House of Lords - Explanatory Note
Financial Services And Markets Bill - continued          House of Lords

back to previous text

Clause 26: Agreements made unenforceable by section 24 or 25

70.     This clause gives the court discretion to allow the contract which would otherwise be unenforceable under clause 24 or 25 to be enforced against the customer. In order to enforce the contract, the court must be satisfied that it would be "just and equitable" to do so and either:

  • where the person contravening the prohibition is a party to the agreement, that he reasonably believed that he had not acted in breach of the prohibition; or

  • where the contravention was by a third party, that the authorised person providing the service did not know that the agreement resulted from a contravention.

Clause 27: Deposit-taking in breach of the general prohibition

71.     This clause concerns deposits made with a deposit-taker who has been carrying on its deposit-taking business in contravention of the general prohibition under clause 17. If the deposit agreement does not entitle the depositor to immediate repayment on demand, the clause provides that the depositor may apply to the High Court (or Court of Session) to direct immediate repayment.

72.     The court has discretion not to direct repayment if it is satisfied on the two conditions in subsection (3), both that the deposit-taker reasonably believed that it was not contravening the prohibition, and that it would not be just and equitable to direct repayment.

Clause 28: Enforceability of agreements resulting from unlawful communications

73.     When a customer enters into an agreement or exercises any rights as a result of a communication in breach of the financial promotion prohibition, the agreement will be unenforceable against him. The customer will also be entitled to recover any property transferred and to receive compensation for losses incurred, but if he chooses to recover property transferred or not to continue the contract, he must return any money received.

74.     However, in certain circumstances the courts may enforce agreements made in contravention of the prohibition. The courts can allow agreements to be enforced and money and property transferred under the agreement to be retained if enforcing it would be just and equitable and either:

  • where the person seeking to enforce the agreement was the illegal promoter, that he reasonably believed that the promotion had not been made in breach of the prohibition; or

  • where the contravention was by a third party, that the person seeking to enforce it did not know that the agreement resulted from an illegal promotion.


75.     This Part sets out who is to be authorised and how authorisation is obtained. It also deals with exemptions from the general prohibition for particular persons or classes of persons. The Bill provides for a single route to authorisation to operate in the financial services industry, replacing several existing regimes.

76.     The main route to authorisation is through an application for a permission under Part IV (see following section), but authorisation may also be obtained by virtue of:

  • notification in accordance with the relevant single market directive from the competent authorities under that directive in another EEA member State. The directives in question are the 2nd Banking Coordination Directive for banks and other credit institutions, the Investment Services Directive for investment firms, and the 3rd Life and 3rd Non-life Directives for insurance companies, including mutual insurers like friendly societies. The person, who must come from or be incorporated in, or formed under the law of, another member State, is then referred to under the Bill as an "EEA firm" as defined in Schedule 3;

  • exercise, in accordance with Schedule 4, of EU Treaty rights other than or beyond those governed by the single market directives, in which case the person is then referred to under the Bill as a "Treaty firm". Again the person must come from, or be incorporated in, or formed under the law of another member State to qualify;

  • exercise of rights under the EC Directive relating to collective investment undertakings to market in the UK collective investment schemes or product authorisation of certain open-ended investment companies ("oeics") under regulations to be made under Chapter IV of Part XVII;

  • a person being "grandfathered" by virtue of the transitional provisions. This includes existing persons authorised under the Banking, Financial Services, Insurance, Building Societies and Friendly Societies Acts (including members of self-regulating organisations and certain members of recognised professional bodies).

77.     The Society of Lloyd's is also authorised for the purposes of this Part by virtue of clause 308.

78.     It is possible for a person who becomes authorised through one of these routes to carry on regulated activities by virtue of other routes. For instance an EEA firm that is authorised by virtue of its home State notification under a single market directive may also carry on other regulated activities by virtue of notification under Schedule 4 or by an application to the Authority under Part IV for an extension of its permission. A Treaty firm may also obtain additional permission, for example under Part IV.

