generally feature in regulations made by the Treasury (previously the Secretary of State) under that Act, which reflects the fact that the Government was directly responsible for supervising the insurance industry. The approach adopted in this Bill is similar to the powers enjoyed by the Authority (previously the Securities and Investment Board).

2.  It would cause practical difficulties for the powers to impose detailed regulatory requirements to be exercisable by statutory instrument made by the Treasury, and current practice has generally been for the regulator to draw up and make the rules. It must also be recognised that because of the nature of the activities covered by the Bill, considerable technical expertise is needed to be able to carry out the functions of imposing regulatory requirements in a way that keeps pace with rapidly evolving market practice.

3.  The Committee considered the approach to rule making at the time of the pre-legislative scrutiny of a draft of the Bill early in 1999, prior to its formal introduction to Parliament. In its submission to the Joint Committee, the Delegated Powers and Deregulation Committee noted:

  "We consider that, in this unusual situation, there is probably no sensible alternative to the approach set out in the draft bill. We have been supported in forming this view by having regard to the reality that it will the Authority which will have the closest understanding of market conditions, and will consequently be best placed to deal with the detailed issues, including many technical issues, which will need to be covered in regulations"

4.  This view was largely supported by those firms and individuals who responded to the Treasury's consultation on the draft bill in Summer 1998.


5.  In view of the importance of the responsibilities being given to the Authority, the Bill includes a number of provisions to ensure that the legislative powers are exercised appropriately used.

6.  Schedule 1 to the Bill makes a number of provisions about the status and constitution of the Authority. Only the Board of the Authority, which will be appointed by the Treasury, will have the powers to exercise the legislative powers. The powers cannot be delegated (paragraph 5(2)). Schedule 1 also imposes a requirement for the Authority to make an annual report about the discharge of its functions under the Bill and such other matters as the Treasury may direct. The Chairman and the Board of the Authority will be appointed and subject to removal by Treasury ministers.

7.  The Bill also imposes clear restrictions on the way in which the Authority may exercise its delegated powers (in addition to any specific limitations on the extent of any particular powers):

  • Importantly, the general duties of the Authority, under clause 2, set out a clear purpose for the Authority when discharging its general functions. The duties include four statutory objectives (defined in clauses 3 to 6) and seven principles to which the Authority is to have regard when exercising its functions as set out in clause 2(3). The principles include the efficient and economic use of resources, proportionality, innovation and competition. For these purposes, the general functions are, broadly, the functions of making rules, issuing codes and giving general guidance, and determining its policy and principles by reference to which the Authority performs particular functions. The general functions apply to the Authority's overall approach rather than individual actions;
  • The Bill also requires the Authority, under clause 7, to maintain effective arrangements for consulting practitioners and consumers on the extent to which its general policies and practices are consistent with its general duties under clause 2. Clauses 8 and 9 require the establishment of practitioner and consumer panels as part of the consultation arrangements under clause 7.

Rule-making procedures

8.  In addition to the general duties described above, the Bill imposes a number of procedural requirements on the Authority when it exercises its delegated powers. The procedures described below are also relevant to the "rule-making" functions under clause 63 (statements of principle and codes of practice for approved persons) and clause 110 (market abuse code).


9.  When proposing to adopt a rule, the Authority will normally be required to follow these procedures. Before adopting the instrument the Authority will be required to consult on its proposals. The Bill in each case requires the Authority to:

a)  publish the proposal in the way it considers best calculated to bring it to the attention of the public;

b)  make a statement that representations may be made within a specified period;

c)  have regard to representations made in accordance with (b) above;

d)  if it decides to proceed to adopt the instrument, publish an account in general terms of:

  i) representations made in accordance with (b) above; and

  ii) its response to them;

e)  if the instrument differs significantly from the original proposal, publish details of the difference.

The Authority is to be permitted to make a reasonable charge for a draft published in accordance with the above procedure.

10.  When adopting the relevant instrument, the Bill requires the Authority:

f)  to publish the final version in the way best calculated to bring it to the attention of the public

g)  to give a copy to the Treasury without delay

h)  to adopt the instrument in writing.

The Authority may charge for a copy of the published version.

11.  Where relevant, for example for codes of practice under clause 63, these provisions - and those described below - also apply to arrangements for altering or replacing such instruments and in such circumstances the provisions need to be read accordingly as applying to altered or replacement instruments (or proposals to alter or replace them). However, this is not the case for rules under Part X where the Authority would simply revoke existing rules and exercise its powers afresh to impose new requirements on firms, in accordance with the requirements described above.

Cost-benefit analysis

12.  When the Authority publishes draft rules for consultation as described above, it is also required to publish a cost-benefit analysis. The provisions also impose a requirement to publish a cost-benefit analysis when the final instrument is adopted after consultation. However, the Authority is not required to meet these requirements where the proposal or final instrument does not give rise to any increase in costs, or where there is only a minimal increase in costs. Where the cost benefit analysis requirement is disapplied, we would expect the Authority to include in its consultation document or feedback statement, as the case may be, a statement as to why it does not consider a cost benefit analysis is necessary, along with any other information relevant to those affected.

