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

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Clause 154: Role of the Treasury

293.     This clause concerns the Treasury's powers to take action following an adverse report from the Commission.

294.     If the Commission's report is that the anti-competitive effect is not justified, subsection (2) requires that the Treasury, unless exceptional circumstances exist, must direct the Authority to take appropriate action. In doing so, subsection (4) provides that the Treasury must have regard to the Commission's opinions as expressed in its report. The special circumstances in which the Treasury does not have to direct the Authority to make changes following an adverse Commission report are where:

  • the Authority has already taken action, for example through changes to its rules or practices, which means that the Commission's recommendations are academic; or

  • the Treasury concludes that the existence of exceptional circumstances mean that it would not be appropriate or necessary to direct the Authority to make changes. For example, the Treasury may conclude that there would be a grave risk to the financial system if the regulating provisions were changed.

295.     Subsection (7) provides that the Authority cannot be directed by the Treasury to take any action which it would not have the power to take itself. If the Commission were to recommend changes which did not, for example, provide an appropriate level of protection for consumers, the Treasury could not direct the Authority to make those changes.

296.     If the Commission's view is that the anti-competitive effect is justified, subsections (5) and (6) allow the Treasury to override that decision and direct the Authority to make changes where there are exceptional circumstances.

297.     Subsections (10), (11) and (12) provide that if the Treasury decide, because of exceptional circumstances, not to take action following a Commission report that a regulating provision or practice is anti-competitive, or decide to take action in the opposite case, they must produce a statement giving their reasons. Any such statement must be made available to the public and must be laid before Parliament.

Clause 155: The Competition Act 1998

298.     This clause makes clear that neither the prohibition in Chapter I (of agreements preventing, restricting or distorting competition within the UK) or the prohibition in Chapter II (of abuse of a dominant position in a market which may effect trade in the UK) of the Competition Act 1998 shall apply to any action taken by a person in order to comply with the Authority's regulating provisions or practices.

PART XI: INFORMATION GATHERING & INVESTIGATIONS

299.     This Part sets out the powers of the Authority to require the production of information and documents, to require reports to be compiled, to conduct investigations and to obtain access to premises. Many of these powers are also held concurrently by the Secretary of State in recognition of his wider responsibilities in relation to company law.

300.     The powers provided for in this Part are in addition to the specific powers conferred on the Authority by other provisions of the Bill to request information from unauthorised persons in particular circumstances, such as in connection with an application for authorisation or recognition. They enable the Authority to require information on an ad hoc basis and therefore supplement the Authority's ability to make rules requiring authorised persons to provide it with information on a routine basis under its general rule-making power (clause 129).

301.     Under clause 168, failure to comply with any requirement imposed using any of the powers in this Part can be certified to the court and dealt with by the court as if the defaulter were in contempt.

Clause 156: Authority's power to require information

302.     This clause gives the Authority a general power to require information or documents (see note on clause 167 below) which may reasonably be required in connection with the discharge of its functions under the Act. The information or documents may be required from any person, including a legal person, who is any of the following:

  • an authorised person;

  • a formerly authorised person;

  • a person connected with an authorised person, as defined in subsection (11);

  • an operator, trustee or depository of an open-ended investment company;

  • a recognised investment exchange;

  • a recognised clearing house.

303.     Either the Authority can write to the person asking for the production of the information or documents within a reasonable timescale, or it can send an officer to whom it has given written authorisation. The person is required to provide the information or documents without delay, and he may also be required to take any reasonable steps the Authority may specify to verify the information provided.

Clause 157: Reports by skilled persons

304.     This gives the Authority the power to require an authorised person or a formerly authorised person to commission and provide the Authority with a report into any relevant matter the Authority may specify. This must be a matter about which the Authority could require information under the preceding clause, that is the report must reasonably be required in connection with the discharge of the Authority's functions.

305.     The power also enables the Authority to require such reports from other persons carrying on a business who are, or were, connected to the authorised or formerly authorised person in the ways specified in subsection (2). Essentially, these are members of the same group of companies, or companies closely linked through a common shareholder, or any partnership of which the authorised or formerly authorised person is or was a member. This is a more limited set of persons than under the preceding clause and Schedule 12.

306.     The person making the report must be nominated by the Authority, or their appointment must be approved by it. The Authority has to be satisfied that they have the relevant skills to report on the matter concerned. In many cases this person may be an accountant, or they may be a person with some other suitable professional qualification, such as a lawyer or an actuary, or they may be a person with particular commercial or professional experience, such as a banker. The Authority may also specify the form of the report.

307.     Subsection (4) imposes an obligation on any in-house expert working for the authorised or connected person to cooperate with the person appointed to produce the report. Thus, if the report is to be produced by an actuary then the in-house actuary who works for the firm is obliged by subsection (5) to cooperate in the production of the report. This duty is enforceable by the Authority through an injunction, or a comparable order in Scotland.

