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

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Clause 81: Registration of listing particulars

171.     This clause provides that listing particulars must be lodged with the Registrar of Companies on or before the date on which they are published. The same requirement applies to prospectuses because of clause 84. Breach of this requirement is an offence under subsection (3).

Clause 82: Prospectuses

172.     This clause provides that a prospectus must be published before securities are offered to the public in the UK for the first time before admission to the Official List, except in certain circumstances. These exceptions are set out in Schedule 10. For example a prospectus does not have to be published if the securities are to be offered to no more than fifty persons.

Clause 83: Publication of prospectuses

173.     This clause makes it a criminal offence for a person to offer new securities to the public in the UK before a prospectus has been published. This offence only applies where listing rules require the publication of a prospectus before particular new securities are admitted to the Official List. Clause 98(5) and Schedule 10 define the circumstances in which a person is to be treated as having offered securities to the public in the UK. For example, an offer is not regarded as being made, and the requirement to publish a prospectus therefore does not arise, where the offer is made to no more than 50 persons.

Clause 84: Application of Part VI to prospectuses

174.     Under this clause the power of the Competent Authority to make listing rules, and the obligations of issuers and others under this Part, apply equally to prospectuses as they do to listing particulars.

Clause 85: Approval of prospectus where no application for listing

175.     Where securities are to be offered to the public in the UK for the first time and there has been no application for listing, listing rules may require issuers to submit prospectuses to the competent authority for approval. This clause terms such prospectuses "non-listing prospectuses". Where such a prospectus has been approved by the Competent Authority, under EC law it must be recognised by competent authorities in other member States as complying with their own rules on prospectuses. Accordingly, there is no need in these circumstances to obtain further approval from another competent authority if the securities are to be issued in another member State.

Clause 86: Compensation for false or misleading particulars

176.     This clause provides that a person responsible for listing particulars (or, under this Part as applied by clauses 84 and 85, prospectuses or non-listing prospectuses) is liable to pay compensation to those who suffer loss as a result of untrue or misleading statements or the omission of any information which is required to be contained in those documents. There are some circumstances in which there is no liability to pay compensation. These are set out in Schedule 9.

Clause 87: Penalties for breach of listing rules

177.     This clause gives the Competent Authority a new power to impose financial penalties on issuers who have breached the listing rules. At present, the Competent Authority can issue private or public censures or suspend or cancel the listing of securities. The new power is intended to provide additional flexibility in this area. The Competent Authority will also be able to impose penalties upon present and former directors (which is defined in clause 392 to include shadow directors) who were knowingly involved in a breach of the listing rules. However, it may not impose a penalty later than two years after it first became aware of the breach. Clauses 88 and 92 set out the procedures the Competent Authority must follow when imposing a penalty. Clause 91 requires the Competent Authority to make arrangements for appeals against penalties. The Competent Authority is also required to publish a statement of its policy as regards penalties (see clauses 89 and 90). Before issuing or altering such a statement, the Competent Authority must consult on its proposals.

Clause 93: Obligations of issuers of listed securities

178.     This clause provides that listing rules may place obligations on issuers and may make provision for non-compliance. Subsection (2) provides that the Competent Authority can make listing rules which allow it to publish the fact that an issuer has breached listing rules and, where an issuer has failed to publish information, which allow it to publish that information itself.

Clause 94: Advertisements etc in connection with listing applications

179.     This clause makes it an offence to issue an advertisement of a kind specified in listing rules (for example an invitation to purchase securities) unless the contents of the advertisement have been approved by the competent authority or the issue of the advertisement has been authorised by the competent authority. This offence only applies where listing particulars are, or are to be, published.

180.     Subsection (3) provides a defence against this criminal offence where someone reasonably believed that the advertisement had been approved or its issue authorised by the competent authority.

Clause 97: Exemption from liability in damages

181.     This clause gives the competent authority and its staff immunity against legal action for damages in respect of anything done or omitted in the discharge of its functions. This immunity does not apply where the act or omission was in bad faith or where it was unlawful as a result of section 6(1) of the Human Rights Act 1998. Section 6(1) says that it is unlawful for a public authority to act in a way which is incompatible with a convention right.