13.  In addition, the cost benefit analysis requirement does not apply to various rules requiring the payment of fees (see clause 146(9)). This is because the underlying requirements which give rise to costs in question would be examined and consulted on in their own right. Moreover, consultation on rules imposing fees will need to be accompanied by details of the expenditure, for example in the form of an annual budget. In such circumstances, a cost benefit analysis would not add to the information already provided and is therefore unnecessary.

Procedures in urgent cases

14.  The Bill allows the Authority not to comply with the consultation requirements - those described in paragraphs (a) to (e) above - nor the requirement to publish a cost benefit analysis with the consultation draft - only in cases where the Authority considers that the delay in complying with these requirements would prejudice the interests of consumers. (In the case of the market abuse code, the test is whether there is an urgent need to publish the code, reflecting the broader market sensitivity of the code.) This is necessary in case the rule book needs to be amended in response to events. However, it is clear from the Bill that this procedure is intended for use only in genuine cases of urgency or in exceptional circumstances.

Competition Scrutiny

15.  A further safeguard is provided in Chapter III of Part X. This gives the Director General of Fair Trading powers to review rules made by the Authority and where he concludes that the rules may have a significant anti-competitive effect, he may report to that effect. The Bill sets out procedures for a further review by the Competition Commission and consideration of the matters by the Treasury in the event of an adverse finding by the Director General.




16.  This paragraph provides for a rule-making power for the Authority to raise fees. It may use the fees to meet its expenses in discharging the functions that it has under the Bill (that is to fund any of its functions, such as those relating to authorisation, rule-making and enforcement, and discipline) or as a result of the Bill (for example, in relation to the registration of building societies under the Building Societies Act 1986) and for meeting expenditure on incidental activities. It may also raise fees to repay borrowing incurred in preparing for the assumption of functions under the Bill or under the Bank of England Act 1998, and to maintain adequate reserves. The Authority may not take into account any penalties which it has received, or expects to receive, in setting the fees under the Bill.

17.  The power to charge fees has been carried forward from existing legislation. For example, under section 113 of the Financial Services Act "a person who is an authorised person by virtue of section 25 or 31 shall pay periodical fees to the [Authority] as may be prescribed". The Authority has issued various fees regulations including the Financial Services (Fees) Regulations 1999 and the Financial Services (Fees) (Amendment) Regulations 1999 as well as the Financial Services (Fees) (Amendment)(No.2) Regulations 1999.

18.  The Authority will need the flexibility to keep its fees rules up­to­date and to tailor them to according to different types of business.



19.  The Authority may make rules under Part III of Schedule 3 governing the notice and procedural requirements for UK firms seeking to exercise passport rights under the single market directives in other EEA member States.

20.  Paragraph 18 concerns the conditions which UK firms must satisfy if they wish to exercise an EEA right to establish a branch. The Authority's rules may specify the manner and contents of the notice of intention which the firm must give to the Authority and the procedure under which the Authority exercises its functions under paragraph 18, including the contents of the consent notice which the Authority gives to the host state regulator. The Authority's rules may also provide for the consequences of a UK firm failing to satisfy the conditions in paragraph 18, including such matters as are specified in the Authority's rules.

21.  Paragraph 19 concerns the conditions which UK firms must satisfy if they wish to exercise an EEA right to provide services. The Authority's rules may specify the manner and contents of the notice of intention which the firm must give to the Authority and the procedure under which the Authority exercises its functions under paragraph 19. The Authority's rules may also provide for the consequences of a UK firm failing to satisfy the conditions in paragraph 19, including such matters as are specified in the Authority's rules.

22.  The Authority's powers to make rules under Schedule 3 are subject to the usual procedural requirements for rules, as well as the requirements of the relevant single market directives which they must implement. They are also subject to any matters which may be prescribed by Treasury regulations. For example, the terms of the consent notice to be given to the host state regulator by the Authority, in relation to the proposed exercise by a UK firm of an EEA right to provide services under any of the insurance directives, are prescribed by Treasury regulations rather than by the Authority's rules.



23.  Clause 58(3) confers a power on the Authority to make rules specifying functions that are to be "controlled functions" for the purposes of Part V of the Bill. A person who it is proposed would perform a controlled function for an authorised person must have the Authority's approval before doing so.

24.  The power under clause 58(3) is not unlimited. Subsections (5) to (7) set out three conditions, one of which must be met before a function could be specified.

25.  The first condition, under clause 58(5), is that the function is likely to enable the person to exercise a significant influence on the conduct of the authorised person's affairs. This is clarified in subsection (9) as including a person who could have that effect if the person failed to perform the relevant functions correctly. This condition is aimed at "prudential" concerns, to ensure that overall the authorised person's affairs are conducted in a suitable manner and to ensure that its solvency is protected. The most likely persons who would qualify under the first condition are senior managers, in charge of the overall business, and managers responsible for the management of the authorised person's assets.

