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

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Clause 171: Increasing control

345.     This clause sets out the circumstances in which an increase in a person's control causes them to be subject to the obligation to notify the Authority under clause 169(1)(c). These are that a person's shareholding or voting power must cross one of the thresholds set out in subsection (2), or they must become a parent of the UK authorised person. These thresholds are determined largely by the single market directives.

Clause 172: Reducing control

346.     This clause sets out the circumstances in which a reduction in a person's control causes them to be subject to the obligation to notify the Authority under clause 181. These are that a person's shareholding or voting power must cross one of the thresholds set out in subsection (2), or they must cease to be a parent of the UK authorised person. The level of these thresholds is as for an increase in control and again are determined largely by the single market directives.

Clause 173: Notification

347.     This clause concerns the procedure to be followed when notifying the Authority. It specifies that the Authority may indicate the information and documents that must be supplied in support of a notification.

348.     Subsection (2) confers a power on the Authority to require persons giving a notice of control to provide the Authority with such additional information as the Authority may reasonably require.

Clause 174: Duty of Authority in relation to notice of control

349.     This clause gives the Authority up to three months from the date it receives a completed notice to determine whether to approve the application or issue a warning notice, according to the procedure in clause 375, indicating that it is proposing to object to the acquisition of, or increase in, control.

350.     Subsection (2) imposes a requirement on the Authority to consult home State competent authorities when required to do so by regulations to be made by the Treasury. The contents of this requirement are determined by the single market directives.

Clause 175: Approval of acquisition of control

351.     The Authority is obliged by this clause to notify the applicant without delay if it gives its approval.

352.     If the Authority fails to indicate its approval or to issue a warning notice within three months, subsection (2) provides that the applicant is to be treated for the purposes of the Part as having been approved.

353.     As a result of subsection (3), the approval is valid for a year, unless the Authority notifies the person intending to acquire control of a another time period. If the person does not acquire the control in that period, a fresh application is required.

Clause 176: Conditions attached to approval

354.     This clause concerns the ability of the Authority to make its approval subject to the imposition of conditions on the applicant. The Authority is able to impose such conditions as it considers desirable, having regard to its duty under clause 39 to ensure that, in general, the threshold conditions will continue to be met in relation to the UK authorised person subject to the control concerned.

355.     If the Authority imposes conditions, subsections (3) and (4) require it to issue the person with a warning notice and a decision notice according to the procedures in clauses 375 and 376. The person has a right to refer the matter to the Tribunal.

356.     Under subsection (5), persons on whom conditions are imposed may apply to the Authority to have the conditions varied or cancelled. The Authority may itself cancel a condition.

357.     The Authority may serve a notice of objection on persons who breach any conditions imposed by this clause. This is provided for in clauses 177 and 179.

Clause 177: Objection to acquisition of control

358.     This clause gives the Authority the power to object to either the acquisition of new or additional control, an increase in control, or to a person who has control who has breached a condition imposed by the Authority or who no longer meets the approval requirements.

359.     The Authority can object to a person acquiring or increasing their control where it is not satisfied that the approval requirements set out in subsection (2) are met.

360.     Subsection (3) confers a duty on the Authority to notify the applicant if it considers that the conditions for approval would be met if the applicant took or refrained from taking a particular step.

Clause 178: Objection to existing control

361.     This clause provides the Authority with the power to object to an existing controller if it is satisfied that the approval requirements are not met or that a condition of a person's permission to be a controller has been breached. The Authority may also object to a person who acquired or increased control without notifying the Authority in the required manner.

Clause 179: Notices of objection under section 178: procedure

362.     This clause sets out the process by which the Authority can object under clause 178 to an existing controller. If the Authority wishes to object to a controller, it is obliged to send them a warning notice.

363.     Subsection (2) has the effect that the Authority must comply with any requirements to consult other persons before serving a warning notice as may be prescribed by the Treasury. The Treasury will exercise this power to ensure that effect is given to requirements imposed by the single market directives to consult home State competent authorities.

Clause 180: Improperly acquired shares

364.     This clause makes provision enabling the Authority to restrict rights deriving from shares in the case of persons who continue to hold shares in breach of a notice of objection. It is a requirement of the single market directives that these powers should be available.

365.     The Authority also has the option of applying to the court for an order directing the sale of shares under subsection (3). If shares are sold in this way, subsection (6) provides that the proceeds (net of the costs of the sale) will be paid, via the court, to persons beneficially interested in them.

366.     Subsection (7) provides that the powers in this clause may only be exercised in relation to shares acquired in breach of a notice of objection or in contravention of a condition imposed by the Authority, and not to any other shares held by the person or his associates.

Clause 181: Reducing control: procedure

367.     This clause concerns notification of reductions in, and cessations of, control, whether or not the reduction or cessation is intentional.