Clause 158: Appointment of persons to carry out general investigations

308.     Under this clause, either the Authority or the Secretary of State (the "investigating authority") may, where it appears that there are good reasons for doing so, appoint competent people to conduct an investigation on their behalf into the business of an authorised person or appointed representative, or into the ownership or control of an authorised person. An "appointed representative" is a person who is exempt from the general prohibition in relation to particular regulated activities by virtue of a contract with an authorised person as described under clause 37 - see above. An appointed representative and the authorised person who is their principal as a result of the contract may be investigated at the same time. An investigation may also be made into a formerly authorised person or a former appointed representative, although the scope of such investigations is limited by subsection (4) to the business they conducted while they were authorised or appointed or the control or ownership of the former authorised person at that time. Written notice must be given to the person under investigation under clause 161(2).

309.     The people appointed to conduct the investigation may be employees of the investigating authority (under clause 161(5)), or other people engaged specifically for the purpose. If they judge it necessary for the purposes of the investigation, they may also inquire into the business of other connected companies or partnerships, including those which were connected at some relevant time in the past (this extends to the same classes of connected company or partnership as under the preceding clause). The investigator(s) must give written notice to any other company or partnership whose business they intend to inquire into in this way.

Clause 159: Appointment of persons to carry out investigations in particular cases

310.     In addition to the general power under the preceding clause to investigate the business of authorised persons and appointed representatives where there is "good reason" to do so, this clause gives the Authority or the Secretary of State the power to appoint competent people (as before these can be employees of the investigating authority) to conduct investigations where it appears that there are circumstances suggesting that some specific contravention or offence may have taken place. The more specific grounds for the exercise of the powers under this clause are reflected in the wider powers of the investigators appointed (see notes on clauses 162 to 164 below).

311.     Among the contraventions that may be investigated by either the Authority or the Secretary of State under this clause are a breach by an unauthorised person of the general prohibition, the commission of the misleading statements and practices offence under section 379, market abuse under clause 109, or insider dealing under Part V of the Criminal Justice Act 1993. The Authority, but not the Secretary of State, may also launch an investigation under this clause where a person is suspected of having committed a "related offence" which the Authority has power to prosecute under the Act, but has no other power to investigate. This covers breach of the Money Laundering Regulations 1993 which the Authority has power to prosecute by virtue of clause 384.

312.     The Authority may also appoint investigators under this clause to look into suspected contraventions of rules or regulations made under the Bill, failures to comply with statements of principle made under clause 63, or to investigate the fitness and properness of approved persons under Part V of the Bill. The fitness and properness of authorised persons may be investigated under the preceding clause.

Clause 160: Investigations etc in support of overseas regulator

313.     This clause gives the Authority new powers comparable to those held concurrently by the Treasury and the Secretary of State under section 82 of the Companies Act 1989 to investigate matters on behalf of an overseas regulator. In deciding whether it is appropriate to exercise this power to require information or to appoint investigators on behalf of an overseas authority, the Authority is directed to take account of the factors listed in subsection (4), which include the seriousness of the case and the wider public interest in providing the assistance.

314     When the request comes from another competent authority under any of the single market directives (see the notes on Schedule 3 for a brief explanation), the Authority is also required to consider whether the assistance must be given in order to fulfil the obligations to cooperate imposed by those directives. If it decides that it is, the other factors fall away.

315.     The Authority may make the exercise of the power conditional on the overseas authority making an appropriate contribution towards the cost of doing so, except where it considers that exercise is necessary in order to fulfil the obligations to cooperate under the directives.

316.     Under subsection (7), the Authority may decide to permit representatives to attend and participate in any interview to be conducted by the investigators it has appointed. But in order to permit this, the Authority is required to be satisfied that the information thus obtained by the overseas regulator will be subject to equivalent safeguards on its subsequent use and disclosure as are contained in Part XXIII of the Bill. The Authority must also prepare a statement of its policy on the exercise of this discretion, which must be approved by the Treasury and, if approved, published. The discretion may not be exercised until this statement has been approved and published.

Clause 161: Investigations: general

317.     Where the Authority or the Secretary of State, whichever is the investigating authority, has launched an investigation into a person under clause 158 or clause 159 they must notify that person that the investigator has been appointed. They must also inform the person under investigation of the reason for the appointment, and the particular provisions of the Bill under which the appointment has been made. However no notification is needed for investigations under clause 159 into possible insider dealing, market abuse or misleading statements and practices, or into contraventions of the general prohibition under clause 17, the financial promotion prohibition under clause 19 or the prohibition on promoting collective investment schemes under clause 231, since in those cases the investigator may not know the identity of the perpetrator or may be looking into market circumstances at the outset of the investigation rather than investigating a particular person.