26.  The second and third condition relate to circumstances where a person has contact with customers of the firm or with a customer's assets. Such contact has to be substantially connected with the carrying on of the regulated activity. These conditions are essentially aimed at persons currently subject to "conduct of business" regulation. It would encompass persons giving investment advice on behalf of the authorised person or someone handling a client's assets on behalf of the authorised person. However, it is not intended that, for example, a person advising on general insurance at a time when giving such advice is not a regulated activity would qualify under the second condition, nor would a person receiving the money for a general insurance policy qualify under the third condition.

27.  The conditions therefore limit the scope of the Authority's rule making power so that only persons whose role is relevant to a potential regulatory risk could be required to be approved. The persons who could come within these arrangements are currently, at least for the most part, already subject to vetting under existing arrangements, some of which are contractual, some statutory.


28.  This clause confers on the Authority powers to issue statements of principle with which approved persons must comply. Failure to comply could result in disciplinary action, in the same way as a breach of rules by an authorised person could lead to disciplinary measures under Part XIII of the Bill. Given the nature of the requirements, the Authority will be best placed to assess what requirements should be imposed. The principles must be elaborated in a code of practice. The purpose of that code is similar to that of the market abuse code under clause 110(1) and considered further below. In broad terms, the code will enable the Authority to set out in greater detail the kinds of standards of behaviour expected of approved persons.



29.  Clause 109 sets out the definition of market abuse. While the Treasury feels that this definition is clear, it is drawn in fairly broad terms. The Treasury believes that this is necessary to avoid creating possible barriers to acceptable changes in market practice which could be created by detailed provisions and to avoid creating loopholes which could be exploited by the unscrupulous. While greater certainty will be created as to the application of the regime by the Tribunal and the courts as cases come before them, the Treasury felt it would be helpful to market users to provide for a code of conduct which would give appropriate guidance to those determining whether or not behaviour amounts to market abuse. Clause 110(1) therefore requires the Financial Services Authority to produce such a code. Among other things, the code may specify descriptions of behaviour which, in the opinion of the Authority either does or does not amount to abuse. It may also set out factors which, in the Authority's opinion, should be taken into account when determining whether an abuse has occurred. Where someone engages in behaviour which is expressly permitted by this code then, under the provisions of clause 112(1), the behaviour will not be market abuse. In other circumstances, the code will carry evidential weight.

30.  The Treasury believes that the a code, which under the provisions of clause 111, is subject to full public consultation, is the right vehicle for providing guidance on the legislation and that the Financial Services Authority, with its expertise and closeness to the fast moving financial markets, it best placed to produce such a code.

31.  The Financial Services Authority published an initial draft code of consultation in June 1998 (Market Abuse Part 2: Draft Code of Market Conduct). Following consultation the Authority set up a practitioner panel to work with it on revising the Code. The Authority proposes to publish a revised code for further consultation in Spring 2000.



32.  Clause 125 enables the Lord Chancellor to make regulations establishing a scheme for legal assistance, to cover Tribunal cases involving individuals upon whom the Authority seeks to impose a penalty for market abuse. The powers of the Lord Chancellor are covered in more detail in the main memorandum.

33.  Under clause 127, the Authority is required to make payments to the Lord Chancellor to cover the costs of the legal assistance scheme. To enable the Authority to make these payments, clause 127(2) provides that it may make rules requiring payments to it from authorised persons. This task of requiring these payments from authorised persons is to be delegated to the Authority because the Authority will already have responsibility for collecting other fees from authorised persons. It will therefore be cost effective for the Authority also to collect payments for the legal assistance scheme.

34.  If the amount paid by the Authority to the Lord Chancellor exceeds the costs of the legal assistance scheme, the Chancellor may decide to repay the excess to the Authority instead of taking the excess into account in his next determination of costs. Should this happen, the Authority can, by virtue of clause 127(7), decide whether to distribute the money amongst those persons upon whom the levy was imposed (or some of them), or to offset it against future invoices, or partly to distribute the amount and partly to offset it. This enables the Authority to avoid costly redistribution of small amounts.



35.  Clause 129(1) empowers the Authority to make such rules applying to authorised persons with respect to the carrying on by them of regulated activities as appear to it to be necessary or expedient for the purpose of protecting the interests of, amongst others, consumers (broadly users of an authorised person's regulated activity services). This brings together in more general terms a number of areas of regulatory legislation (including major rule making powers) which deal with the regulation of a range of authorised persons who will be covered by the Bill.

36.  The existing powers which this provision is intended to replace include various powers to make rules which are conferred on the Authority in relation to investment business under Chapter V of Part I of the Financial Services Act 1986 and the powers to make rules which, by virtue of the recognition criteria in Schedule 2 to that Act, self-regulating organisations within the meaning of section 8 of that Act are required to have. The also include legislative powers for which the Authority currently has responsibility in relation to banks and insurance companies. It is intended that some of the detailed provisions which currently appear in the Insurance Companies Act 1982 and the Banking Act 1987 will in future be made by the Authority (see by way of example some of the provisions of sections 17 to 36 of the 1982 Act).

