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

back to previous text

Clause 49: Applications under this Part

118.     This clause sets out what must be included as a minimum in an application for a new permission. It also enables the Authority to specify the manner in which an application may be made, for example whether applications by e-mail will be accepted, and such other things that should be included as the Authority considers necessary or appropriate. The Authority can require additional information after the application is received, and can require the applicant to verify any of the information supplied.

Clause 50: Determination of applications

119.     The Authority is required to determine an application within 6 months of receiving the completed application. The Authority has discretion whether to determine incomplete applications, but it must determine even incomplete applications within 12 months of the initial receipt of the application. The Authority may, of course, refuse an application on the grounds that it is incomplete where it is appropriate to do so. Under subsection (3) an applicant may withdraw an undetermined application at any time.

120.     Once the Authority has determined an application it must give written notice of its decision and, if the application is being granted, the date upon which the authorisation takes effect and from which the relevant activities may commence.

Clause 51: Refusal of application for permission

121.     This sets out the procedure which the Authority must follow when refusing an application. First, the Authority must give the applicant a warning notice (in accordance with clause 375) of its proposed refusal. However, the Authority is not obliged to issue a warning notice if its reason for refusing to grant the permission under this Part is because they are an EEA firm and it is properly something for which they would be entitled to permission under Schedule 3. The Authority is able simply to advise the applicant how to proceed without engaging in the full warning and decision notice procedures.

122.     On receiving a warning notice, the applicant then has the opportunity to make representations, as set out in clause 375. If, taking account of any such representations, the Authority refuses the application, it must issue a decision notice, in accordance with clause 376.

Clause 52: Procedure on exercise of the Authority's own initiative power

123.     This clause sets out the procedure to be followed when the Authority exercises its own initiative power but there is no particular urgency. For instance, there is unlikely to be any urgency if the grounds for exercising the power were that the authorised person had not made use of their permission to carry on a particular regulated activity for more than a year.

124.     The clause requires the Authority to issue a notice to the authorised person setting out its proposed action and the reasons for it. The Authority must allow a period for the person to make representations, which must be specified in the notice.

125.     If, in light of any representations received, the Authority decides to proceed with the action, a further notice must be issued. This must state the reasons for proceeding with the action, inform the authorised person of their right to have the matter referred to the Tribunal, and specify the date on which it takes effect if not referred.

Clause 53: Exercise of own initiative power with immediate effect

126.     In some circumstances it will be necessary for the variation in an authorised person's permission to have immediate effect, for example where the action is intended to forestall the possibility of a financial failure, or to prevent further business being conducted that might be fraudulent or otherwise damaging to the interests of consumers or potential consumers. The urgent procedure provided for in this clause is therefore only applicable where it appears to the Authority that there is such a threat and that it is desirable in the interest of consumers or potential consumers to act without delay.

127.     Under this procedure the Authority must specify the date on which the action takes effect in the first notice it issues. That date would be the date on which the notice is issued. It must also give the reasons and inform the authorised person of their rights to make representations within a specified period. At the end of that period, the Authority must consider whether to take further action, for example reversing the variation to the permission, and must inform the authorised person of this decision, giving its reasons. The second notice must inform the authorised person of their right to have the matter referred to the Tribunal.

Clause 54: Right to refer matters to the Tribunal

128.     A decision by the Authority to refuse an application for a permission, or to vary or cancel a permission, or to vary or cancel a permission on its own initiative, may be referred to the Tribunal.


129.     This Part confers on the Authority a range of powers which will enable it to ensure that people who work for authorised persons for certain purposes are fit and proper to perform the functions for which they have been engaged. While the focus of regulation is on authorised firms, the Part gives the regulator powers to prevent harm which might otherwise be caused by persons attached to firms.

130.     Under the existing regulatory framework, there is considerable variation between the arrangements applying to employees working in different sectors. The SROs have introduced a contractual system which requires employees to sign up to regulatory and disciplinary arrangements. Lloyd's has applied similar regulation to employees of underwriting agents, using its byelaw making powers. Banking and insurance legislation provides for pre-vetting of certain senior management positions, in some cases as part of the regime for the regulation of controllers of such firms. The current legislation does not provide for the regulator to take disciplinary action against those managers, although senior managers, as officers of the firm, could commit a criminal offence where the firm itself had committed such an offence. There is, in addition, a power in section 59 of the FS Act 1986 for the Authority to prohibit a person's employment in connection with investment business. These arrangements will be replaced by arrangements under this Part.

131.     The Part seeks to harmonise these arrangements. It provides a power for the Authority to ban unfit individuals from carrying out specified functions within the financial services sector. It also provides for:

  • the Authority to require its approval to be obtained before a person may perform specified functions;

  • the Authority to issue statements of principle with which approved persons must comply, and codes of conduct elaborating on the statements; and

  • a disciplinary regime for those who fail to comply with the principles.