79.     For a person authorised by virtue of having permissions under Part IV, authorisation generally ends when that person no longer has permission to carry on regulated activities, whether at the initiative of the Authority or themselves.

Clause 29: Authorised persons

80.     This defines the circumstances in which a person is authorised under the Bill, and therefore able to carry on regulated activities without breaching the general prohibition.

Clause 30: Partnerships and unincorporated associations

81.     This clause makes particular provision for partnerships and unincorporated associations. In principle, it is possible to view a change of partners in a partnership, or a change of the membership of an unincorporated association, as the formation of a new partnership or association. It would be very burdensome and unsatisfactory if such changes meant that a partnership or association that was substantially the same had to renew its authorisation simply because of such a change to its membership. This clause therefore ensures that in such circumstances the authorisation is not interrupted. It also allows the authorisation to pass to a successor partnership or association in the event of dissolution, but where the members and the business of the successor are substantially the same as the original.

Clause 31: Withdrawal of authorisation by the Authority

82.     This clause requires the Authority to withdraw authorisation from a person who does not have a permission.

Clause 32: EEA firms

83.     So long as an EEA firm retains its home State authorisation, the Authority may not remove the firm's authorisation under Schedule 3. Such a person will only cease to qualify for authorisation under Schedule 3 if their home State regulator, that is the competent Authority under the relevant directive from the person's home State, notifies the Authority that it is withdrawing authorisation for the person to continue to carry on the regulated activities in the UK, which may or may not be as part of withdrawing the person's authorisation completely, including in the home State.

84.     However, if the person has also obtained a permission under Part IV, loss of the grounds for its authorisation under Schedule 3 does not necessarily lead to loss of its authorisation unless the Authority decides that as a result of the changed circumstances it should also withdraw the permission granted by it under Part IV. The Authority may also cancel an authorisation under Schedule 3 on request from the EEA firm.

Clause 33: Treaty firms

85.     As for an EEA firm, a Treaty firm ceases to qualify for authorisation under Schedule 4 if the relevant home State authorisation is withdrawn. The Authority may remove any additional permission under Part IV, but loss of home State authorisation does not necessarily mean that Part IV permission would be withdrawn. The Authority can also cancel an authorisation on request from a Treaty firm.

Clause 34: Part XVI qualifiers

86.     This clause enables the Authority to cancel the automatic authorisation under Schedule 5 of managers and depositaries of UCITS schemes at their request. However, if the person also has permissions under Part IV, it does not cease to be an authorised person as a result.

Clause 35: Exercise of EEA rights by UK firms

87.     Part III of Schedule 3 governs home state regulation by the Authority of UK credit institutions, investment firms and insurance companies exercising their passport rights under the single market directives to establish a branch or provide services in other EEA states.

88.     UK firms do not need to be authorised persons in order to exercise EEA passport rights. For example, lending is covered by both the second banking co-ordination directive and the investment services directive. Consequently a firm holding a licence under the Consumer Credit Act 1974 may have an EEA right to carry on Consumer Credit Act business in another EEA state.

Clause 36: Exemption orders

89.     This clause gives the Treasury the power to make orders exempting specific natural or legal persons or classes of person from the general prohibition under Part II, and therefore from the need to be authorised. A draft order to be made under this power was published by HM Treasury for consultation in February 1999 (Financial Services and Markets Bill: Regulated Activities - A Consultation Document). This carries over a number of exemptions under existing legislation, but not including those which are obsolete or where a person is now to be subject to regulation, notably Lloyd's and underwriting agents at Lloyd's.

90.     Subsection (2) provides that a person may not benefit from an exemption under an order made under this clause if they hold a Part IV permission. However, if they cease to hold a Part IV permission and the exemption from which they formerly benefitted is still extant, they may benefit from it again.