37.  The power conferred by clause 129(1) extends to making rules to protect the interests of persons who "have used" financial services. The Treasury intend that, in appropriate cases, the basic rule-making power should be able to cover reviews of past business (reviewing for example pensions mis-selling). Clause 129(1) is also intended to allow the Authority to make rules to further market integrity and protect against systemic risk.

38.  Clause 129(3) provides that the Authority's power to make general rules is not limited by any other power which it may have to make regulating provisions, while under subsection (4), the Authority may make provisions applying to authorised persons, even though there is no relationship between the authorised persons to whom the rules will apply and the persons whose interests will be protected by the rules. This is needed to enable, for example, rules to be made which protect the interests of the spouse and children of a person who has taken out a life insurance policy.

39.  Clause 129(5) provides that rules requiring an authorised person to maintain financial resources can take account of other members of the regulated person's group, even if those other members are not carrying on regulated activities. This will be important in order to ensure proper prudential supervision: so, for example, if a bank, which is authorised and permitted to take deposits, has in its group a leasing company, or a separate lending company, neither of which is authorised, the Authority would be able to look at the financial position of the group as a whole in order to form a sensible view on the group's financial stability and resources.

40.  Clause 129(6) makes it clear, however, that rules made under clause 129 cannot prevent European passporting firms from carrying on business in the UK which they are entitled to carry on by virtue of the single market directives. The Authority will, however, be able to apply its own conduct of business rules to firms which passport into the UK to do business (so long as these can be justified as in the general good), although rules relating to prudential supervision, such as in relation to capital requirements and basic fitness and propriety, will remain a matter for the home State Regulator.

41.  The Authority will be expected to keep its rules under review, in the light of its statutory objectives and the regulatory principles in clause 2, amongst other things. It is therefore important that the Authority has the power to make such changes as are appropriate.


42.  Clause 130(1) complements the Authority's general rule-making power under clause 129 by giving the Authority power, in appropriate circumstances, to apply rules to authorised firms' non-regulated activities. This clause is essentially aimed at protecting consumers (as with clause 129, broadly users of an authorised person's regulated activity services), while also giving the Authority power to make rules for those matters which the existing regulators are able to make under current legislation. Currently, the existing regulators can make rules requiring notifications of certain events to be made in respect of a firm's non-regulated activities or in relation to other group members. It is also envisaged that the Authority will make non-regulated activities rules in relation to an authorised person's financial resources (under subsection (3)), where the regulator needs to monitor the financial soundness of a business as a whole.

43.  The broad intention is that the clause will be used to allow the Authority to make rules in areas where the regulators can currently make them. It is not the Government's intention that clause 130 be used to apply conduct of business rules in inappropriate cases, such as, for example, generally to deposit-taking or general insurance.

44.  The Authority may at some point wish to change its rules issued under this clause. This power will allow it the flexibility to make such changes as are appropriate, subject again to the consultation requirements in clause 146 in relation to new rules.


45.  Clause 132 empowers the Authority to make rules prohibiting an authorised person who has permission to act as the manager of an authorised unit trust scheme from carrying on a specified activity. Article 6 of the UCITS Directive prohibits any management company engaging in activities other than the management of unit trusts and of investment companies. This prohibition is in turn reflected in section 83 of the Financial Services Act 1986 ("restrictions on activities of manager"), which prohibits managers of authorised unit trust schemes engaging in activities which do not fall within section 81(2)(managing unit trusts, open-ended investment companies or any other collective investment scheme under which the contributions of the participants and the profits or income out of which payments are to be made to them are pooled). The rule-making power in clause 132 will be used to replicate this requirement.

46.  Rules made under this clause may specify an activity which is not a regulated activity. The Authority may at some point want to change its rules issued under this clause. This power will allow it the flexibility to make such changes as are appropriate. New rules will be subject to the requirements of clause 146.


47.  Clause 133 empowers the Authority to make rules prohibiting an authorised person who has permission to deal in contracts of insurance from carrying on a specified activity. Subsection (1) is intended to allow provision to be made to the restriction in section 16 of the Insurance Companies Act as well as section 38(1) of the Friendly Societies Act 1992.

48.  Under subsection (3), the Authority may make rules in relation to contracts entered into by an authorised person in the course of carrying on long-term insurance business, in particular restricting the descriptions, or indices of value, of property by reference to which the benefits under such contracts may be determined. This broadly replicates the regime under section 78 of the Insurance Companies Act 1982 (and section 56 of the Friendly Societies Act 1992), under which the regulator can take steps to prohibit or vary terms in long term insurance contracts which link the value of the benefits payable under the contract to the value of particular types of investment or commodity.

49.  As the amount paid out on the maturity of a long term insurance contract will reflect the performance of the money invested in a relevant fund, the precise amount is likely to reflect, for example, the performance of the stock market and interest rates over the period of the policy, as well as the amount invested. The benefits under a policy may be defined by reference to something quite specific (small company shares or technology stocks). Given that this may involve risks for the consumer (the underlying commodity or index may be volatile), it makes sense that the regulator may intervene to protect the consumer either by prohibiting contracts which involve undue risks or requiring an amendment to the terms of the contract so as to substitute the index or value to which the benefits payable are linked.

