|Financial Services and Markets Act 2000 (Regulated Activities) Order 2001
Mr. Howard Flight (Arundel and South Downs): I would like to put on record my congratulations to the Minister and her officials. The orders are complex and I know that great efforts have been made to consult representatives of the industry, especially security lawyers. As the Minister said, it is important to the nation's economy to get such matters right. There is broad satisfaction with those efforts and with the fact that the point about reinstating the overseas person exemption for investment firms without such branches in the UK has been taken on board.
As I think is my duty, I have consulted representative bodies in the industry, the Law Society, and lawyers and I seek clarification from the Minister on a number of points. As the Minister mentioned, although we are dealing with secondary legislation, in some sense the matters are meat suitable for primary legislation. I also thank the Minister for her comments on N2. The industry has been keen to know where the Government stand on that.
First, I want to deal with the regulated activities order. The clarification of the overseas person definition in article 3 is welcome. However, further clarification is needed on two points. Would a branch office of an overseas person be regarded as a ``permanent place of business''? Would a person offering to carry out a specified activity from a branch office therefore need to be an authorised person?
Does the exclusion in article 22(2) cover moneyfor example, if a cash ISA is held temporarily by an investment firm before it is deposited in a bank? In respect of article 51, there have been many queries by the industry about the previous draftin which it was numbered article 48most of which have been resolved. However, why does article 51(2) say that the terms ``trustee'', ``authorised unit trust'' and ``depository'' have the same meaning as that given in section 237 of the Financial Services and Markets Act 2000, but does not say that ``open-ended investment company'' has the same meaning as that given in section 236 of the Act?
The inclusion of the activities of establishing, operating or winding up a stakeholder pension in article 52 is welcome. Can the Minister confirm that that applies to trust-based stakeholder schemes, as well as to contract-based schemes run by authorised managers?
Article 54 contains a welcome clarification of the provision of advice that is given in newspapers. Can the Minister confirm that, provided the service meets the ``principle purpose'' test, the exclusion applies to the specialist financial trade press and to money or financial supplements? She may know that the industry has expressed some concern on that issue.
Article 76 states that shares in an open-ended investment company are excluded from the sort of shares that are regarded as specified investments. That is presumably because OEIC shares, although not specifically mentioned, are included within the meaning of units in a collective investment scheme.
The absence of a specific reference to OEIC shares has given rise to confusion in the past, particularly when institutions are subject to restrictions or reporting requirements on investment in unquoted shares. Problems have arisen when OEICs are treated as unquoted shares rather than units in a collective investment scheme. Full clarification and confirmation would be welcome.
On article 82, I would welcome clarification that rights in both individual and employer-designated stakeholder pensions are included. Interests under the trusts of an occupational pension scheme are not included as a specific investment in article 89 and, although it is not stated explicitly, there is a presumption that rights in a personal pension scheme are also not considered to be specified investments.
Echoing the Minister's comments on the subsequent order and its relationship to the Myners report and on encouraging entrepreneur and venture capital activity, there is no explicit exemption from articles 14 or 69 for corporate venturing, even when the trading company which invests in start-up is carrying on similar related activities which are less than the 20 per cent. necessary to fall within article 15. The issue has already been raised with the Treasury and I am sure that it has the Government's support given the Chancellor's wish not to have structural obstacles to investment in start-ups.
There are some omissions concerning issues that have been discussed but not included and I would like to know whether the Government have any intention of addressing them either in further orders or through the FSA. The first concerns article 25 on the arrangement of deals in investments. Article 25(2) follows the text of the similar regulated activity in the Financial Services Act 1986 and is preferable to the proposed regulated activity that it replaces, which was too wide. It covers all arrangements that are made to enable a person who participates in them to buy or sell investments and so covers even a courier who arranges to take an application form to a receiving bank. However, I hope that the Government will interpret that as applying only when the courier knows that his customer has given him an application form.
The scope of the arranging deals and investments category of regulated activity should be more restricted along the lines of making arrangements with a view to inviting, influencing or persuading someone to enter into a transaction under which a person who participates will buy, sell or subscribe or underwrite investments falling within the relevant articles. The Financial Services and Markets Act 2000 is new, so advisers will be less relaxed than they were under the previous Act and all arrangers may be advised by their lawyers to seek precautionary authorisation. I am sure that the Government do not intend that, because it would merely clutter the over-burdened FSA machinery.
