Memorandum submitted by the Financial
NOTE ON ACTIVITIES REGULATED BY THE FSA
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
the many types of investments (eg
shares, futures, options, unit trusts, life and pension policies,
etc) previously regulated under the Financial Services Act 1986;
long-term insurance contracts;
membership of Lloyd's syndicates;
pre-paid funerals; and more recently
mortgages and general insurance (see
paragraph 5, part 4).
C. The FSA's Consumer, Investment and Insurance
5. The following types of businesses carrying
on regulated activities fall within this directorate:
insurancethe 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'sthe 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 firmsthis 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 intermediariesas 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
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.
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
15. There are specific areas of the financial
services market which are not covered by the FSA. Examples include:
consumer creditthis comes
under the remit of the Office of Fair Trading;
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
28 May 2002