50.  As with clause 132, such rules may specify an activity which is not a regulated activity. The Authority may, in the future, wish to change its rules issued under this clause. This power will allow it the flexibility to make such changes as it feels appropriate.


51.  Under clause 135, the Authority may make rules endorsing the Takeover Code and the Substantial Acquisition Rules (SARs) so that, if necessary, it can take action against authorised persons who breach the Code or the SARs.

52.  The Takeover Panel functions in order to ensure that there are clear and transparent rules on the expected conduct of parties to public takeovers, and in providing advice on those rules and in policing them. If the Authority has made endorsing rules under this clause, subsection (3) allows it to take action for breach of the endorsed Takeover Code or SAR rules under various parts of the Bill where it has been asked to do so by the Takeover Panel. (The Authority may take action under any of Part IV (varying a firm's permissions), Part XIII (which allows the Authority to take action in respect of incoming EEA or Treaty firms), Part XIV (disciplinary matters) and Part XXV (injunctions and restitutions)).

53.  This regime replaces the current regime under section 47A of the Financial Services Act 1986.

54.  Since the provisions of the Takeover Code or SARs may change, it is essential that the Authority has the flexibility to adapt its endorsement of the Panel's rules. Clause 135 will allow it the flexibility to make such changes as it feels appropriate.


55.  Price stabilisation techniques are used reasonably frequently in the case of new issues of securities to the public and large secondary offers in order to stabilise the price of the securities around the time of the issue or offer. The reason for allowing limited price stabilisation is to protect the efficiency of the capital markets. It is a practice allowed, subject to rules, in all the major financial markets, including the US and Japan.

56.  Price stabilisation will only work if the market is not fully informed about the amount or duration of stabilisation is taking place. It can, therefore, be a form of misleading the market. There is therefore a safe harbour from the existing offence of market manipulation (section 47 of the Financial Services Act 1986) for action taken for the purpose of price stabilisation in accordance with price stabilisation rules. The Bill continues to provide a safe harbour in this circumstance.

57.  Clause 136(1) allows the Authority to make rules as to the circumstances, condition and time during which action may be taken for the purpose of stabilising the price of investments. Section 48(2)(i) of the Financial Services Act 1986 currently allows the Authority to make rules concerning price stabilisation and section 48(7) provides that things done in conformity with those rules do not breach the market manipulation offence. The Treasury believe that it is appropriate to continue these arrangements which allow the Authority, with its expertise and closeness to the markets, to make price stabilisation rules. The Authority has recently consulted on proposals for such rules under the Bill (Consultation Paper 40: The Price Stabilising Rules).


58.  Under clause 137, the Authority is empowered to make rules applying to authorised persons dealing with the communication of invitations or inducements of a kind governed by the financial promotion regime. Rules may concern the form and content of the communication, or the approval by authorised persons or communications of others. The Authority will at some point want to change its rules issued under this clause. This power will allow it the flexibility to make such changes as it feels appropriate.


59.  Clause 138 gives the Authority the power to make rules in relation to the prevention and detection of money laundering in connection with the carrying on of regulated activities by authorised persons. The Authority could not make all the rules it might wish to make in this area under the general rule making power in clause 129 since that clause only allow the Authority to make rules for the purpose of protecting the users of the services of authorised persons. Rules in relation to the prevention and detection of money laundering may not always come within these vires. The Treasury believes that the Authority is well placed to make and police such rules given that they make and police rules relating to the systems and controls of authorised persons more generally and their conduct of business.



60.  Subsection (1) requires the Authority to make rules establishing a scheme for compensating customers in cases where a relevant person (that is, an authorised person, or an appointed representative, at the time the of the act giving rise to the claim) is unable, or unlikely to be able, to pay claims made against them. The Authority must enable the scheme manager to assess and pay compensation.

61.  Subsection (3)(b) requires that the Authority empower the scheme manager to impose levies on authorised persons for the purposes of meeting its expenses. In making the necessary provisions, the Authority must take account of the desirability of the levies imposed on any particular sector reflecting the claims made, or likely to be made on that sector. (Clause 217 allows the Authority to limit the management expenses recoverable by the scheme manager through levies.)

62.  It is important that the compensation scheme is able to adapt over time, so that, against the background of a flexible and changing market, it remains able to respond to new types of product, deal appropriately with claims for compensation, and set levies in such a way as accords with the Authority's statutory responsibility to take account of the desirability of avoiding subsidy across sectors. Attempting to incorporate the detailed rules under which the scheme manager will have to operate would make the Bill unwieldy and the rules inflexible. Making the Authority responsible for rules, within the statutory confines imposed by the Bill, should provide the necessary scope for the scheme to develop responsively to changes over time. As the scheme will be determined by rules made by the Authority, the normal procedural arrangements for rules will apply. It is appropriate to give responsibility for rule making to the Authority, rather than the scheme manager, because the scheme manager will assess the validity of claims for compensation and determine the amount to be paid, and it would not be proper for it also to make the rules under which it will be operating.