PART VII: CONTROL OF BUSINESS TRANSFERS

182.     This Part provides a new mechanism for transferring, with the sanction of the courts, all or part of the business of certain kinds of authorised persons. In broad terms, the mechanism covers 2 types of transfer:

  • transfers of insurance business; and

  • transfers of banking business.

183.     The mechanism, as it relates to transfers of insurance business, replaces the existing mechanisms under sections 49 - 52B of and Schedule 2C to the Insurance Companies Act 1982, which implement requirements in certain insurance directives 1.

Clause 99: control of business transfers

184.     This clause establishes that the new mechanism is generally the exclusive route for giving effect to the types of transfer to which it applies. However, the definition of insurance business transfer schemes under clause 101 does, in effect, leave scope for choice of mechanisms between this one and those provided for in other member States in accordance with the directives.

Clause 100: insurance business transfer schemes

185.     This clause defines the insurance business transfers covered by the new mechanism. It only applies to transfer schemes where after the transfer the business transferred will be carried on from an establishment in the EEA, and where prior to the transfer all or part of the business to be transferred is:

  • carried on, wholly or in part, in the EEA by a 'UK authorised person' (defined in subsection (8)); or

  • reinsurance business and it is carried on in the UK branch of an EEA firm (see Schedule 3); or

  • carried on, wholly or in part, in the UK by an authorised person who is neither a UK authorised person nor an EEA firm.

186.     In each case the authorised person transferring the business must have the appropriate permission under Part IV of the Bill or Schedule 3 to it.

187.     However, subsection (3) sets out a series of cases for which the new mechanism is excluded or is only optional. The mechanism does not apply where the transferor is a friendly society (referred to as case 1). Such transfers are covered by provisions in the Friendly Societies Act 1992. The optional cases are:

  • transfers of reinsurance business by UK authorised persons which have been approved by a court in another EEA State or by the relevant regulator in the State or States in which it is carried on (case 2);

  • transfers of business carried on outside the EEA which does not include policies (other than reinsurance policies) against risks arising in the EEA, and which have been approved by the courts or relevant authorities in a non-EEA State (case 3);

  • reinsurance business between entities in the same group or who are each other's 'controllers' (within the meaning of Part XI), where the affected policy-holders have given their consent (case 4).

188.     These categories are all transfers which fall outside the scope of the directives.

189.     Subsections (5) to (7) ensure that the powers of a court to make orders under the Companies Act 1985 (and the equivalent Northern Ireland provisions) dealing with schemes for reconstruction (compromises or arrangements agreed with creditors) can apply in transfers covered by the new mechanism 2.

Clause 101: Banking business transfer schemes

190.     This clause enables parties to a transfer of business involving deposit-taking to apply to the court for an order sanctioning the transfer. Subsection (1) applies the arrangements under this part to transfers of the business of authorised persons domiciled in the UK with permission to accept deposits, wherever the business is carried on. It also applies the arrangements where an overseas firm carrying on banking business in the UK transfers its business to another firm. However, the arrangements do not apply to transfers from building societies (for which separate arrangements exist under the Building Societies Act 1986) or credit unions or transfers falling within section 427A of the Companies Act 1985.

Clause 102: Application for order sanctioning transfer scheme

191.     This clause enables either a transferee, or the transferor, or both, to apply to the court for an order sanctioning a transfer of an insurance or deposit-taking business. Subsection (2) defines the court to which an application may be made. The appropriate court will depend on the country or territory in which the businesses are registered or have their head office.

Clause 103: Requirements on applicants

192.     This clause confers on the Treasury a power to specify, by regulations, requirements with which firms must comply before seeking an order sanctioning a transfer under clause 106. Where firms have not complied with those requirements, the court would not be able to sanction the transfer.

193.     Subsection (3) confirms that regulations made under this clause may include requirements to give notice and the way in which notice must be given. This may, for example, include giving notice of the proposed transfer to customers or creditors of the firm but the kinds of requirement are not limited.

194.     Regulations made under this power may also specify the circumstances in which the court may decide that a firm need not comply with a requirement. This is necessary to ensure that in circumstances where a firm cannot reasonably comply with a requirement, it need not prevent a court from approving a transfer. An example where this might be necessary is in relation to a requirement to give notice to customers of the firm transferring its business to another, in circumstances where it did not have contact details for some of its customers, as sometimes happens in the case of dormant bank accounts or old life insurance policies.