Clause 37: Exemption of appointed representatives

91.     This clause makes an exemption from the general prohibition for appointed representatives of authorised persons (an authorised person cannot be an appointed representative). The exemption only applies if the authorised person, referred to as the principal, has:

  • contracted with the representative for the latter to carry on the relevant sort of investment business on their behalf; and

  • accepted responsibility in writing for the conduct of those regulated activities.

92.     Any regulated activities which are carried on by the representative in accordance with such an arrangement are the responsibility of the principal, who must therefore have permissions (see Part IV below) for all the activities. The Authority may therefore take regulatory action against the principal in respect of anything said or done (or not said or not done) by the representative in carrying on the investment business as if they had expressly authorised the action or inaction in question. Such acts or omissions will be taken into account by the Authority in determining whether the principal has breached any rules or requirements under the Bill. However, nothing in this clause would make the principal liable to prosecution for a criminal offence in place of the representative. The representative may also be subject to the arrangements under Part V.

93.     This clause is similar to, and replaces, section 44 of the FS Act 1986. The Treasury have the power to limit the types of business that may be carried on under this exemption. The intention is that this will broadly reproduce the breadth of the current provision, except that unlike now, it will not be possible under this clause for an appointed representative to be exempt for some activities and authorised for others. Under existing arrangements a person could be authorised under the Banking Act 1987 or the Building Societies Act 1986, and exempt as an appointed representative under the Financial Services Act 1986. With the bringing together of various previously separate authorisation regimes, it is not necessary and would not be appropriate to allow an authorised person to obtain an exemption rather than have their permission extended to cover those additional activities.

94.     The Treasury have the power to prescribe further conditions which the contract between the principal and his representative has to meet. The intention is that this power would be used to reproduce the detailed requirements in sections 44(4) and (5) of the FS Act 1986. These are aimed at ensuring that the principal has adequate control over activities the appointed representative may carry on for the benefit of, or on behalf of, other providers of investment products to ensure that the exemption is not misused.


95.     This Part governs the way in which a person can obtain permission to carry on regulated activities. It is through obtaining one or more permissions that authorisation is generally obtained under clause 29(1). A consultation paper published by the Authority in October 1999 (The Permission Regime, CP29) sets out the process in some detail. However, this route to authorisation does not apply to those EEA firms who qualify for authorisation by virtue of Schedule 3 or those Treaty firms who qualify by virtue of Schedule 4. These provisions only apply to EEA and Treaty firms to the extent that they have obtained additional permissions beyond those that they obtained under those Schedules.

Clause 38: Application for permission

96.     This sets out the type of person who can be given permission and therefore who can be authorised by this route. Permissions can be applied for and granted to individuals, bodies corporate, partnerships and unincorporated associations. In the case of some regulated activities, however, there are specific constraints on the type of person which may be given permission under the threshold conditions in Schedule 6.

97.     A single permission may cover a number of regulated activities. Permission is only given once, after that it is simply changed. Thus, subsection (2) rules out an application for the grant of permission to an authorised person where he already has permission. Therefore, if a person wishes to carry on additional activities, he would need to apply for a variation of permission under clause 42.

Clause 39: The threshold conditions

98.     This clause requires the Authority to satisfy itself in giving or varying a Part IV permission, or imposing or varying any requirement, that the person concerned will satisfy the threshold conditions set out in Schedule 6 in relation to all the regulated activities covered by his permission. However, this does not prevent the Authority from taking such steps in relation to an authorised person as it considers necessary to secure its regulatory objective of the protection of consumers. The Authority's consultation paper (The Qualifying Conditions for Authorisation, CP20), published in March 1999, discusses these in more detail.

Clause 40: Giving permission

99.     Having received an application for permission, the Authority must consider it in the light of its duty under clause 39. The Authority has discretion to grant permission for all the activities applied for, or just some of them.

100.     The Authority can also frame the permission it grants so as to cover activities which are wider or narrower than the activities as described in the application, and may thus impose its own limitations on the way in which an activity may be carried on. This allows the Authority to design the permission in order to be satisfied that the qualifying conditions are met in circumstances where it would not be satisfied if it granted the permission sought in full. The ability to grant a wider permission than was applied for would enable the Authority, if it so chose, to have standard types of permission that it granted. However, the Bill does not require the Authority to operate in this way.