63.  The arrangements under Part XV are similar to those under section 54 of the Financial Services Act 1986, under which the current Investors Compensation Scheme was established. By way of contrast, the statutory arrangements under the Policyholders Protection Act 1975 had a number of difficulties which it was not possible to resolve without the Policyholders Protection Act 1997.

64.  Clauses 208 to 211 clarify, but do not limit, the scope of the Authority's power to make rules for the scheme.


65.  This clause deals with the general provisions that may be made. For example, it makes clear that the scheme may consist of a number of different compensation funds, and allows different levies to be raised in different cases and different provisions to be made to cover different claims. It also allows rules to be made covering the type of claim that can be made, and by whom, and the procedure for making a claim. Rules can be made limiting the eligibility of claimants according to a number of different factors, including where the event took place or where the claimant resides.


66.  This clause clarifies the rights of the scheme in the event of a relevant person's insolvency. It allows that the scheme manager may be empowered to assume the rights of an eligible claimant to recover a debt from a relevant person; and it specifies that rights thus assumed cannot exceed those that the claimant would have had. It also allows insolvency rules to be made for the purpose of integrating procedures resulting from rights so assumed into the general procedures on administration, winding-up, sequestration, or bankruptcy.



67.  These clauses clarify the provisions that may be made in respect of insurance businesses, carrying forward arrangements currently under the care of the Policyholders Protection Board. The nature of long-term insurance policies can mean that a simple payment of compensation may not be enough to enable policyholders to find alternative cover in the event that their insurer goes into liquidation. Clause 210 therefore enables the Authority to make rules requiring the scheme manager to secure continuity of insurance for relevant policyholders. Insurance businesses generally can face claims for events which happened several years earlier. This means it can be difficult properly to identify all the liabilities of an insurer on liquidation. The administration of insurance claims can be costly and the delay for policyholders can be lengthy. Clause 211 therefore allows the Authority to empower the scheme manager to give assistance to insurance companies in financial difficulties, either by transferring the insurance business to another insurer or by enabling the continuance of insurance business by that firm. However, the rules may also require that payments to the firm do not materially benefit other persons such as shareholders and company directors, and that the scheme manager satisfy himself that the necessary measures are likely to cost less than would paying compensation if the insurer were allowed to go into default.


68.  This Part makes provisions for the operation of the ombudsman scheme. The provisions also clarify the extent of the Authority's powers under Part XVI. The delegated legislative powers of the scheme operator which are considered in Annex 2 to this memorandum.

69.  The scheme will comprise two jurisdictions. The compulsory jurisdiction under clause 220 will be compulsory for authorised persons in relation to the activities specified by the Authority in compulsory jurisdiction rules. The voluntary jurisdiction will apply to persons who are not authorised but who carry on activities specified by the scheme operator in voluntary jurisdiction rules. It will also apply to authorised firms carrying on activities which the Authority has decided not to specify as falling within the compulsory jurisdiction. The scheme will therefore potentially be able to deal with a wide range of financial services, whether or not they are regulated activities. It will be able to deal with complaints relating to lending as well as deposit taking. However, whereas banks and building societies could be compelled to join, other consumer credit firms could not. The rules for both the compulsory and voluntary jurisdictions will only be able to specify activities that the Treasury could specify as regulated activities under the order making power in clause 20.

70.  As noted in the memorandum, the current arrangements for dispute resolution vary by sector. In several cases, the arrangements have been established on a purely voluntary basis by the industry sector concerned, although it has often been a condition of membership of the relevant trade associations that firms also subscribe to the industry ombudsman scheme. The Financial Services Act 1986 imposes a requirement on self-regulating organisations to establish complaint handling arrangements, but is not prescriptive about what arrangements are required. In each case, the relatively informal approach fits with the generally informal arrangements.

71.  The Bill seeks to put in place broad statutory parameters for the ombudsman scheme, such as the boundaries between the compulsory and voluntary jurisdictions and the limits on when costs may be included in awards. It also puts in place a framework for the constitution of the scheme operator and for the relationship between the Authority, the scheme operator, and the ombudsman. However, the Government does not consider that there is any need for the legislation to be excessively prescriptive and believes that scheme will need to be flexible enough to respond to changes over time to ensure that this key objective is met.


72.  This clause provides for the ombudsman scheme, which is to be established by rules made by the Authority under Part XVI. The Scheme is to be operated by a body corporate (the scheme operator) and its object will be to resolve disputes quickly and with a minimum of formality. The fact that the Scheme is to be established by rules means that the procedural requirements - such as consultation and cost benefit analysis - set out in Chapter II of Part X will apply to rules made under Part XVI.