Clause 104: Scheme reports

195.     Under this clause, it is a requirement that a proposal to transfer insurance business is to be accompanied by a report by an expert. The coverage of the report may be determined by the Authority and the appointment of the expert is subject to the approval of the Authority. The purpose of this clause is to ensure that the Court is presented with a full and accurate report of the proposed transfer by an independent expert in order that the court may properly assess its impact, including the effect on policyholders of the insurance company in question (and any third parties who may rely on their policies).

Clause 105: Right to participate in proceedings

196.     This clause gives the Authority and those affected by the proposed transfer a right to be heard by the court when it is considering an application under new clause 103. This will mean that the Authority will be able to make representations about matters which, as regulator, cause it concern. It also ensures that any person connected with either the transferor or transferee firm - including customers of either firm or their employees - may also make representations to the court about the implications for them. The court will be able to take these views into account when considering the application.

Clause 106: Sanction of the court for business transfer schemes

197.     This clause sets out the conditions that must be met before the court may sanction a business transfer scheme. The conditions are that the transferee firm has obtained any necessary certificates, which are set out in Schedule 11, and also that court should be satisfied that the firm will have the necessary authorisation to carry on that business after the transfer (unless no authorisation is required, as may be the case for some reinsurance undertakings in other territories).

198.     The precise requirements imposed under the Schedule will depend on a number of factors including whether the business in question is insurance or banking business, and the location of the business (that is whether it is domiciled in the United Kingdom, another EEA member State or overseas).

199.     An insurance business will require:

  • a certificate about whether it has the necessary margin of solvency (paragraph 2 of the Schedule); and

  • a certificate indicating that a host state regulator - in cases involving risks or firms located in another EEA member state) has consented (or failed to object within 3 months) to the transfer (paragraphs 3-5).

200.     In the case of a bank it will need to produce:

  • a certificate confirming that the bank has adequate resources; and

  • in the case where either the transferor or transferee company is domiciled in another EEA state, a certificate confirming that the home state regulator has been informed about the transfer.

201.     In deciding whether to sanction the scheme, the court must consider whether it is appropriate, in all the circumstances, to do so.

Clause 107: Effect of order sanctioning business transfer scheme

202.     This clause makes it clear that any order of the court sanctioning a business transfer scheme may include any necessary provisions to ensure that any transfer is able to take proper effect. Accordingly the court will be able to order either that all rights and liabilities of and against the firm whose business is being transferred remain rights and liabilities of the transferee firm, or that appropriate measures are taken to extinguish or reduce such rights and liabilities.

203.     A reduction may be necessary, for example, where a firm is insolvent and the transfer of business is part of a "rescue" proposal. In other cases, rights and liabilities may not be suitable for transfer and so alternative arrangements may be required, for example in the case where a bank had a taken a floating charge over the assets of the firm in relation to a credit facility, where neither would be relevant to the ongoing business after the transfer.

204.     Such arrangements are consistent with the current arrangements under Schedule 2C of the Insurance Companies Act 1982 and relevant companies and insolvency legislation.

Clause 108: Rights of certain policyholders

205.     This clause provides that any EEA policyholders whose local law confers on them a right to cancel the policy in the event of a transfer have an adequate opportunity to exercise that right.

PART VIII: PENALTIES FOR MARKET ABUSE

206.     This Part confers power on the Authority to impose penalties for market abuse. The Bill sets out the kinds of behaviour which will constitute market abuse and places a duty on the Authority to produce a code which will help to determine whether particular behaviour amounts to market abuse. This code will carry evidential weight, and in certain circumstances will provide a defence, or "safe harbour", against allegations of abuse. This Part also gives the Treasury the power to prescribe the coverage of the regime by specifying both the markets and the investments traded on those markets to which it applies. It sets out the procedures the Authority must follow when proposing to impose a penalty. It also confers a right to refer a decision to impose a penalty to the Tribunal.

Clause 109: Market Abuse

207.     This clause sets out the behaviour which constitutes market abuse. It also confers on the Treasury an order-making power to specify which markets and which investments come within the scope of this clause. The Treasury published, in June 1999, a draft Order which named the six currently recognised UK investment exchanges as the markets covered by the regime (Financial Services and Markets Bill - Market Abuse: Prescribed Markets).