132.     This Part provides for firms and individuals concerned to refer matters to the Tribunal if the Authority:

  • issues a prohibition order;

  • refuses an application to vary or revoke a prohibition order;

  • refuses an application for approval;

  • takes disciplinary action; or

  • withdraws approval.

133.     The Part is primarily directed at the employees of authorised firms. However, it extends beyond employees to include, for example, directors, representatives and contractors of an authorised person, and extends to bodies corporate where relevant. If, for example, a life insurance company entered into a marketing agreement with a firm of estate agents to sell life insurance, the agency and relevant sales staff giving investment advice might need prior approval. Part V would also cover "matrix managers" who carry out certain functions, often on a fairly informal basis, for a group of companies even though technically they are "employees" of a sister company rather than of the authorised person for whom they carry out relevant functions. Such arrangements are increasingly common in multi-national groups.

Clause 55: Prohibition orders

134.     This clause enables the Authority to make an order prohibiting any individual whom it considers is not fit and proper to perform functions in connection with regulated activities. A prohibition may relate to all functions in relation to any regulated activities carried on by all authorised (or exempt) persons or it can specify the kind of functions, activities or authorised (or exempt) persons to which it relates. A prohibition order may be varied or revoked. Where the Authority proposes to issue an order, it must give notice in accordance with the standard notice requirements in clauses 375 and 376.

135.     Subsection (4) makes it an offence for an individual not to comply with a prohibition order. The maximum penalty for this offence is a fine at level 5 on the standard scale (currently £5,000).

136.     Subsection (5) imposes an obligation on an authorised (or exempt) person to take reasonable care not to engage individuals who have been disqualified under this clause from performing relevant functions. Failure to comply with this requirement could trigger the use of the Authority's powers to amend the authorised person's permission or discipline the firm. It also potentially gives rise to a cause of action under clause 71 from a private person who suffers a loss as a consequence of the breach.

Clause 58: Approval for particular arrangements

137.     This clause requires authorised persons to obtain the approval of the Authority before allowing persons, natural or corporate, to perform certain functions. Subsection (2) makes it clear that an authorised person must also take reasonable steps to ensure that any contractor does not allow a person to perform such functions without the approval of the Authority. A person in respect of whom approval is given is an "approved person". The nature of the functions requiring approval will be specified by the Authority's rules, within the limits set out in subsections (5) to (7) and subject to the normal consultation requirements under Part X. The limits can be summarised:

  • The function may enable a person significantly to influence the conduct of the authorised person (for example a director). By virtue of subsection (9) account may be taken of influence which might result from a failure properly to carry out that function (for example a proprietary trader).

  • The function involves dealing with consumers (for example a financial adviser) or dealing with their property (such as a stockbroker) in a way that is substantially connected with the carrying on of a regulated activity by the firm.

138.     Subsection (8) limits the application of this clause in the case of EEA or Treaty firms. The Authority will only have powers to act in relation to functions over which it, rather than the home State regulator, has jurisdiction.

Clause 59: Applications for approval

139.     This clause requires an application for approval to be submitted by the authorised person concerned or, in the case of new firms awaiting authorisation, a prospective authorised person.

140.     Subsection (2) gives the Authority the powers to specify the information it will require to support applications for different types of posts and subsection (3) enables it to request any additional information it needs to assess the suitability of each candidate.

Clause 60: Determination of applications

141.     This clause sets out the basis on which the Authority is to assess the suitability of a candidate for approval, whether they are an individual or a body corporate. Subsection (1) requires the Authority to be satisfied that a candidate is fit and proper to perform the functions in question before it is able to give its approval. Where the Authority proposes to refuse an application, clause 61 requires it to give notice in accordance with the standard notice requirements in clauses 375 and 376. Notice must be given to the authorised person, the candidate and, where relevant, a contractor.

Clause 62: Withdrawal of approval

142.     This clause gives the Authority power to withdraw the approval granted for the purposes of clause 58 where it no longer considers that the person is a fit and proper person to carry out the functions for which they had been approved, for example because the Authority had obtained new information which cast doubt over its initial assessment. If the Authority proposes to exercise this power it must give notice in accordance with the requirements in clauses 375 and 376.

Clause 63: Conduct: statements and code

143.     This clause gives the Authority power, as part of its wider rule making functions, to issue statements of principle, setting out in general terms the kinds of behaviour which it requires from approved persons in respect of any particular type of function. Any statements of principle issued under this clause must be elaborated by a code of practice. Such a code would not need to be exhaustive but it would have to illustrate the circumstances in which it would regard a principle as having been complied with, or not complied with, as the case may be. Different statements of principle and codes could be made to apply to employees of different categories. The purpose of requiring a code to elaborate on a statement of principle is to prevent the Authority taking a disciplinary action for an alleged breach of a principle in cases where a person had acted in accordance with the code.