On specific exemptions for professionals when providing professional services under article 67, there is still no specific exemption for lawyers or accountants, although the Treasury made it clear that it wants one. No one wants lawyers and accountants to have to become authorised under the Act to practice. Specific exemptions or a blanket exemption is, therefore, surely necessary.
There is now a more relaxed exemption than in the previous version of the regulated activities order that applies if the activity is
The exemption is made worse because it applies only if no other activities carried on by the professional firm consist of other related activities. That seems to apply anywhere in the world.
I believe that the intent is to exclude from articles 21, 25(1) and (2), and 53 any activity undertaken in the course of carrying on any profession or business that does not otherwise consist of carrying on regulated activities in the United Kingdom; and either: may be reasonably regarded as a necessary or desirable part of other services provided in the course of that profession or business; or relates only to negotiating or the legal or commercial consequences of an investment transaction or agreement.
The exemption for arranging deals with or through FISMA authorised firms may be helpful in specific circumstances but in many other cases there will be no FISMA authorised firm involved. The parties may therefore negotiate a particular transaction using only their lawyers or accountants and not have a corporate finance firmor at least one authorised under the Actto advise them. That exemption cannot apply in such cases, hence the need to cover it with either further exemption or clarification of the existing intent.
The consultation document issued by the Treasury in February 1999 with the first draft of the regulated activities order stated expressly in section 3 that the Government wanted to avoid professionals seeking authorisation on a precautionary basis merely in order to ensure that in advising their clients in a professional capacity they did not commit a criminal offence. The Treasury said that the RAO would seek to define activities regulated under the Bill in a way that would leave as little room for doubt as possible, and therefore, minimise the number of firms that would clutter up the process by seeking authorisation protectively.
The Treasury's consultation document made it clear that professional firms would need to be authorised only for investment activities and, even in that case, they would not need to be authorised if those activities were clearly carried out by the professional firm when providing professional services. In addition, the Treasury suggested that the RAO would include provisions to clarify that the authorisation requirement for arranging deals in investments does not include arrangements that are purely administrativepreparing legal documents, for example. We are asking only that the Treasury make that clear. Our concerns also relate to all United Kingdom and non-UK firms of lawyers or accountants, not only to non-UK firms. Our advice, and what we have found, is that City firms will not want to become FISMA authorised merely because they advise or negotiate corporate finance transactions.
It is surely inappropriate that firms that provide only legal or accountancy advice to companies or private individuals on transactions, or negotiate the transactions for themtypically, a law firm advising on corporate finance transactionshould be regarded as providing a financial service. Those are not investment activities, but merely professional activities connected with investments. The Treasury has said that they would not require an authorisation, and section 3(6) of the consultation document makes that point. There is no need to require authorisation for those firms. Indeed, in a debate on the Financial Services and Markets Act 2000 in the other place, Lord McIntosh said that professionals would not require authorisation under that Act if authorisation is not required under the old legislation.
It is surely inappropriate to require professionals to use part XX exemption unless they are providing financial services. In order to use the exemption, a firm would have to accept that it was providing financial services even if it were not. In addition, use of the exemption would subject the firm to the risk of eventual direct regulation by the FSA, which neither the firm, the FSA nor the Government want. As a result, many non-UK law firms practising in the UK that are not multinational partnerships will not be regulated by the Law Society, so they will be unable to use the exemption. In terms of international markets, that point touches on the need for the Government to keep the UK as open as possible to all participants who are connected with the financial services industry.
As matters stand, all such overseas firms would need to apply for precautionary authorisation, which, according to the Government, is precisely what their light-touch regime is trying to avoid. Such firms provide advice or arrange facilities only in relation to investment transactions; they do not advise on investments themselves or arrange investment transactions, except in the sense that they are involved in negotiations leading to the purchase or sale of shares or other investments.
On signature of investment agreements, given that article 21 is concerned with dealing in investments as an agent, the Government presumably intended some form of exemption where a person merely signs an investment agreement on behalf of another, is not himself a party and has no discretion as to the terms of the agreement. However, I am advised that, in the FSA's view, that constitutes dealing as an agent. The person signing is binding the party to the agreement by signing on his behalf, and is therefore agreeing to do whatever the party has to do as an agent. The person signing is not agreeing to buy or sell anything as an agent; he is merely arranging matters and agreeing only that the party to the agreement will buy or sell.