208.     Subsections (1) and (2) set out the conditions which must be satisfied before behaviour can be regarded as market abuse (and a penalty possibly imposed). In order to be abuse the behaviour must:

  • take place in relation to qualifying investments traded on a market to which the clause applies;

  • be behaviour of a particular kind, as set out in subsection (2); and

  • be behaviour which is likely to be regarded by a regular user of the market as a failure on the part of the person (A) engaged in the behaviour to observe the standards which the regular user would reasonably expect of a person in A's position. The regular user of the market is defined in subsection (11) to be a reasonable person who regularly deals on the market. He is intended to represent the distillation of the standards expected by those who regularly use the market.

209.     There are three kinds of behaviour set out in subsection (2). Broadly speaking, these are that the behaviour is based on information not generally available to the rest of the market; that the behaviour is likely to give the regular market user a false or misleading impression; or that the regular user would be likely to regard the behaviour as behaviour which would distort the market.

210.     Subsection (3) provides a safe-harbour for those who take care to avoid engaging in market abuse or who believe that the behaviour does not amount to market abuse. These will be considerations which will affect the judgement of the regular user as to whether the person concerned failed to live up to expected standards of behaviour.

211.     Subsection (7)(a) brings behaviour which takes place in relation to the subject matter of investments within the definition of behaviour which can be caught by these provisions. This means that, for example, behaviour in relation to a precious metal which affects the price of a futures contract in the metal can potentially be caught by these provisions if it is behaviour which falls within all of the tests set out above. Subsection (7)(b) also brings investments within the regime which are not themselves qualifying investments for the purposes of this clause, but which are derivatives of a qualifying investment (for example options on options); or whose price or value is expressed by reference to the price or value of qualifying investments, for example spread bets.

Clause 110: The Code

212.     This clause places a duty on the Authority to prepare and issue a code which will allow it to set out in more detail than the primary legislation the kinds of behaviour which can constitute market abuse. The purpose of this code is to give guidance as to whether or not behaviour is abusive. The Authority has already taken steps to begin this process, publishing an initial draft code for consultation in June 1998 (Market Abuse Part 2: Draft Code of Market Conduct; CP10). It proposes to publish a revised draft code for further consultation in Spring 2000.

213.     Subsection (2) makes clear that the code may describe behaviour which, in the opinion of the Authority, either does or does not amount to abuse. (Clause 112 provides that a statement in the code that a particular type of behaviour is not an abuse is conclusive evidence of this fact.) It may also set out factors which, in the Authority's opinion, should be taken into account when determining whether an abuse has occurred. An example of such factors might be an individual's expertise or the fact that someone holds a position of particular responsibility. Subsections (6) to (8) place the Authority under a duty to consult on the initial version of the code and on any subsequent changes to it.

Clause 112: Effect of the Code

214.     Subsection (1) provides a safe harbour, by making it clear that if a person undertakes any behaviour which the code currently in force specifically states does not amount to market abuse, then he cannot be held by the Authority or the Tribunal to have abused the market. Subsection (2) makes clear that in other circumstances the code may be relied upon insofar as it indicates that the behaviour in question does or does not amount to market abuse.

Clause 113: Power to impose penalties in cases of market abuse

215.     This clause allows the Authority to impose a monetary penalty on any person, whether an authorised person or not, who has engaged in market abuse or has required or encouraged another to engage in market abuse.

Clause 114: Statement of policy

216.     This clause places a duty on the Authority to prepare and publish a statement of its policy in respect of penalties under clause 98. The Authority will be able to set out in this document the circumstances in which it might impose a penalty and factors it will take into account in deciding what level of penalty to impose. Subsection (2) requires that the Authority's policy for determining the amount of a penalty must take into account the effect and seriousness of the behaviour, whether or not it was deliberate or reckless and whether the person who engaged in the abuse was an individual. The Authority may also take into account other matters it considers appropriate. The Authority must consult on the initial version of the statement and on any subsequent changes as provided for in clause 115. Subsection (5) makes clear that, having published this policy statement, the Authority must then have regard to it in using its powers.

Clause 119: Suspension of investigations

217.     This clause allows the Authority to direct a recognised investment exchange or recognised clearing house not to conduct an inquiry or to stop any inquiry it is already undertaking where the Authority is, or is considering, carrying out an investigation itself, or imposing a penalty on a person for market abuse.

