POINTS RAISED BY THE DELEGATED POWERS AND DEREGULATION
COMMITTEE IN ITS SUBMISSION TO THE JOINT COMMITTEE
1. There should be an obligation on the FSA
to submit an annual report to the Secretary of State, outlining
the exercise of its rule-making powers. The Secretary of State
should, in turn, lay this report before Parliament. In addition
to informing Parliament generally, such a report might be well
suited to scrutiny either by a Select Committee, or by a Joint
Committee of both Houses established for the purpose.
Paragraph 10 of Schedule 1 to the Bill requires the
Authority to submit an annual report to the Treasury. Sub-paragraph
(1) allows the Treasury, by direction, to require the Authority
to report on specified matters. A further provision not in the
draft Bill allows the Treasury to require that the annual report
is accompanied by such other reports or information, prepared
by such persons, as the Treasury may from time to time direct
(sub-paragraph (2)(b)). The Authority issued a press notice on
6 July 1999 setting out the matters it proposed to cover in its
annual report. Those matters include:
- rule making: an account
of the exercise of the rule-making powers of the FSA, including
a list of legislative acts which took effect during the year.
- consultation: An account
of consultations over the year including information on consultation
responses made publicly available and feedback to consultation
- cost-benefit analysis:
An account of cost-benefit analysis policy and practice including
the contribution of cost-benefit analysis to policy decisions/rule
making, and whether revised cost-benefit analyses have been published
In addition, the Treasury has modified the procedure
applying to the exercise of the rule-making powers. The procedure
is described in Annex 1 to the memorandum. This reinforces the
procedures set out in clause 85 the draft bill (now clause 146),
in particular with the introduction of a requirement for the Authority
to publish, in general terms, a statement of the representations
made to it and its response to them.
Other changes have been made to the Bill to improve
the accountability of the Authority. For example, the Bill now
requires the Authority 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.
The Treasury Select Committee has indicated its intention
to take a close interest in the Authority's performance and to
scrutinise its annual report. Treasury ministers have welcomed
2. We understand that it is contemplated that
there should be appropriate separation of functions within the
FSA between those responsible for bringing any disciplinary proceedings
and the body responsible for adjudicating on these proceedings.
We believe that this should be made plain on the face of the legislation.
In the light of the comments of the Committee, the
Treasury has amended the Bill. Clause 377 of the Bill has been
introduced to require a separation of functions within the Authority.
Subsection (2) makes it clear that procedures must ensure
that persons involved in investigating and assessing a case are
different from those who a responsible for deciding whether or
not a warning notice, under clause 375 or, where relevant, a decision
notice, under clause 376, should be issued. The Authority is required
by clause 378 to consult on its proposed policy for meeting the
requirements under clause 377.
In addition, the Bill has been modified to make it
clear that the Financial Services and Markets Tribunal is a tribunal
of first instance. The word "Appeal" has been dropped
from the title. And relevant provisions in the Bill make it clear
that if upon receipt of an unfavourable decision notice, the person
concerned is not satisfied about the Authority's proposed course
of action, the matter may be referred to the Tribunal who will
be able to determine the matter.
3. We do not find it clear on the face of
the Bill whether it is intended that breaches of rules should
be regarded as invoking civil process and sanctions or criminal
process and sanctions. This has important consequences for the
standard of proof required to establish a breach and potentially
as to the extent to which the protections of the Human Rights
Act apply. We believe that this uncertainty is unacceptable and
that the position should be clarified in the legislation.
The Treasury believe that the Bill is clear on this
point. Breach of Authority rules will not be a criminal offence.
The process that will be followed where a breach of the rules
has occurred and the Authority is proposing to take action is
set out in the relevant parts of the Bill. Where the Authority
is proposing to take disciplinary action, for example for breach
of rules made under Part X, it will need to send the person concerned
a warning notice under the notice requirements set out in Part
The process will be the same where someone engages
in market abuse and the Authority is proposing to impose a penalty
under Part VIII of the Bill. However, as the Treasury announced
in their memorandum to the Joint Committee of 14 May, in cases
to impose a penalty for market abuse, the Bill has been amended
to provide for the Convention safeguards appropriate to proceedings
which would be classed as criminal for Convention purposes. Clause
165 now provides that statements made to investigators using compulsory
powers cannot be used in proceedings to impose a penalty for market
abuse against the person who gave those statements.
Clauses 126 to 128 also provide the Lord Chancellor
with powers to establish a scheme for providing free or subsidised
legal assistance to individuals on whom the Authority is proposing
to impose a financial penalty under Part VIII.
