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

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Clause 125: Legal assistance scheme

226.     This clause gives the Lord Chancellor the power to make regulations establishing a legal assistance scheme. It sets out the coverage that such a scheme should have, namely that a person should only be eligible for legal assistance if he is an individual who has referred a decision of the FSA to impose on him a penalty for market abuse and provided that he meets the eligibility criteria which are to be established under subsection (1)(d) of clause 126.

Clause 126: Provisions of the legal assistance scheme

227.     This clause gives examples of the type of provision the Lord Chancellor may include in the regulations, for example determining:

  • the form legal assistance may take;

  • the persons who may be engaged to provide the assistance;

  • eligibility criteria; and

  • procedural details as to how an application is made, to whom, and as to what happens when assistance is granted.

Clause 127: Funding of the legal assistance scheme

228.     This clause sets out the way in which the legal assistance scheme is to be funded. It will be a free-standing scheme rather than an extension of legal aid and will be paid for by levies raised from authorised persons. The Lord Chancellor will determine the potential or actual cost of the legal assistance scheme. The Authority will have responsibility for determining the distribution of levies across the regulated community, collecting them and paying them over to the Lord Chancellor's Department.

229.     The money raised will be paid into the Consolidated Fund. Spending on the legal assistance scheme will be voted expenditure. The costs of administering the scheme will come out of the running costs of the Tribunal.

230.     If the amount paid to the Lord Chancellor in any one year exceeds the cost of the legal assistance scheme (for example because the costs in that period prove to be lower than anticipated), he must decide either to repay the excess to the Authority or else take into account this amount in the next determination of costs (i.e. reduce the amount which the Authority has to levy during the following year). If the excess amount is repaid to the Authority, the Authority has discretion whether to distribute the money amongst those persons upon whom the levy was imposed (or some of them) or else offset it against future invoices, or partly to distribute the amount and partly offset it. This enables the Authority to avoid costly redistribution of small amounts. If the Authority considers that it is not practicable to deal with an excess in any of these ways, it may obtain the permission of the Lord Chancellor to dispose of the sum in some other appropriate manner.

Clause 128: Further appeal on a point of law

231.     This clause establishes the right to appeal to the Court of Appeal or Court of Session on a point of law against a decision of the Tribunal. An appeal may be brought only with the permission of the Tribunal or the appeal Court. If the appeal Court considers that the decision is wrong in law it may remit the matter back to the Tribunal for a rehearing and decision or make a decision itself. An appeal may be made from the Court of Appeal or Court of Session to the House of Lords with the leave of the Court or the House of Lords. The Lord Chancellor may make procedural rules in relation to the exercise of these appeal rights.


232.     This Part of the Bill confers powers upon the Authority and the Treasury to set regulatory requirements for firms authorised under the Bill. It also gives the Authority power to issue guidance on requirements imposed by or under the Bill. The Authority published a consultation paper in April 1998 on the overall approach to creating its handbook (Designing the FSA Handbook of Rules and Guidance; CP8)

Chapter I: Rule-Making Powers

233.     Chapter I concerns the Authority's basic rule-making powers, the purpose for which rules can be made and the scope of the powers. There are other rule-making powers for specific purposes in relevant parts of the Bill, including Parts XV, XVI, XVII, XX and XXII. This Chapter also sets out the relevant procedural requirements when making rules under any power in the Bill.

234.     Parts V, VIII, XIX, and XX also contain specific powers which enable the Authority to impose requirements on particular classes of person. For example, through statements of principle, codes of practice and directions on approved persons; on any person in relation to market abuse; on members of Lloyd's; and on members of the professions. Those powers are described in the relevant Parts of these explanatory notes.

Clause 129: General rule-making power

235.     This clause confers a power on the Authority to make rules applying to authorised persons with respect to their carrying on of regulated activities. Rules made under this clause are referred to as "general rules" and can only be made to protect the interests of the persons mentioned in subsection (1), that is mainly for the protection of users of financial services. There need not be a direct relationship between the authorised firms to whom the rules apply and the consumers who are protected by the rules - so, for example, the Authority will be able to make rules under this clause to protect the interests of beneficiaries of trusts, to further market integrity, as required by the Investment Services Directive, or to protect against systemic risk.