318.     Subsection (5) allows employees of the investigating authority to act as investigators under this Part of the Bill.

319.     Subsections (7) and (8) allow the investigating authority to control the scope, timetable and form of the investigation by issuing directions to the investigator(s). Any directions must be notified to the person under investigation under subsection (9) except for those types of investigation where initial notice is not required.

Clause 162: Powers of persons appointed under section 158

320.     This clause establishes the powers of investigators appointed under the general investigations power to require people to attend before them and answer questions, and to provide information or documents. The investigators may only impose these requirements where they reasonably consider that the questions, information or documents in question are relevant to the investigation. And they may only impose them on the person under investigation, or any other "connected person" as defined in subsection (4). These limitations reflect the broad grounds on which the general investigatory power is exercisable.

Clause 163: Additional power of persons appointed under section 159(1)

321.     This clause establishes wider powers for investigators appointed under clause 159, the particular cases power. This clause only applies where a person has been notified under clause 161 as the subject of the investigation, and so does not apply to an investigation into possible insider dealing, market abuse, misleading statements and practices or a breach of the general prohibition or the promotional prohibitions. Because the grounds required under clause 159 are more specific, the powers available to the investigator are wider in terms of who may be required to give information. A person who is not the person under investigation or connected to that person may only be asked questions so long as the investigator is satisfied that it is necessary or expedient to do so. The term "connected" attracts the same meaning as under the previous clause.

Clause 164: Powers of persons appointed to investigate as a result of section 159(2)

322.     This clause establishes wider powers for investigators appointed to investigate possible insider dealing, market abuse, misleading statements and practices or a breach of the general or the promotional prohibitions under clauses 17, 19 or 231. Because these are liable to focus, at least initially, on market circumstances rather than the conduct or circumstances of any particular person, there is no requirement to notify a particular person as the subject of the investigation. So the concept of connectedness does not apply. The investigator can require any person to attend and answer questions, or to supply information or documents, so long as the investigator considers that they may be able to give information relevant to the investigation.

Clause 165: Admissibility of statements made to investigators

323.     A statement made by a person in compliance with a requirement imposed by an investigator under this Part is generally admissible in any proceedings. But it may not be adduced against that person, or questions relating to it asked, by the prosecution in criminal proceedings other than for the charges listed in subsection (3), nor by the Authority in proceedings before the Tribunal to determine whether a penalty for market abuse should be imposed. It may, however, be adduced, or a question relating to it may be asked, by the person himself, or by those acting on his behalf. It can be used by the prosecution or the Authority in cases against another person, or in cases against that person where the charge is one of those listed in subsection (3). All of these latter charges relate to the provision of false information.

324.     The clause is necessary to take into account the judgment by the European Court of Human Rights in the Saunders case (Saunders v UK 1997/23, ECHR 3B).

Clause 166: Information and documents: supplemental provisions

325.     This clause enables the Authority or an investigator appointed by either the Authority or the Secretary of State under this Part to compel the production of a document by a person who is holding a document on behalf of another person if they would have the power to compel the latter to produce the document if they held it. If any person required to produce a document fails to do so, they may be compelled to state where, to the best of their knowledge, the document is.

326.     A document once obtained may be copied or have extracts taken from it, and the person producing the document, or any other relevant person, may be required to explain it. But the production of a document does not affect any rights a third party may have over it.

327.     None of the powers under this Part may be used to compel a person to produce or disclose a privileged communication, such as advice from their legal adviser, although a lawyer may be compelled to disclose the name and address of their client. The term privileged communication is defined in clause 401.

328.     Documents subject to banking confidentiality may also be withheld unless the person holding the information, or the person to whom the duty of confidence is owed, is the person under investigation or a related company, or the person to whom the duty is owed consents to its disclosure, or the requirement to disclose has been specifically authorised by the Authority or the Secretary of State.

Clause 167: Entry of premises under warrant

329.     An investigator appointed by the Authority or the Secretary of State may obtain a warrant for entry to any premises from a justice of the peace, or from a JP or a sheriff in Scotland. Such a warrant can then be executed by a police constable (subsection (5) sets out what the constable may do in the exercise of the warrant).

330.     To issue the warrant the justice of the peace or sheriff must be satisfied that there are reasonable grounds for believing:

  • a request for information under this Part has not been wholly complied with, and that the documents or information may be found on the premises concerned; or

  • the premises are the business premises of an authorised person or appointed representative, that information or documents on those premises could be required by the Authority or the investigator, but that a request for that information or those documents would not be complied with, or would result in the information or documents being removed, tampered with or destroyed; or

  • a serious offence has or is in the process of being committed, and that there is information or are documents on those premises which are relevant to that offence, which could be required by the Authority or the investigator, but which would not be produced, or which might be removed, tampered with or destroyed.