4. The provisions on market abuse are clearly
of great importance to those regulated by the legislation. Under
clause 57 [now clause 110] of the Bill, the FSA propose a code
for the purpose of determining whether or not behaviour amounts
to market abuse. We consider that it should be made plain that
compliance with the code is a "safe harbour" for commercial
The Treasury agreed with this recommendation and
has made appropriate changes to clause 112. Clause 112(1) provides
a safe harbour for behaviour which is described in the code as
not amounting to market abuse. In other circumstances, the code
will continue to carry evidential weight as provided for in clause
5. We also consider that in view of the width
of the rule-making powers and their potential effect, and the
assumed lack of Parliamentary control, it is highly important
that those seeking the certainty which is not necessarily granted
either by the legislation or the FSA rules should be entitled
to seek advance rulings, whether in the form of "no action"
letters or otherwise, which enable them to know in advance of
taking any particular action that it does not contravene the rules.
We accordingly recommend that the Bill should be amended to that
The Treasury agrees and for this reason the Bill
gives the Authority waiver and guidance powers.
Under clause 139 of the Bill, the Authority may,
on the application or the consent of an authorised person, direct
that all or any of the rules specified in clause 139 are not to
apply to the authorised person, or are to apply to him with such
modifications as may be specified in the direction. The Authority
will not then be able to take action for breach of a particular
rule if someone has acted in accordance with a waiver. The Authority
may revoke a direction or vary it on the application or with the
consent of the authorised person to whom to relates.
Under clause 148 of the Bill, the Authority has broad
powers to give guidance consisting of such information and advice
as it considers appropriate with respect to any rules made under
the Bill, as well as any matters relating to the Authority's functions.
Guidance can also be given for the purpose of meeting the Authority's
regulatory objectives, and with respect to any other matters about
which it appears to the Authority to be desirable to give information
or advice (including Treasury statutory instruments and the operation
of the Bill's provisions).
While guidance will continue to be non-binding (as
are SEC "no action letters" in the US), as long as a
person has acted within current written guidance issued to him
in the circumstances contemplated by the guidance, the Authority
will not be expected to take regulatory action against him. This
was reflected in the Authority's September 1999 policy statement
The FSA's approach to giving guidance and waivers to firm.
Similarly, where matters are referred to the Tribunal, the
Tribunal will take any relevant guidance into account in forming
its decision on the matter referred to it.
With regard to judicial proceedings, clause 22 of
the Bill provides that it is a defence for the accused to show
in relation to an alleged false claim to be authorised or exempt
that he took all reasonable precautions and exercised all due
diligence. Likewise, under clause 23 in relation to an alleged
breach of the financial promotion prohibition, it is a defence
for the accused to show that he took all reasonable precautions
and exercised all due diligence to avoid committing the offence.
Both defences may well focus on reliance on Authority guidance.
As with waivers or modifications, the Authority may
alter or revoke any of its general guidance as long as it complies
with the procedural requirements set out in the Bill.
PARAGRAPH 22 AND 23
The Committee has considerable unease about clause
55(2) [now clause 71(2)]. Whereas it is normally the right of
the individual to have the courts decide whether he has a remedy,
under this subsection the FSA is given this power, which it will
exercise without the consent of the Treasury or Parliamentary
control. Parliament will wish to consider carefully whether it
considers the delegation of this power appropriate. ... The Committee's
comments on clause 55 [now 71] also apply to clause 80(5) [now
Changes were made to the Bill before its introduction
to so that the power to define "private person" is conferred
on the Treasury, and exercisable by statutory instrument. The
exercise of this power is discussed in the memorandum. This change
is reflected in clauses 71(2) and 141(5).
Clause 18 (controlled activities) [now clause
19] confers a power on the Treasury to determine the scope of
the prohibition in clause 17. This can be different from the scope
of regulated activities made under clause 11 [now clause 20].
... Although this power is narrower than that under clause 11
the Committee considers that it too should be made subject to
the affirmative resolution procedure.
It should be noted that clause 404 has now been amended
so that an affirmative resolution procedure applies to the following:
the first orders made under clause 19(4), subsequent orders varying
orders made under clause 19(4) so as to make clause 19(1) (the
financial promotion prohibition) apply in circumstances in which
it did not apply, the first orders to be made under clauses 19(5)
and 19(7), and orders adding one or more activities to those that
are controlled activities for the purposes of clause 19. With
respect to clause 19(5) orders, whether the affirmative resolution
procedure is to be extended to subsequent orders is under consideration.
11 February 2000