368.     Under subsection (1) a person who proposes to reduce the control that they have over a UK authorised person, or to cease to have any control, must notify the Authority that that is their intention. The circumstances in which a reduction in control triggers this notification requirement are set out in clause 172. A person required to give a notice to the Authority under this subsection must, under subsection (3), notify the Authority again when the proposed reduction or cessation of control actually occurs.

369.     Subsection (2) requires persons whose control is reduced, or ceases, without themselves taking any action, to notify the Authority within 14 days of becoming aware of the reduction.

370.     Subsection (4) sets out various requirements in relation to the notices given pursuant to this clause.

371.     The Authority has no power to make any objection in these circumstances but it is an offence to fail to give the necessary notification.

Clause 182: Offences under this Part

372.     This clause sets out the offences in relation to this Part of the legislation.

373.     Subsections (1) and (2) provides that it is an offence not to notify the Authority in accordance with the requirements in this Part when acquiring, increasing, reducing or ceasing to have control over a UK authorised person.

374.     Subsections (3) and (4) provide that where proper notification has been given, it is an offence to carry out a proposal before the Authority has given its approval or, where it has issued a warning notice, before it has decided whether to follow the warning notice with a notice of objection.

375. A person guilty of any of the above offences is liable on summary conviction to a fine not exceeding level 5 on the standard scale, currently £5,000.

376.     It is also an offence, under subsection (5), to acquire control in contravention of a notice of objection. This is a more serious offence and a person guilty of it may be convicted on indictment to imprisonment for a term of up to two years and to a fine. There are lesser fines on summary conviction. The penalties are set out in subsections (7) and (8), and include provision for a daily fine if the offence continues.

377.     Subsection (9) provides a defence for those who are prosecuted for failing to notify the Authority of their influence. The defence is available if a person can show that he was unaware of the act or circumstance by virtue of which the duty to notify the Authority arose. In these circumstances, the person must notify the Authority within 14 days subsequently of becoming aware. Failure to do so is a criminal offence, the penalty on summary conviction being a fine not exceeding level 5 on the standard scale, currently £5,000.

Clause 183: Power to change definitions of control etc.

378.     This clause gives the Treasury power to amend by order certain definitions in this Part and others which are relevant to it.

379.     The Treasury may alter the cases in which a person is said to acquire control as set out in clause 170, and therefore it also has a power to change the definition of controller in clause 397 to ensure the two remain aligned. The Treasury may also alter the thresholds the crossing of which triggers the requirements in this Part to notify an increase or decrease in control. This power is necessary to give effect to any future change in the single market directive requirements for controllers of UK authorised persons who are not currently covered by the single market directives.

PART XIII: INCOMING FIRMS: INTERVENTION BY AUTHORITY

380.     This Part confers power on the Authority and, in certain cases, the DGFT to intervene in the business of EEA and Treaty firms who are, or have been, automatically authorised by virtue of Schedules 3 and 4. These firms are referred to in the Part as "incoming firms". This power, which is referred to as the power of intervention, does not apply in respect of persons who are authorised solely by virtue of having a permission under Part IV. Nor does it apply in respect of the additional Part IV permissions that may be held by incoming firms. The Part sets out the grounds on which the power is exercisable and the procedures for exercising it.

Clause 185: General grounds on which powers of intervention are exercisable

381.     This clause sets out the grounds on which the Authority may exercise its power of intervention. The 4 grounds are:

  • where it appears to the Authority that there has been, or is likely to be, some contravention of a rule or other requirement imposed by the Authority in accordance with the division of responsibility between home and host State under the appropriate single market directive;

  • where it appears to the Authority that the authorised person has knowingly or recklessly misled the Authority;

  • where it appears to the Authority that it is desirable to exercise the powers in order to protect customers, or potential customers, in relation to the regulated activities which the person is permitted to carry on; or

  • where the incoming EEA firm is carrying on consumer credit business in the UK under their passport and the DGFT has informed the Authority that the person has done any of the things listed in section 25(2) of the Consumer Credit Act 1974. These are factors to be taken into account by the DGFT in deciding whether a person is fit and proper to hold a consumer credit licence, and they cover contraventions of that Act, offences involving fraud, dishonesty or violence, practising racial or other forms of discrimination, and engaging in deceitful, oppressive, unfair or improper business practices.

Clause 186: Exercise of powers in support of overseas regulator

382.     This clause enables the Authority to exercise its intervention power at the request of, or for the purpose of assisting, an overseas regulatory authority ("ORA"). The Authority may exercise its powers under this clause whether or not the grounds set out in the previous clause are met. Authorities in other EEA States who are competent authorities under the single market directives are automatically ORAs. Other overseas authorities, from the EEA or elsewhere, which have functions equivalent to those set out in subsection (4) are also ORAs.

383.     When the Authority receives a request from an EEA competent authority, it must consider whether it is obliged to exercise the powers under the relevant directive. In other cases, the Authority may exercise its discretion, taking account of the factors listed in subsection (6).

384.     Under subsection (7) the Authority may make its use of its powers conditional on the ORA making an appropriate contribution toward the cost of taking the action.