Clause 41: Imposition of requirements

101.     When granting permission, the Authority may impose what it considers to be appropriate requirements. Such requirements might include requirements on the authorised person to act, or refrain from acting, in a certain way. Subsection (4) allows the Authority to specify a period during which such requirements have effect. Thus the Authority might impose a limit on the amount of a certain type of business the person may conduct during the first five years after receiving the permission. This would enable the Authority to continue the current practice adopted by the insurance supervisors of restricting the premium income that can be received by insurance companies in the period following its authorisation to undertake a new form of insurance business.

102.     Under subsection (3), such requirements may also be imposed in respect of unregulated activities. For instance, the Authority might have misgivings about the way in which a regulated activity might be carried on in conjunction with an unregulated activity that the person already carried on, or which he proposes to carry on. Those misgivings may not justify preventing the person from commencing the regulated activity because the Authority may not consider that the unregulated activity, of itself, casts doubt about the person's fitness to carry on the regulated one. It may, however, be concerned that the juxtaposition of the two activities could be confusing to consumers, or that the manner in which the unregulated activity was carried on might pose a threat to their interests. Therefore, the Authority could place limitations on the way in which the unregulated activity was carried on for a period after the granting of the new permission in order that it could observe how the activities were carried on, or related to each other, in practice.

Clause 42: Variation etc at request of authorised person

103.     The Authority may vary the permission, including cancelling it completely, at the request of the authorised person, subject to being satisfied that the person will satisfy the threshold conditions for any resulting permission in accordance with clause 39. If it is not satisfied, it may refuse the request outright, grant a more limited new permission than the one requested, or grant the requested permission, but subject to new requirements. The Authority may also refuse to grant a request for variation on the grounds that refusal is in the interests of consumers. If as a result of the variation, the authorised person would no longer have permission to carry on any regulated activity, the Authority must consider whether it is still necessary for the person to hold a permission at all (and therefore continue to be an authorised person). If it is not necessary, the Authority should cancel the permission.

Clause 43: Variation etc on the Authority's own initiative

104.     This clause has the effect that the Authority may revoke or vary the terms of an authorised person's permission on its own initiative in three cases. These are where the Authority:

  • considers that the person is failing, or likely to fail, to meet the threshold conditions in relation to the existing permission;

  • has cause to believe that the authorised person has failed to make use of the permission to carry on a particular regulated activity for a year or more;

  • considers that it is desirable in order to protect the interests of consumers, or potential consumers.

105.     As for the previous clause, if as a result of the variation the authorised person no longer has permission to carry on any regulated activity, the Authority must consider whether it is necessary for them to continue to hold a permission and be an authorised person. If it is not necessary, the Authority should cancel the permission.

Clause 44: Variation of permission on acquisition of control

106.     The Authority may also impose a new requirement or vary an existing one if:

  • someone "acquires control" over the UK authorised person within the meaning of Part XII; and

  • the result is that although the Authority does not consider that it has grounds to object to the acquisition, it nevertheless considers that there is some significant uncertainty about the impact of the acquisition, or further acquisition, of control on the conduct of the authorised person's business.

Clause 45: Exercise of powers in support of overseas regulator

107.     This clause, which reproduces an existing power under section 128C of the FS Act 1986, enables the Authority to cancel or vary a permission on its own initiative on behalf of an overseas regulatory authority. The clause gives the Treasury power to prescribe by order the sort of authority and the sort of regulatory provisions that it should be open to the Authority to help. The functions that it is proposed should be prescribed in this way are functions corresponding to those of:

  • the Authority itself under this Bill;

  • the London Stock Exchange as competent authority for listing;

  • the Secretary of State under the Companies Act; and

  • the prosecuting authorities for insider dealing and money laundering.