236.     The bulk of the Authority's handbook of rules and guidance will be constructed using the rule-making power in this clause. The power will also enable the Authority to make appropriate rules, including financial resources rules imposing capital adequacy and liquidity requirements (which take into account other group entities), rules relating to firms' systems and controls and rules regulating the conduct of firms' business with customers. These could, for example, include "know your customer" rules and "disclosure" requirements.

237.     The provisions in this clause enable the Authority to make rules at differing levels of detail, from rules with a high level of generality, which the Authority refers to as principles, to detailed conduct of business provisions.

238.     Clauses 143 to 146 set down the procedural requirements which the Authority must follow when making rules.

Clause 130: Non-regulated activity rules

239.     This clause allows the Authority to make rules concerning non-regulated activities carried on by authorised persons in certain circumstances. These rules are referred to as non-regulated activity rules and can be made where necessary to prevent other activities of a firm having an adverse effect on its regulated activities, and as a result on the customers of those activities. It is intended that rules under this clause will include the following:

  • financial resources and large exposures rules which cover a bank's unregulated lending business, as well as, for example, its regulated deposit-taking business; and

  • rules preventing authorised persons from gaining in their own account trading at the expense of customers.

240.     The non-regulated activity rules will not, however, allow the Authority to make rules binding on EEA firms operating in the UK under a passport on matters (such as capital adequacy) which are reserved to home State regulators under the single market directives.

Clause 131: Miscellaneous ancillary matters

241.     This clause elaborates on the provisions which the Authority can make under the rule-making powers.

242.     For example, the Authority may supplement rules relating to the financial resources of authorised persons with individual administrative notifications which impose different requirements on a case by case basis, based on an authorised person's individual risk profile. These requirements might, for example, relate to the capital adequacy or liquidity of an authorised person. The broad rules must be made under the same constraints in the legislation which apply to all other types of rules (so that consultation and other procedural requirements may apply). However, the administrative notifications can be made on a case by case basis and are not subject to the same procedural requirements. Notifications can be set for the authorised person on a group as well as individual basis.

243.     This clause also enables the Authority to make rules in respect of the handling of client money by authorised persons. The rules could be used to require money to be held in trust.

244.     This clause also allows the Authority to make rules which require authorised persons to allow customers a "cooling off" period after agreeing to enter into an agreement. Under current rules, for example, persons entering long-term insurance contracts have 14 days in which to cancel and retrieve any premium paid.

Clause 132: Restrictions on managers of authorised unit trust schemes

245.     This clause enables the Authority to make rules prohibiting an authorised person permitted to act as the manager of an authorised unit trust scheme from carrying on a specified activity. A specified activity may be a non-regulated activity.

Clause 133: Insurance business rules

246.     This clause empowers the Authority to make insurance business rules prohibiting an authorised person who has permission to deal in contracts of insurance from carrying on a specified activity. As with clause 132, a specified activity may be a non-regulated activity.

247.     Subsection (3) enables the Authority to make rules in relation to contracts entered into by an authorised person in the course of carrying on long-term insurance business, in particular restricting the descriptions, or indices of value, of property by reference to which the benefits under such contracts may be determined.

Clause 134: Insurance business: regulations supplementing Authority's rules

248.     This clause enables the Treasury to make regulations applicable to non-authorised persons connected with authorised insurance companies, preventing them from taking actions which would weaken the effect of rules made by the Authority under clause 131. Breaches of these regulations are subject to criminal sanctions.

249.     Subsection (4) gives the Treasury powers to make regulations which would prevent a company paying dividends or creating a mortgage or charge over its property, and which would make void any mortgages or charges made, in breach of those regulations.

Clause 135: Endorsement of codes etc issued by other bodies

250.     This clause confers a power on the Authority to make rules endorsing the City Code on Takeovers and Mergers ("the Takeover Code") and the Substantial Acquisition Rules ("SARs").