Given the FSA's policy, the provision needs further clarification or there should be some form of exemption from dealing in investments. For example, one could exclude from the provisions of article 21 any transaction that is, or will be, entered into by a person or agent who is signing, or will sign, an agreement to that transaction as signatory for, and at the discretion of, one of the parties to the arrangement. For the purposes of article 1, a person signs an agreement at the direction of a party only if that party has approved the agreement or an agreement of substantially the same form.
Article 76, which deals with the definition of shares, treats as shares interests in any unincorporated body constituted under the law of a country or territory outside the UK. Accordingly, a Netherlands, Antilles, Cayman Islands or Channel Islands limited partnership will be treated as a company as well as a collective investment scheme. For marketing, it is therefore always necessary to fall within the exemption for both the public office of securities regulations applying to shares within article 76(1)(b), and the restrictions on marketing collective investment schemes under section 238(1). There is no exemption because both the section 238(1) restrictions and the prospectus requirement under the POS regulations apply whether or not the unincorporated body is open-ended. That contrasts with a corporate collective investment scheme because a body corporate is a collective investment scheme only if it is open-ended, in which case the POS regulations do not apply.
There is a cumbersomeness in the regulations that limits the utility of the exemption. Although the definition is the same as that in the Financial Services Act 1986, surely it can be amended to avoid defining both bodies as collective investment schemes. Another solution would be to amend the references to shares in the POS regulations so that they exclude shares in all entities that are collective investment schemes.
The final piece of legal meat concerns the definition of close relatives in article 3. The exemption should surely include trustees of trusts where the only beneficiaries are close relatives, which is especially important in relation to the exclusions for activities connected with the sale of a body corporate. Many family companies use trustees, but if the definition of close relatives is extended, unless a spouse is given a life interest and any children are minors, the exclusion, which currently applies under the Financial Services Act 1986, cannot be used, which strikes me as pedantic.
There is also the issue of the removal of the investment services directive passport from non-UK European economic area banks. The regulations do not reinstate the unilateral ISD passport, which has been granted to non-UK EEA credit institutions. In other words, the passport, which is similar to the passport granted by the ISD to non-bank investment firms, has been granted by the Treasury to credit institutions from the EEA that are unincorporated in the UK. However, when we asked for the reinstatement of the universal passport during the passage of the Financial Services and Markets Act 2000 through Parliament, the Government stated in both Houses that the Treasury has not unilaterally granted such a passport. None the less, a leading expert on the single financial European passport has again advised us that the Treasury has granted it. It covers ISD activities that are not covered by the second banking directive and is especially relevant to arranging deals in the secondary market that are not takeovers and mergers or receiving and transmitting orders. That is highly technical territory over which there is a bona fide dispute, but it certainly needs to be nailed down and tidied up.
The important point is that the ISD passport is contained in regulation 5 of the investment services regulations. Regulation 3(1)(c) provides that an investment firm is a European investment firm if it is a European authorised institution. An investment firm is any firm that provides core investment services to third parties on a professional basis and which would therefore normally be subject to the ISD, unless it is excluded by virtue of the provisions of article 2(2). Crucially, credit institutions are excluded from the ISD by article 2(1) only if the bank is authorised to provide at least one core investment service by its banking rules. I understand that both Andrew Whittaker, the general counsel of the FSA, and his predecessor, Michael Blair, QC, are aware of the position.
The Financial Services and Markets Act 2000 does not continue the unilateral ISD passport and will therefore prejudice incoming EEA banks. It would surely be helpful to the United Kingdom to continue with the passport systemwhich is, presumably, intended to reflect the internal marketas UK banks can similarly benefit when they use their outgoing passports. Indeed, the UK surely wants an open market in principle.
I do not have a great deal to say about the order that relates to carrying on regulated activities by way of business, but some clarification would be helpful on the main aspect to which the Economic Secretary referred: pension fund trustees. The proposed exemption of pension fund trustees from the need to be FISMA authorisedthe effect of article 4is welcome. However, the exemption under article 4(1)(b) applies even if decisions to invest in private equity funds under paragraph (6) are not taken by authorised or exempt firms or overseas persons.
That exception to the general rule that the exemption applies only if all decisions on investments are taken by firms that fall within those permitted categories reflects a major recommendation of the Myners report, as the Economic Secretary said. However, the order does not meet the objective. It merely allows the end decision to be taken by pension fund trustees; they still need to be advised by one of the permitted persons. The trustees must still find a permitted person who knows about venture capital, become his client and, at least in the case of FISMA-authorised firms, hold a know-your-customer inquiry. Indeed, if the FSA conduct of business rules reflect existing Investment Management Regulation Organisation requirements, the authorised firm must treat the pension fund as a private client and comply with the suitability requirements.