73.  As noted above, the Authority will use its compulsory jurisdiction rule making powers under Clause 220 to specify what activities come within the compulsory jurisdiction. This clause also provides that the Authority will, by rules, establish the criteria to determine when a complainant is eligible to be dealt with under the scheme. The scheme is aimed primarily at retail consumers, but some smaller firms are likely to be eligible to use the service. The scheme will not be able to deal with complaints made by authorised persons, except in circumstances specified in the rules. Clause 222 enables the ombudsman, under the compulsory jurisdiction to make a determination on the basis of what is fair and reasonable in all the circumstances of the case, and to make any award binding on the respondent, up to a limit set by the Authority under clause 223.


74.  This clause allows the Authority to levy fees on authorised persons to meet both the costs of establishing and the costs of running the compulsory jurisdiction. (The costs of voluntary jurisdiction will be met by fees set as part of the voluntary jurisdiction.)


75.  Further detailed provision about the powers of the Authority in establishing the compulsory jurisdiction is made in Schedule 16. For example, paragraph 13 requires the Authority to make procedural rules for the operation of the compulsory jurisdiction of the scheme. The Authority must set a time limit and make rules with the effect that complaints will only be entertained if made within that time limit (unless extended by the ombudsman in circumstances specified in the rules). The Authority may also make rules requiring a complainant to give the respondent a reasonable opportunity to deal with the complaint before the ombudsman can deal with it. In respect of rules governing how authorised persons deal with complaints, this paragraph also extends the Authority's rule making powers under Part X of the Bill to matters which are not regulated activities.

Voluntary jurisdiction

76.  The voluntary jurisdiction will be determined by rules made by the scheme operator, and its standard terms. Those rules and terms are subject to the approval of the Authority. The scheme operator's powers are considered in Annex 2.





77.  Under clause 231, authorised persons cannot issue an invitation to participate in a collective investment scheme unless the scheme itself is approved (that is, unless it is an authorised unit trust, an authorised open-ended investment company or a recognised overseas scheme). In addition, the clause allows certain exemptions for other types of scheme to be marketed other than to the general public in circumstances to be set out in the Authority's rules. In effect, this carries forward the broad regime under section 76(3) of the Financial Services Act 1986 (currently the Financial Services (Unregulated Schemes) Regulations.

78.  Under clause 232, the Treasury may, by regulations, make provision for exempting single property schemes from the restrictions from financial promotion set out in clause 231. Under clause 232(4), if regulations are made under this section, the Authority may make rules imposing duties or liabilities on the operator and (if any) the trustee or depositary of a scheme exempted by the regulations. The rules may also cover, to the extent that the Authority thinks appropriate, things which it can make rules about for authorised unit trusts under section 241(scheme particulars rules). Following the Treasury issuing the Financial Services Act (Single Property Schemes) (Exemption) Regulations 1989, SI 1989/28, the Securities and Investments Board (now the Authority) in turn issued The Financial Services (Single Property Schemes) (Supplementary) Regulations 1989, which includes provisions on, amongst other things, the preparation of scheme particulars, facilities to be maintained in the United Kingdom and annual report / financial statements requirements.

79.  Under clause 240, the Authority may make rules on a variety of matters, comprising the constitution, management and operation of authorised unit trust schemes, the powers, duties, rights and liabilities of the manager and trustee of any such scheme, the rights and duties of the participants in any such scheme, and the winding up of any such scheme. These rules will cover broadly the same area as the constitution and management regulations made under sections 81(1)-(3) and (5) of the Financial Services Act 1986. However the prohibition in section 81(4) of that Act on the Authority imposing restrictions on the remuneration of managers will not be carried forward into the Bill. The Authority will now be able to use its proposed constitution and management power or its general rule-making power to make rules to make equivalent provision as to earnings, as long as these are permissible under the Authority's other rule-making powers.

80.  The Authority's regulations in this area are to be found in the Financial Services (Regulated Schemes) Regulations 1991, which make provisions for, amongst other things, the trust deed, UCITS obligations, public availability of the trust deed, types of units and categories of scheme. It is expected that equivalent provision will be made by the Authority by way of rules once the Bill is implemented. The provisions of clause 146 will apply to new rules made under this clause.


81.  Under clause 241, the Authority may make rules ("Scheme particulars rules") requiring the manager of an authorised unit trust scheme to submit particulars to the Authority and publish scheme particulars or make them available to the public on request. This continues the existing regime under section 85(1), under which the Authority may make regulations "requiring the manager of an authorised unit trust scheme to submit to him and publish or make available to the public on request a document ... containing information about the scheme with such requirements as are specified in the regulations". The Authority has issued the Financial Services (Regulated Schemes) Regulations 1991, which include provisions for, amongst other things, the preparation, publication and inspection of scheme particulars as well as schemes authorised in certain designated territories. With regard to open-ended investment companies, there is a similar rule-making power contained in The Open-Ended Investment Companies (Investment Companies with Variable Capital) Regulations 1996, SI 1996/2827 (r.6(1)).

82.  Scheme Particulars serve a similar function to a prospectus which a company is required to publish on the occasion of an offer to the public of any of its securities. The sorts of things which might be covered by scheme particulars rules include details of the manager, investment adviser, registrar and auditor, along with details of the constitution and objectives of the scheme, applicable charges and information concerning the issue and redemption of units.