251.     This clause provides a mechanism enabling the Authority to exercise its disciplinary powers over authorised persons for a breach of the endorsed provisions of the Takeover Code or SARs. The arrangements are designed to ensure that an adviser will cease to act where the Takeover Code or SARs have been breached. Subsection (3) has the effect that disciplinary or intervention powers in respect of endorsed provisions may be taken by the Authority if the Takeover Panel has requested it to do so.

252.     The clause sets out the procedural requirements which the Authority must follow in order to endorse codes. These requirements include a requirement to consult and largely shadow those in clause 146. However, if the Takeover Panel alters its rules, the Authority may endorse the amended rules without consultation, provided it has confirmed that it is satisfied with the Takeover Panel's consultation procedures.

Clause 136: Price stabilising rules

253.     This clause allows the Authority to make rules regarding actions which may be taken by authorised firms to stabilise the price of investments. Clause 379(4)(b) provides that a person has a defence to a charge of creating a false or misleading impression as to the market in certain investments if he proves that he was acting in conformity with rules made under this clause.

254.     Subsection (3) provides that the Authority may make rules which provide a similar defence to persons who have stabilised investments in compliance with the price stabilisation rules of an overseas body which is specified by the Authority. If an overseas body which is specified under this clause changes its rules, the amended body's rules will be taken by the Authority to be endorsed under this clause if the Authority has confirmed that it is satisfied with the overseas body's consultation procedures.

255.     Subsection (4) confers on the Treasury a power to make regulations setting the outer boundaries of the Authority's power to make price stabilising rules.

Clause 137: Financial promotion rules

256.     This clause confers a power on the Authority to make rules applying to authorised persons in relation to the regulation of financial promotion under Parts II and XVII of the Bill.

257.     Subsection (3) enables the Treasury to restrict this power.

Clause 138: Money laundering rules

258.     The Authority may make rules applying to authorised persons concerning the prevention and detection of money laundering in connection with the carrying on of regulated activities. These will enable the Authority to make compliance with the Money Laundering Regulations a regulatory obligation. The Authority will also be able to make rules supplementing the Money Laundering Regulations.

Clause 139: Modification or waiver of rules

259.     This clause concerns the power of the Authority to waive or modify certain kinds of rules, as set out in subsection (1), at the request of an authorised person or with their consent. Subsection (4) specifies the circumstances in which the Authority may waive or modify these rules.

260.     Waivers or modifications of rules can have indefinite effect or can be revoked by the Authority. Breaches of conditions attached to a waiver or modification are equivalent to a breach of rules.

261.     Subsections (6) and (7) concern the obligation on the Authority to publish rule waivers or modifications. They provide that the Authority must publish waivers or modifications in such a way as to bring them to the attention of the people who are likely to be affected, unless the Authority thinks it would be inappropriate to do so. In considering whether publication would be appropriate, the Authority should take into account whether it believes that publication would unreasonably prejudice the authorised person's commercial interests or contravene any international obligations of the UK. The Authority would also need to take into account whether a breach of the rule in question would give rise to a right of action by a private person under clause 141. Persons affected by the modification or waiver will include clients of the authorised person and other authorised persons who might wish to benefit from similar arrangements.

262.     In deciding whether certain of the conditions for withholding publication are met, subsection (8) requires the Authority to consider whether it can publish a waiver or modification of a rule without disclosing the identity of the authorised person concerned.

Clause 140: Evidential provisions

263.     This clause enables the Authority to make rules which, if breached, will not lead to any disciplinary or other sanction provided for under the Bill. Rules made under this clause must state that they will not give rise to sanctions under the Bill, but they must also indicate that their contravention can be relied on as indicating that another rule has been contravened, or that compliance with the rule can be relied on as indicating that another rule has been complied with. In particular, this power will enable the Authority to elaborate on rules, including principles, which are framed at a higher level of generality. The power can be used to promulgate codes, such as a code of practice, whereby rules comprising the code carry evidential status as to whether a higher level principle, which is underpinned by the code, has been breached.