That is extremely cumbersome and expensive and represents a regulatory obstacle to pension funds investing more in private equity. Perhaps the requirements in paragraph (6)(b) cannot be deleted, but they need to be explained away. Surely the idea behind the exemption is that a private equity fund is an investment in which it is fair for the pension fund trustees to invest because it is managed by a permitted person.
The definition of ``relevant investments'' under paragraph (7) is also rather narrow. Shares include interests in non-UK collective investment schemes, unless the Government accept the suggestion that article 76(1)(b) of the regulated activities order should be restricted so that it does not include unincorporated bodies that are collective investment schemes. Without that, the two-tier fund, whereby the body corporate itself invests in relevant investmentsfor example, when it is an investment trust or a venture capital trustbecomes a three-tier fund, whereby the fund in the second tier is not restricted to private equity. If that was not specifically included, surely it would be appropriate to allow for such three-tier funds to be established throughout UK collective investment schemes, too.
Paragraph (6)(d)(i) requires a manager who is FISMA authorised to be permitted to act as a discretionary investment manager. However, the private equity fund may be managed only on a non-discretionary or advisory basis, in that the investment decision may be taken by the trustee, general partner or directors of the body corporate itself. If it is, the manager may only be authorised under article 53.
In addition, the order contains two small typos. In article 3(2)(c), in line 1 an ``s'' needs to be added to the word ``investment'' that appears in brackets, and in article 4(6)(a), in line 1, we should delete ``trustee'' and substitute ``trustees''.
I have another small point to make about article 4. Following consultation, the activity of managing the assets of an occupational scheme can be delegated to an overseas person with no requirement for that person to be subject to an appropriate level of authorisation or supervision by the relevant national authorities. Obviously, that could reduce the protection afforded to members of the scheme. I have a second question about the implications of article 4(6). What is the significance of the words,
In practically all cases, it will be best for a variety of reasons for the passporting firm not to be authorised at all. For example, as an unauthorised person it will be able to approve financial promotion communications issued by other people, which it cannot do under the EEA nationals exemption in the 1986 Act. Firms whose executives merely visit the UK from time to time without having a branch here should not be able to do that.
The second issue concerns the provision of express authorisation for UK credit institutions to carry on all lawful activities. The Law Society, in particular, pointed out that unless there is such an express authorisation for UK credit institutions to carry on lawful activities, UK banks will not be able to establish branches overseas under the 2BCD passport for lending. While UK banks will not need authorisation under the Financial Services and Markets Act 2000 or the Consumer Credit Act 1974, to provide loans to companies, none the less, there must still be express authorisation from the banking regulatorthat is, the Financial Services Authorityfor such activity, otherwise the 2BCD passport will not apply.
We had assumed that the Treasury intended to provide for such other activities to be covered, because paragraph 19(3) of the schedule to the Act that provides the outgoing passport expressly states that the notice of intentionwhich is what sets out the passport activitiescould include activities that are not regulated activities, such as making loans. Will the Treasury be providing for such activities in regulations under the European Communities Act 1972, or under its powers granted by section 426? I hope that it is not too late to cover that point, as it will be a practical impediment if it is not so covered. The express authorisation should be for all activities covered by the 2BCD passport, even if there is no need for authorisation under UK law. The passport will cover the activity only if it is authorised by the banking regulator. That is the proviso to article 18(1) of the 2BCD. The authorisation should follow the clever wording drafted by Jane Stokes in regulation 21 of the 2BCD regulations, and provide that UK credit institutions are authorised to carry on all 2BCD activities that they can lawfully carry on.
If, however, the Treasury wants to give UK banks an ISD passport as well, it will be necessary to exclude core investment services from the wording so that credit institutions may also use the ISD passport. The passport will apply to them because they are not authorised for any core investment service by their banking regulator, but only by their securities regulatoralthough the securities regulator and the banking regulator are both the FSA. Jane Stokes suggested that that was how UK credit institutions would qualify for the ISD passport under the ISD's terms.
I apologise for raising such detailed and technical issues, but it is important that, as we move to complete our consideration of them, there are no party political issues involved. The law officers in the Treasury are aware of most of the points and I am simply seeking assurances from the Minister that, although they are not covered in any of the orders, they will be dealt with somewhere.
|©Parliamentary copyright 2001||Prepared 15 March 2001|