Clause 120: Power of court to impose penalty in cases of market abuse

218.     This clause allows the Authority to apply to the court to impose a penalty for market abuse where the court is considering whether to grant an injunction under clause 368 or order restitution under clause 370 in a case of market abuse.

Clause 121: Guidance

219.     This clause allows the Treasury, with the approval of the Attorney General and the Secretary of State, if the need arises, to issue guidance to the relevant prosecuting authorities (as set out in subsection (3)). The purpose of this guidance would be to help those authorities in deciding whether a case should be subject to criminal prosecution, or the imposition of penalties under the market abuse provisions, in the area of overlap between these provisions and the criminal offences of insider dealing (in the Criminal Justice Act 1993) and misleading statements and practices (in clause 379).

PART IX: HEARINGS AND APPEALS

220.     This Part establishes the Financial Services and Markets Tribunal. Various clauses in the Bill provide a right to refer a matter to the Tribunal once the Authority has notified the person concerned of its decision. This Part sets out the procedural framework for referrals to the Tribunal and for appeals from the Tribunal to the Court of Appeal, or in Scotland to the Court of Session, on a point of law. The Part gives the Lord Chancellor a general power to make rules for the Tribunal's operation. Schedule 12 sets out further details of the Tribunal's constitution and operation.

221.     This Part also confers on the Lord Chancellor a power to establish a scheme to provide subsidised legal assistance in proceedings before the Tribunal for individuals on whom the FSA seeks to impose a penalty for market abuse under Part VIII of the Bill.

Clause 123: The Financial Services and Markets Tribunal

222.     This clause establishes the Tribunal and gives the Lord Chancellor the power to set its procedural rules. The Council on Tribunals is to be given oversight of the new Tribunal in keeping with the role established for the Council under the Tribunals and Inquiries Act 1992. Schedule 12 sets out requirements for the appointment of the President of the Tribunal, and the "panel of chairmen" panel and lay panel from which members of the Tribunal will be drawn. It includes provision for their qualifications and terms of office. It also permits the appointment of a Deputy President and administrative staff. It further provides power for the Tribunal to summon witnesses and to award costs. Subsection (3) contains the power for the Lord Chancellor to make rules for the Tribunal. The Lord Chancellor's Department will publish draft rules for consultation in due course. Schedule 12, paragraph 9 sets out examples of the aspects of the Tribunal's procedures which might be covered by the Lord Chancellor's rules (such as when hearings might be held in private). Subsection (4) provides that this does not limit the Lord Chancellor's power.

Clause 124: Proceedings: general provision

223.     This clause sets the time limit for making a reference to the Tribunal. The time limit is 28 days from the date of the decision notice, unless a different period is prescribed in the procedural rules made for the Tribunal by the Lord Chancellor under clause 123. The Tribunal will also have discretion to allow references to be made after the time limit has expired, subject again to any provision in the Tribunal's procedural rules.

224.     The clause also makes clear that the Tribunal may hear any evidence it considers relevant in determining the case before it, including evidence that was not available to the Authority when it made its decision. The Tribunal can confirm, vary or set aside the Authority's decision, it can remit the matter back to the Authority, impose, revoke or vary the amount of a penalty, and it may make recommendations as to the Authority's rules and procedures. If the case is remitted back to the Authority, the Authority must act in accordance with the Tribunal's decision.

225.     A decision referred to the Tribunal does not take effect until the case has been finally disposed of, including any subsequent appeals to the Court of Appeal, Court of Session or House of Lords (see clause 128 below). An order of the Tribunal may be enforced as if it were an order of a county court in England, Wales or Northern Ireland, or the Court of Session in Scotland.


1. The relevant provisions are as follows -

    Article 28a of the 1st Non-Life Directive (as inserted by the 3rd Non-Life Directive)

    Article 12 of the 3rd Non-Life Directive

    Article 31a of the 1st Life Directive

    Article 11 of the 3rd Life Directive

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2. Section 427A was inserted into the Companies Act in order to implement the Third Council Directive on mergers of public limited companies. It modifies the provisions of Part XIII of the Act when applied to schemes for the reconstruction where one of the parties is a public company.      Back

 
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Prepared: 15 February 2000