Clause 141: Actions for damages

264.     This clause sets out the circumstances in which persons who suffer loss as a result of a rule breach by an authorised person have a right of action for damages for resulting losses. This clause does not remove any common law cause of action which a person might otherwise have. It allows a class of people to recover losses just by showing that there has been a breach of a rule as a result of which they have suffered loss rather then having to rely on that breach as evidence of negligence.

265.     The clause creates a presumption that private persons (as defined by the Treasury) who suffer loss as a result of a rule breach have a right of action for damages. The right does not extend to breaches of financial resources rules or other rules which may be specified by the Authority. Customers would only generally suffer loss as a result of a breach of financial resources rules if the authorised person concerned became insolvent. In those circumstances, the relevant person's rights in the insolvency would not be altered by a separate right of action. Additionally, it might not be appropriate to attach a right of action to certain other rules, such as those drawn at a high level of generality.

266.     There is a presumption that persons other than private persons do not have a right of action for damages, although the Authority is able to specify that breaches of certain rules are actionable by non-private persons.

Clause 142: Limits on effect of contravening rules

267.     Breach of the Authority's rules does not make a person guilty of an offence, nor does it make a transaction unenforceable or void.

Clauses 143: Notification of rules to Treasury

268.     This clause places a requirement on the Authority to give the Treasury written notice when the Authority makes or amends a rule.

Clause 144: Rule-making instruments

269.     This clause require the Authority to publish written copies of its rules. As a result of subsection (3), if rules do not specify the power under which they are made, they will not have effect.

Clause 145: Verification of rules

270.     This clause concerns the procedure whereby the Authority can be required to verify its rules for the purposes of legal proceedings.

Clause 146: Consultation

271.     This clause imposes consultation requirements on the Authority when it proposes to exercise its rule-making powers. Generally, draft rules issued for consultation must, as a result of subsection (2), be accompanied by a cost-benefit analysis of the proposals, an explanation of the purpose of the proposed rules and a statement that representations about the Authority's proposals may be made to the Authority within a specified time. They must also be accompanied by a statement of the Authority's reasons for believing that the proposed rules are compatible with the Authority's objectives.

272.     Subsection (4) provides that the Authority must have regard to those representations. Subsections (5) and (6) provide that if the Authority decides to make the rule, it must give a feedback statement on the representations it received. If the rules which are introduced differ significantly from those which the Authority consulted on, the Authority must publish a statement of that fact, together with a cost-benefit analysis concerning the new provisions.

273.     The Authority does not have to prepare a cost-benefit analysis when it considers that its proposals will not result in a material increase in costs. It would, however, still need to consult on the content of the proposed rules. Also, where the Authority proposes to exercise its powers to charge fees, the requirement to produce a cost-benefit analysis does not apply but the Authority is required to consult on the proposed expenditure which would result from the fee-raising exercise. Part III of Schedule 1 contains further provisions regarding the Authority's fee-raising powers.

274.     Consultation requirements will not apply if the Authority considers that any delay resulting from the consultation would harm consumers.

Clause 147: General supplementary powers

275.     This clause confirms that the Authority's rules may make different provision for different cases and that the rules may make incidental, supplemental, consequential and transitional provisions.

Chapter II: Guidance

276.     Chapter II concerns the Authority's power to issue and charge for guidance on its rules, the legislation and other matters relating to its functions, including its regulatory objectives.

Clause 148: Guidance

277.     This clause enables the Authority to issue and charge for guidance on all the matters listed in subsection (1).

278.     Subsection (2) confirms that the Authority can use its financial resources or its other resources to support the giving of information and advice by third parties where the Authority considers it could have given the advice or information under this clause.

279.     Subsection (3) provides that when giving guidance on its rules which is intended to have broad application, the Authority will need to meet various of the requirements of clause 146, including those requiring consultation and the publication of a cost-benefit analysis. Subsection (4) clarifies that the Authority can charge for its guidance, whether it is offered generally or in response to a specific request.

Clause 149: Notification of guidance to the Treasury

280.     This clause sets out what is meant by "general guidance" and requires the Authority to give copies of any general guidance issued to the Treasury.