144.     Subsection (8) makes it clear that failure to comply with a principle does not give a third party grounds for action against the approved person. Therefore, if for example a financial adviser employed by an insurance company failed to comply with a statement of principle when arranging a personal pension, that would not give a customer a right of action against the employee, with whom they had no contractual relationship. This provision would not remove or lessen any rights, including those under contract or by virtue of clause 71, the customer may have against the authorised person who had entered into an agreement to provide the pension.

Clause 64: Statements and codes: procedure

145.     This clause sets out the procedure that the Authority is required to follow when issuing a statement or code under clause 63. The procedures, including the requirements to consult and publish a cost-benefit analysis, are broadly the same as the procedures that will apply when the Authority exercises other powers to issue codes (for example under clause 110) and its rule making powers under Part X.

146.     The Authority issued a consultation paper setting out its proposals in August 1999 (The regulation of approved persons; CP26).

Clause 65: Disciplinary powers

147.     This clause gives the Authority a power to take disciplinary action against approved persons when the two conditions set out in subsection (1) have been met. The Authority must first be satisfied that it is appropriate to take action against them. In this context, the Authority would have to have regard, among other things, to its regulatory objectives set out in Part I. The Authority would need to take into account whether disciplinary action against the approved person, rather than action against the firm, would be appropriate, taking into account the responsibility of the senior management of the firm for the conduct of the firm and its employees. A second important factor would be to ensure that any action, or any particular course of action, it takes should be proportionate to the nature and seriousness of the misconduct.

148.     In addition, a person must have been found guilty of misconduct, as defined in subsection (2). One possibility is that the approved person has acted in breach of a statement of principle, issued under clause 63, as evidenced by a breach of a code of practice. The other possible situation is that an approved person has been knowingly involved in a breach by the authorised firm of rules made by the Authority or of any requirement by or under the Bill.

149.     Subsection (3) gives the Authority powers to impose a penalty on an approved person or to make a public statement about their misconduct.

150.     Subsection (4) restricts the period during which the Authority may take action under this clause to a period of two years after the Authority became aware of the misconduct. This period reflects the time available to the Secretary of State to bring disqualification proceedings against a company director under the Company Directors Disqualification Act 1986.

Clause 66: Disciplinary measures: procedure and right to refer to the Tribunal

151.     This clause sets out the procedures which the Authority is to follow when it proposes to take disciplinary action against an approved person.

Clause 69: Statements of policy

152.     This clause requires the Authority to issue a statement of its policy on the circumstances in which it will impose penalties on approved persons under clause 65 and the basis on which the level of penalties will be determined for different types of misconduct. The policy set out in the statement must take into account a number of factors which are set out in subsection (2). Subsection (8) requires the Authority to have regard to the statement in force at the time of the misconduct when imposing penalties under this Part.

Clause 70: Statements of policy: procedure

153.     This clause sets out the procedure for issuing a statement of policy under clause 69. Before deciding on its policies in these areas, or changing those policies, the Authority will be required to consult the public.

Clause 71: Action for damages

154.     If a private person suffers a loss because a person has acted in breach of the duty under clause 55(5) or 58(1) or (2) (allowing someone to carry out functions in contravention of a prohibition under clause 55, or without obtaining the Authority's approval under clause 58) they may bring an action for damages against the person.


155.     EC law requires each member State to nominate or create a Competent Authority to maintain an Official List of securities, to regulate the admission of securities to the Official List, and to monitor issuers' adherence to the listing rules (as explained below) thereafter. In the UK these functions are exercised by the London Stock Exchange ("LSE"). The provisions of this Part implement these requirements of EC directives. These provisions replace those currently set out in Part IV of the FS Act 1986.

156.     There is no requirement for issuers of securities, for example companies issuing new shares, to apply for admission to the Official List. However, admission to the Official List signals that certain standards regarding the financial status and history of the company have been met; that adequate information about a security has been made available to investors at the time of application; and that information about the performance and plans of the issuer will continue to be made available on a continuing basis so long as the company has securities listed on the official list.

157.     In carrying out its functions, the competent authority makes rules which govern the admission of securities to listing, the continuing obligations of issuers, the enforcement of those obligations and the suspension and cancellation of listing. These rules are collectively known as "listing rules". They are currently published by the LSE, as the UK's Competent Authority, in the "yellow book". The competent authority also has a role in scrutinizing prospectuses and circulars where there is no application for admission to the official list.

