Select Committee on Treasury Minutes of Evidence


Memorandum submitted by the Financial Services Authority

NOTE ON ACTIVITIES REGULATED BY THE FSA

A.  INTRODUCTION

  1.  The Committee asked for a note explaining the scope of regulated activities for which the FSA is responsible. This paper is in response to that request.

  2.  The paper is divided into four sections. The first section outlines the legislative background. Sections C and D outline the activities of those directorates within the FSA which deal with the regulated activities set out in paragraph four below. Section E covers authorisation and enforcement. The final section discusses areas we don't regulate.

B.  The Legislative Background

  3.  The FSA regulates the activities specified in the Regulated Activities Order (RAO), an order made by the Treasury under Section 22(1) of the Financial Services and Markets Act 2000 (FSMA). The Treasury maintain a consolidated and up-to-date version of the RAO on their web-site (http://www.treasury.gov.uk).

  4.  The regulated activities relate to the following products:

    —  the many types of investments (eg shares, futures, options, unit trusts, life and pension policies, etc) previously regulated under the Financial Services Act 1986;

    —  deposits;

    —  long-term insurance contracts;

    —  membership of Lloyd's syndicates;

    —  stakeholder pensions;

    —  pre-paid funerals; and more recently

    —  mortgages and general insurance (see paragraph 5, part 4).

C.  The FSA's Consumer, Investment and Insurance Directorate

  5.  The following types of businesses carrying on regulated activities fall within this directorate:

    —  insurance—the FSA is the prudential regulator (ie monitoring the adequacy of financial resources, management and internal controls) of providers of life and non-life insurance, whose regulated activities are the "effecting and carrying out contracts of insurance". The FSA also undertakes conduct of business regulation (ie regulating aspects of firms' relationships with consumers) for those life insurers and friendly societies undertaking investment business.

    —  Lloyd's—the FSA has responsibility for regulating the Lloyd's insurance market. In general, we rely on or act through the Council of Lloyd's to regulate the conduct of its members. However, the Society of Lloyd's and its managing agents are authorised persons and are subject to direct regulation by the FSA. The regulated activities are "advising on syndicate participation", "managing the underwriting capacity of a syndicate", "arranging deals in contracts of insurance written at Lloyd's" and "dealing as an agent or principle";

    —  investment firms—this covers a range of regulated activities relating to investment business. Regulated activities include the provision of advice to consumers, arranging deals and handling customer money and managing portfolios. A broad spectrum of firms carry on these activities, ranging from fund managers and stock-brokers to independent financial advisors;

    —  mortgage lenders, and general insurance and mortgage intermediaries—as announced by the Treasury at the end of 2001, the FSA will become responsible for regulating mortgage advice (as well as mortgage lending and administration) and the sale of general insurance products sometime in 2004;

    —  products such as unit trusts and open-ended investment companies (ie collective investment schemes) are regulated by the FSA. There are several regulated activities associated with this type of product including establishment, operation, winding up or acting as a trustee of a collective investment scheme. Acting as a depository or sole director of an open-ended investment company is also a regulated activity.

  6.  We also deal with firms operating within the European Economic Area and slightly different regulatory arrangements apply. Under the relevant EC directives, some types of business are regulated in the member State in which the authorised firm is based (home state), and where that happens the regulator in the local member State (host state) may have limited powers over such firms. For example, a UK based general insurance company would be regulated by the FSA for all its business within the EEA, while a French competitor would be regulated by the French authorities, including for its activities in the United Kingdom. Such arrangements apply essentially to the prudential regulation of firms. By contrast, conduct of business regulation is normally the responsibility of the member State in which the firm is doing business. The FSA does therefore regulate the sale of investment products in the UK by a firm from another member State, although the ultimate decision as to whether such a firm may be authorised to do investment business rests with the home member State.

  7.  As well as the regulated activities described above, the regulation of financial promotions (eg the requirements for advertising of investment products and for cold calling) is carried out in this directorate.

  8.  This directorate also includes Consumer Affairs which works to help consumers acquire the knowledge, the aptitude and skills necessary to become informed consumers so that they can manage their financial affairs more effectively.

D.  DEPOSIT TAKERS AND MARKETS DIRECTORATE

  9.  The regulated activity of ``accepting deposits'' (including, from 27 April 2001, E-money deposits) is a major focus of this directorate. Retail banks, investment banks, building societies and credit unions (to be supervised from July 2002) are the typical firms carrying on this activity. Wholesale-only banks also accept deposits but only from, for example, other banks, large companies and government bodies (not from retail depositors).

  10.  Although the FSA supervises the prudential soundness of banks, building societies and credit unions, we do not undertake conduct of business regulation in terms of taking deposits. This is provided for through industry codes such as the Banking Code. However, those banks carrying on investment business are subject to our conduct of business rules.

  11.  The regulation of the largest financial groups such as HSBC or the Prudential is undertaken by the Major Financial Goups Division within this directorate, irrespective of the regulated activities these groups carry on. This allows the FSA to look at risks across the whole of these large groups and to apply a common set of standards to senior management and internal systems and controls.

  12.  The FSA has responsibility for overseeing the integrity of the UK investment markets. The Markets and Exchanges Division (MED) of this directorate supervises Recognised Investment Exchanges (such as the Stock Exchange) and clearing hourses (which, for example, organise the settlement of transactions on recognised exchanges) and conducts market surveillance to highlight unusual trading activity. In addition, the FSA's Code of Market Conduct sets standards required of all those who participate in particular markets. Compliance with the Code is monitored by MED.

  13.  As the UK Listing Authority, the FSA regulates issuers of listed securities. The FSA's listing rules apply to all firms listed on the Stock Exchange and impose ongoing obligations on companies, such as providing a regular flow of relevant information to the market.

E.  REGULATORY PROCESSES AND RISK DIRECTORATE

  14.  Under the Regulatory Processes and Risk Directorate, the FSA carries out its authorisation and enforcement functions. It is through the authorisation or approval process that firms enter the regulatory environment. Our enforcement function means that the FSA investigates and, where appropriate disciplines those responsible for conducting financial business outside the rules. The FSA's risk assessment work is conducted by this directorate.

F.  AREAS NOT REGULATED BY THE FSA

  15.  There are specific areas of the financial services market which are not covered by the FSA. Examples include:

    —  consumer credit—this comes under the remit of the Office of Fair Trading;

    —  occupational pensions—these are regulated by the Occupational Pensions Regulatory Authority;

    —  money service business (bureau de change operations)—as an anti-money laundering measure, HM Customs and Excise have powers to inspect (and prosecute) money service businesses (MSBs) to ensure compliance with the Money Laundering Regulations. The Government decided that the FSA would have supervisory responsibility for the MSB activities of FSA authorised firms but only in relation to money laundering. Such businesses will not be subject to the general FSMA regime.

  16.  The Committee will be aware (from a recent FSA briefing note) that split capital investment trusts are not regulated products but listed shares and so do not require specific approval from the FSA. However, they are subject to the Listing Rules and managers of these trusts and those who advise consumers to invest in them are subject to our conduct of business rules.

28 May 2002


 
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