Chapter III: Competition Scrutiny

281.     Chapter III provides for competition scrutiny of the Authority's rules, guidance, policy and practice statements, codes and practices. It places a duty on the Director General of Fair Trading ("DGFT") to keep these under review, and to report to the Treasury about any rules which may have a significantly anti-competitive effect. On receipt of a report under this Chapter, the Treasury may require changes to be made to the relevant rules, guidance, statements, codes or practices, if it is satisfied that the anti-competitive effect is greater than is necessary.

Clause 151: Reports by the Director General of Fair Trading

282.     This clause concerns reports by the DGFT on possible anti-competitive effects of the Authority's regulating provisions and practices. An anti-competitive effect, as defined in clause 150, is something which prevents, restricts or distorts competition.

283.     Subsection (1) provides that the DGFT must keep the Authority's practices and regulating provisions (which are defined in clause 150 and include rules, guidance and codes) under review. The DGFT can, at any time, investigate the Authority's practices and regulating provisions under the powers conferred by clause 152.

284.     Following an investigation, if the DGFT finds that regulating provisions or practices, either singly or in combination, have a significant anti-competitive effect, then he must produce a report. The DGFT has discretion as to whether to produce a report or not if he finds that there is no anti-competitive effect.

285.     Subsections (5) and (6) provide that the DGFT must send a copy of any report he produces to the Competition Commission (the "Commission"), the Treasury and the Authority. The DGFT must, so far as is practicable, exclude from the published version of the report any matter which relates to the affairs of a person which might seriously prejudice that person's interests. (Subsection (9) provides that such matters do not need to be excluded from the version which goes to the Commission, the Treasury and the Authority.)

Clause 152: Power of the Director to request information

286.     This clause provides that, in carrying out his functions under clause 151, the DGFT has powers to request relevant documents from any person, and to request relevant information from any business. (Subsection (4) makes clear that these powers do not, however, require anyone to disclose a legally privileged communication.)

287.     Subsections (5) and (6) provide that if a person fails to produce a required document, or piece of information, then the DGFT may report the matter to the court, and if the court is satisfied that there was no reasonable excuse for this failure, that person may be punished as if he had been guilty of contempt of court.

Clause 153: Consideration by the Competition Commission

288.     This clause concerns the role and duties of the Competition Commission following receipt of a report from the DGFT. It is supplemented by the provisions of schedule 13.

289.     There are two types of report which the Commission must consider under this clause and on which it must produce a report. The first is a report by the DGFT which concludes that particular regulating provisions or practices of the Authority have a significant anti-competitive effect (type A). The second is a report by the DGFT which concludes that particular regulating provisions or practices do not have a significant anti-competitive effect, but where the DGFT has referred the matter to the Commission for further consideration (type B). (If the DGFT does not ask the Commission to consider a type B report, then that is the end of the matter.)

290.     Subsection (4) provides that the Commission's report must state whether, in its opinion, the regulatory provisions or practices have a significant anti-competitive effect. If it concludes that there is no significant anti-competitive effect (that is, it agrees with a type B report or disagrees with a type A report), then that is the end of the matter. No further action can be taken.

291.     If, however, it concludes that there is a significant anti-competitive effect, then subsection (5) requires it to go on to state in its report whether it considers that the anti-competitive effect is justified. In taking this decision, subsection (7) requires the Commission, as far as is reasonably possible, to reach a conclusion which the Authority could have reached given the obligations which the Bill places on the Authority and the functions which it confers. In its report, the Commission has to state what action, if any, ought to be taken by the Authority in the light of the unjustified anti-competitive effect. This could include the Authority changing its rules or practices in specified ways.

292.     Any report produced by the Commission under this section has to be sent to the Treasury, the Authority and the DGFT. Subsection (2) of the clause provides that the Commission does not need to produce a report where there has been a change of circumstances which makes it unnecessary. For example, the Authority may, once it has received the DGFT's report, change the rule in question, or stop engaging in a particular practice, so that the anti-competitive effect identified by the DGFT is removed.

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Prepared: 15 February 2000