158.     The Government has announced that, as a result of the LSE's decision to seek to demutualise, it would no longer be appropriate for it to remain as the UK's Competent Authority for listing. The Economic Secretary announced to the Standing Committee on 28 October 1999 that the Bill would be amended to name the Financial Services Authority as the Competent Authority in place of the LSE. The Economic Secretary said that a number of other changes would be made to the Bill to take account of this change and that appropriate amendments would be brought forward in due course.

Clause 72: The competent authority

159.     This clause confers the functions of competent authority on the London Stock Exchange Limited. The London Stock Exchange is currently designated as the UK's competent authority for listing under Part IV of the FS Act 1986. However, subsection (2) and Schedule 7 provide a new power for the Treasury to transfer some or all of the functions of the Competent Authority for the UK to another body in accordance with the requirements in that Schedule.

Clause 73: The official list

160.     This clause places a duty on the Competent Authority to continue to maintain the Official List. Clause 95 allows the Competent Authority to charge fees for this purpose. Currently, the Official List is made up of securities which are admitted by the Competent Authority under the statutory provisions of Part IV of the FS Act 1986 and securities and other financial instruments which are admitted by the Competent Authority under contract with issuers (for example gilts and covered warrants). In future under the Bill there will be a single statutory regime for the official listing of all these securities and other instruments.

161.     As a result, the legislation gives the Treasury a power in subsection (3) to provide that certain categories of financial instrument cannot be admitted to the Official List. The Treasury do not currently anticipate having to use this power. It is a reserve power to ensure that the Treasury could stop the admission to the list of financial instruments which it considers, for example, pose undue risks to investors.

Clause 74: Applications for listing

162.     This clause provides that only applications for listing which are by, or with the consent of, the issuer and meet the requirements imposed by the Competent Authority may be granted. The Competent Authority can refuse an application for listing where it considers that granting it would be detrimental to the interests of investors.

163.     Subsection (3) provides that no application for listing can be entertained by the Competent Authority in respect of securities issued by a body of a prescribed kind. The Treasury intend to use this power to prescribe that securities issued by a private company or by an old public company (within the meaning of section 1 of the Companies Consolidation (Consequential Provisions) Act 1985) cannot be admitted to listing. This will replicate provisions currently in the FS Act 1986.

Clause 76: Discontinuance and suspension of listing

164.     Occasionally circumstances arise which mean that normal dealings in listed securities cannot take place. For example, a company may fail to comply with reporting requirements in the listing rules, so that investors and potential investors do not have sufficient information on which to make informed decisions about the company's securities in order to deal in the securities. Alternatively, a company may be in financial difficulties which it has not clarified or quantified. This clause gives the Competent Authority the power to suspend or discontinue the listing of a company's securities in such circumstances. During a suspension, trading in the securities cannot take place on a recognised investment exchange.

Clause 77: Listing particulars and other documents

165.     Under EC law, where there is an application for the listing of securities which are to be offered to the public in the UK for the first time, a prospectus must be approved by the Competent Authority and published. This is provided for by clause 82. Where a prospectus is not required, for example because the securities have already been offered to the public or because there is an exemption (as set out in Schedule 10) the Competent Authority can provide that securities can only be admitted to the Official List after publication of listing particulars and other documents approved by the Competent Authority. Listing particulars are documents which contain information on the nature and circumstances of the applicant and on the securities to be listed. The content is determined by listing rules. The existence of the power will allow investors to make informed decisions about that security. This is necessary given the comprehensive nature of the statutory regime under clause 73.

166.     Subsection (3) allows the Treasury to prescribe the persons responsible for listing particulars. The Treasury intend to exercise this power to prescribe those persons currently covered by section 152 of the FS Act 1986. However, the power will allow there to be some flexibility to adopt the admission of any possible types of financial instrument to the Official List.

Clause 78: General duty of disclosure in listing particulars

167.     This clause places a duty on those responsible for producing listing particulars to ensure that those particulars contain, at the very least, adequate information to enable investors and their professional advisers to make informed decisions about the issue and securities in question. The Competent Authority can authorise the omission of certain information in certain circumstances, as set out in clause 80.

Clause 79: Supplementary listing particulars

168.     This clause provides that where there is any significant change following the submission of listing particulars to the Competent Authority but before dealings in the securities have started, supplementary listing particulars must be approved and published.

Clause 80: Exemptions from disclosure

169.     This clause allows the Competent Authority to authorise the omission of information required by listing rules to be included in listing particulars in certain circumstances. These circumstances are set out in subsection (1); namely, that the disclosure of the information would be contrary to the public interest, or would be seriously detrimental to the issuer (for example the disclosure of commercial secrets), or would be unnecessary given the kind of people who could be expected to buy or sell those securities (for example, if the securities were only dealt in by professionals).

170.     Subsection (2) provides that information cannot be omitted where it would be seriously detrimental to the issuer if that information is essential in order for a person to make an informed assessment. ("Essential" is defined in subsection (6).)

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