108.     However, even where the overseas regulator and the provisions they are seeking to enforce meet these requirements, the Authority is not obliged to act in accordance with the request. The Authority must act reasonably, as it must in discharging any of its functions, but it is also directed to consider certain factors in particular. First among these is whether EC law obliges the Authority, as the competent authority under one of the single market directives or otherwise, to assist the overseas authority. Unless there is an EC obligation to act the Authority must consider the further factors listed in subsection (4) which include the seriousness of the case and the public interest. The Authority is also able to charge a contribution towards the costs of taking the enforcement action, and to make this a condition of exercising the power.

Clause 46: Prohibitions and restrictions

109.     Among the requirements which the Authority can impose on an authorised person when acting under clause 43, 44 or 45 are:

  • restrictions on the use or disposal of the authorised person's assets; or

  • requirements to transfer its assets or assets it holds on behalf of investors to a trustee approved by the Authority.

110.     The purpose of these types of restriction is to prevent an authorised person disposing of particular assets or making certain types of investment, in circumstances where the Authority is concerned about a person's solvency or where it wishes to investigate suspected fraudulent behaviour.

111.     Where an authorised person's assets are held by a third party, for example by a bank, subsection (4) enables the Authority to give the institution notice of any restrictions it has placed on the authorised person's assets. This notice might state, for example, that a bank should not allow any payments to be made from the authorised person's account without the permission of the Authority. Subsection (5)(a) provides that if the institution refuses to comply with a request to make a payment from the account of an authorised person who is subject to a restriction notice, it is not to be taken as a breach of its contract with the authorised person. However, if the institution were to allow a payment to be made from such an account, in breach of a restriction under subsection (5)(b), it would then have to pay the same amount of money to the Authority.

112.     Subsections (6) to (11) are concerned with the transfer of an authorised person's assets to a trustee approved by the Authority.

113.     Subsection (6) requires a trustee not to deal with or release any of the assets transferred to them unless the Authority agrees. If the trustee does release assets without the Authority's consent, they are guilty of an offence under subsection (9). However subsection (11) protects the position of the persons who are beneficiaries of the trust by preserving all the remedies they would normally have under trust law. The beneficiaries of the trust are the owners of the assets transferred to the trustee. This will be either the authorised person or, where the assets transferred include assets the authorised person was holding or controlling on behalf of other investors, those investors.

114.     Subsection (7) makes void any charge that the authorised person makes over his assets while they are held by a trustee. Any charges arranged before the assets were transferred to a trustee remain valid. The effect of this is that were the authorised person to enter into a contractual arrangement which gave a third person a right ahead of existing creditors or a liquidator to any of his assets which, as a result of a requirement made by the Authority under subsection (3)(b), were held by a trustee, that contract would be void and the rights of the liquidator and existing creditors to the assets would be upheld.

Clause 47: Persons connected with an applicant

115.     Subsection (1) of this clause makes clear that, in deciding whether to approve an application, the Authority may also have regard to other relevant persons who are related to the applicant in some way. What constitutes a relevant relationship is not defined, but is left to the Authority to interpret in the particular circumstances of the case.

116.     The Authority is obliged under subsection (2) to consult with the home State regulator of an EEA firm as defined by Schedule 3 before granting an application from a person who is a subsidiary undertaking of that firm or the subsidiary undertaking of a parent undertaking of that firm.

Clause 48: Authority's duty to consider other permissions etc.

117.     When considering the exercise of its own initiative power to cancel or vary the additional permissions of EEA or Treaty firms or collective investment schemes, the Authority must take account of relevant EC law and EEA or Treaty firms' and schemes' home State authorisation. Such consideration may inform the Authority's view on whether the firm or scheme is fit and proper to continue to hold the additional permissions in question, or its view on whether the cancellation or variation it proposes is appropriate in light of the wider assessment of the firm which the home State regulator is responsible for making.

previous Section contents continue
House of Commons home page Houses of Parliament home page House of Lords home page search Page enquiries

© Parliamentary copyright 2000
Prepared: 15 February 2000