331.     Subsections (6) and (7) apply to these warrants certain safeguards and other protections that apply to warrants issued under the Police and Criminal Evidence Act and the equivalent order in Northern Ireland. This includes giving the constable the right to employ reasonable force to gain entry.

332.     Subsection (8) provides for documents seized under a warrant to be held for up to 3 months, or for longer if relevant proceedings are instituted during that period.

Clause 168: Offences

333.     If a person fails to comply with a requirement imposed under this Part without a reasonable excuse, the Authority or the Secretary of State may certify the fact to a court and the court may then deal with the person as if he were in contempt. A person who intentionally obstructs the exercise of any rights conferred by a warrant under the preceding clause is guilty of a criminal offence and liable on summary conviction to a prison term of up to 3 months, or a fine up to level 5 on the standard scale (£5,000), or both.

334.     A person who knowingly or recklessly provides false or misleading information in response to a requirement under this Part also commits an offence. On summary conviction he would be liable to a prison term of up to 6 months, or a fine up to the statutory maximum (£5,000), or both. On indictment he would be liable to a prison term of up to 2 years, or a fine, or both.

335.     The same penalties would be available against anyone who knows or suspects that an investigation is likely to be conducted and falsifies, conceals, destroys or disposes of any document he knows or suspects to be relevant, or causes such a document to be falsified, concealed, destroyed or disposed of.

PART XII: CONTROL OVER AUTHORISED PERSONS

336.     This Part is concerned with persons who intend to acquire control over UK authorised persons by virtue of their shareholding or voting rights. The Part also deals with increases and decreases in the extent of a person's control. Specifically, a person who proposes either to acquire control or to increase the level of their control must notify the Authority and secure its approval. The Authority may object to a particular acquisition or increase in control or it may attach certain conditions to its approval. A person proposing to decrease their control must merely notify the Authority of their intention. A breach of the obligations imposed by this Part is a criminal offence. The requirements in this Part are necessary to meet certain single market directive obligations. They carry forward similar requirements in existing legislation. For consistency, the requirements have been extended to cover controllers of all authorised persons incorporated in or formed under any part of the UK and not just those persons which are included in the scope of the single market directives. Parts of the existing legislation place similar notification requirements on persons who exercise control over authorised persons by virtue of their position in that firm or in a parent firm, for example as a director or chief executive. These sorts of people may need to be approved by the Authority under Part V of the Bill.

Clause 169: Obligation to notify the Authority

337.     This clause imposes a requirement on persons who propose to acquire control (or acquire an additional kind of control) or increase their control over a UK authorised person to give the Authority a "notice of control" informing them of their intentions. What constitutes "control" and a "kind of control" for these purposes is described in clause 170. The circumstances in which a person is taken to "increase" their control are set out in clause 171.

338.     Subsection (2) provides for passive acquirers of control. These are persons who acquire control without themselves taking any action, for example, through inheriting a large number of shares. A passive acquirer may not be able to notify the Authority in advance, but under this subsection, they must do so within fourteen days of first becoming aware that they have acquired the control.

339.     A person who is required by subsection (1) to notify the Authority of his proposal to acquire or increase control is also required by subsection (3) to make a further notification when the acquisition or increase has taken place.

340.     Subsection (4) defines the range of authorised persons with whose control of whom this Part is concerned. In line with single market directive requirements this is limited to authorised persons incorporated in or formed under the law of any part of the UK, "UK authorised persons". This is because under the single market directives, the supervision of those who have control is subject to home State regulation. The requirements do however cover all classes of UK authorised persons and not just those included in the scope of the single market directives.

Clause 170: Acquiring control

341.     This clause defines the circumstances in which a person acquires control and is therefore subject to the obligation to notify the Authority under clause 169(1)(a) or (b).

342.     A person may acquire control either directly via a shareholding or voting power in the UK authorised person itself, or indirectly via a shareholding or voting power in a parent of the UK authorised person. This is required by the single market directives.

343.     Subsection (3) provides that for the purposes of determining whether a person has control, the percentage shareholding or voting power is aggregated with that of their associates as defined in clause 397. This means, for example, that where a firm has a holding of 5% of the shares in a UK authorised person and one of its subsidiaries has a holding of 7% of the shares in the same UK authorised person, the firm will be required to notify the Authority (provided that neither the parent nor subsidiary already has significant influence).

344.     Subsection (4) sets out what constitutes a "kind" of control. A person who has control of one kind would be required under clause 169 to notify the Authority again were they to acquire control of a different kind either as well as, or instead of, the control they had before.

 
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Prepared: 15 February 2000