83.  The Authority will at some point want to change its rules issued under this clause to keep them up to date. This power will allow it the flexibility to make such changes as it feels appropriate.


84.  Clause 270 allows the Authority to make rules for schemes recognised under clause 262 or 264 (that is non-UCITS recognised schemes corresponding to the scheme particulars rules for authorised unit trusts). This essentially continues the position under the Financial Services Act. This will mean that the Authority can make rules placing a duty on the scheme operator to disclose relevant information about the scheme to the Authority and to the public. The Authority can also specify the form of that disclosure and the nature of the information which must be disclosed. In addition, the rules can make the scheme operator liable to pay compensation to scheme participants who suffer loss as a result of untrue or misleading statements or omissions in those particulars.


85.  Clause 276 relates to all categories of recognised schemes (under clause 258, 262 or 264) and concerns facilities and information in the United Kingdom. It reproduces section 90 of the Financial Services Act 1986. The clause allows the Authority to make rules requiring operators of recognised schemes to maintain in the UK certain facilities which the Authority considers desirable in the interests of participants. This reflects an existing provision under article 45 of the UCITS Directive which requires EEA schemes to ensure that facilities are available in the UK for making payments to unit-holders, re-purchasing or redeeming units, and making available to scheme participants the information which schemes are required to provide.

86.  The Authority will at some point want to change its rules issued under this clause to keep them up to date. This power will allow it the flexibility to make such changes as are appropriate.



87.  Recognised bodies are exempt from the need to be authorised to carry on regulated business and the Authority cannot, therefore, make rules applying to recognised bodies under the rule making power in clause 129. Instead recognised bodies have to meet the recognition requirements as set out in regulations made by the Treasury in order to be and remain recognised and exempt.

88.  In order to satisfy itself that the recognised bodies are continuing to meet the recognition requirements, the Authority will need information about their activities. Clause 286 places a requirement on recognised bodies to send certain information, such as notices of changes to its rules, to the Authority. Clause 286(1) also allows the Authority to make rules requiring a recognised body to give it notice of events and information in relation to those events as may be specified. A similar power exists at present in section 41 of the Financial Services Act 1986. The Treasury believes that it is appropriate for the Authority to have this flexible power given that recognised bodies come in different forms and different information will be required from them. The information that is relevant is also liable to change along with changing conditions and developments in the market. It would not be feasible for the Bill to set out the full range of circumstances in which information should be supplied to the Authority.



89.  This clause relates to the regime concerning the provision of non-mainstream financial services by designated professional bodies. It allows the Authority to make rules requiring exempt professionals to disclose to their clients that they are not authorised. Since the nature of such disclosure and its terms may be subject to change in the light of experience, it is thought appropriate that this should be dealt with through rules.



90.  Subsection (1) of this clause provides the Authority with the power to make rules requiring a particular authorised person, or a particular class of authorised persons, to appoint an auditor or an actuary, if that person is not already required to do so by another enactment (as, for example, limited companies are required by the Companies Acts to appoint auditors to report on their annual accounts).

91.  Subsection (2) then goes on to provide that the Authority may make rules requiring an authorised person, or class of authorised persons, to produce periodic financial reports, and to have these reported on by an auditor or actuary, whilst subsection (3) enables it to make rules imposing such other duties on appointed auditors or actuaries as may be specified. These subsections are intended to take account of the fact that auditors and actuaries are not simply appointed by a particular person, but are also appointed to carry out a particular function or functions (for example, auditors are often appointed to report upon, as opposed to preparing, the annual accounts of individual businesses). These subsections will allow the Authority the flexibility to specify what kinds of functions, and, in particular, what kinds of information, auditors and actuaries will be required to obtain from particular authorised persons.

92.  In some situations, the Authority may feel that a report of an auditor or actuary on a particular authorised person, or class of persons, might assist it in its regulatory duties. The purpose of these powers is to allow it to require this, without having to impose similar requirements on other persons for whom this would not be necessary. It is, of course, possible that, in the light of experience, the Authority will at some point decide it will need to extend, or cut back on, the class of authorised persons required to appoint an auditor or actuary. These powers will allow it the flexibility to make such changes, if it feels that this is appropriate.

93.  Subsection (4) provides that rules made under subsection (1) may make provision about the manner and time within which an auditor is to be appointed, as to the notification of the Authority of the appointment, as to remuneration of the auditor or actuary appointed, as to the terms of the appointment, and to enable the Authority to make an appointment itself, if no appointment has been made or notified. These are effectively reserve powers to ensure that the appointment of auditors or actuaries runs smoothly, and to enable the Authority to deal with any problems which may arise in practice. For example, if the Authority requires a person to appoint an auditor, and no appointment is made, then it is clearly necessary to provide for some way to resolve this situation.

94.  Subsection (5) performs a similar function to subsection (4), by allowing the Authority make rules providing auditors and actuaries with such powers as are necessary to carry out their duties, whilst subsection (6) allows the Authority to make rules providing for the professional qualifications and experience necessary for appointment under the Bill.

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