Clause 187: The power of intervention

385.     This clause provides that the nature and extent of the Authority's power of intervention are the same as the power to vary a permission or impose a requirement under Part IV.

Clause 188: Procedure

386.     This clause establishes the procedure by which the Authority exercises its powers of intervention, which follows the warning-notice/decision-notice procedure used elsewhere. The intervention only becomes effective following the issuing of a decision notice. However, where the Authority considers that it should act urgently it may follow the alternative procedure set out in the following clause.

Clause 189: Procedure in cases of urgency

387.     Where the Authority believes it should use its intervention powers urgently it may follow this alternative procedure. The Authority does not have to give a warning notice and any requirements imposed by the Authority come into force as soon as the decision notice is served on the person concerned. That notice must specify what the requirements are and the reasons for imposing them. The firm has an immediate right to refer the matter to the Tribunal.

Clause 190: Power to apply to the court for injunction in respect of certain overseas insurance companies

388.     Under this clause the Authority may act on behalf of an insurance authority in another EEA member State by applying to the courts for an injunction, or in Scotland an interdict, to freeze assets held in the UK by an insurance company from that member State.

389.     The power implements article 20(5) of the 1st Non-Life directive, relating to general insurance, and article 24(5) of the 1st Life directive, relating to long-term insurance. Subsection (1) limits use of the power to where it is in accordance with those articles, which means that it is exercisable where the firm's home State authority has asked the Authority to prohibit the free disposal of assets of that firm and has confirmed that:

  • the firm has failed to comply with the requirements of article 15 of the 1st Non-Life directive or article 17 of the 1st Life directive;

  • the solvency margin of the firm has fallen below the minimum required by article 16(3) of the 1st Non-Life directive or article 19 of the 1st Life directive; or

  • the solvency margin of the firm has fallen below the guarantee fund as defined in article 17 of the 1st Non-Life directive or article 20 of the 1st Life directive.

Clause 191: Additional procedure for EEA firms in certain cases

390.     This clause imposes an additional procedure to be followed in some circumstances where the Authority proposes to use its intervention power against an EEA firm. This procedure applies where the EEA firm has contravened a requirement imposed by the Authority pursuant to host State functions under the relevant single market directive.

391.     First, the Authority must require the firm to remedy the situation. If the firm fails to do so, the Authority must request the firm's home State regulator to take appropriate measures to ensure the firm remedies the situation and inform the Authority of the measures it proposes to take (or why it does not propose to take any measures). Only if the Authority considers that the measures that the home State regulator has taken are inadequate, or if no action has been taken by that regulator, may it exercise its powers.

392.     However, where the Authority decides it needs to act urgently it may do so before it has required the firm to remedy the situation and either before it requests the home State regulator to act or, having already made a request, before it is satisfied that the home State regulator is not going to take adequate action. But if the Authority takes urgent action in this way, it must inform the European Commission and must comply with any direction from the Commission to rescind or vary the requirements imposed.

Clause 192: Rescission and variation of requirements

393.     Either on its own initiative or at the request of the authorised person who is subject to a requirement under this Part, the Authority may rescind or vary such a requirement placed on an authorised firm under its power of intervention. Refusal to rescind or vary a requirement on request gives rise to a right to refer the matter to the Tribunal.

Clause 193: Re-issue of certificate of authorisation

394.     If the Authority has exercised its power of intervention to prohibit an authorised person from carrying on a regulated activity, or to restrict the way in which an activity may be carried on, this clause gives it the power to require that person to deliver up his certificate of authorisation so that it may be replaced with one reflecting the prohibitions or restrictions imposed.

Clause 194: Effect of certain requirements on other persons

395.     Where the power of intervention is used to impose a restriction of the type covered in clause 46, then the other provisions in that clause apply.

Clause 195: Actions for damages

396.     This clause makes a contravention of a requirement imposed on an authorised person in the exercise of the intervention power actionable by third parties in the same way as a contravention of a rule under Part IX.

Clauses 196: Powers to prohibit the carrying on of Consumer Credit Act business

397.     Under the Bill, EEA firms may, on the basis of their home State authorisation, be automatically authorised to carry on the types of activity covered by the passport under the various single market directives. Two of these directives include lending in their listed activities, which encompasses consumer credit business regulated in the UK under the CCA 1974. This means that EEA firms may carry on consumer credit business without having to apply to the DGFT for a consumer credit licence and they are therefore not subject to the DGFT's powers under the CCA 1974.

398.     This clause, along with clause 197, confers on the DGFT separate powers to restrict or prohibit the carrying on, or the purported carrying on, of consumer credit business in the UK under the relevant directives if the firm or any of its employees has done any of the things listed in section 25(2)(a) to (d) of the CCA 1974. That is, if they have:

  • committed any offence involving fraud, dishonesty or violence;

  • contravened any provision made by or under the CCA 1974, or by or under any other enactment regulating the provision of credit to individuals or other transactions with individuals;

  • practised discrimination on grounds of sex, colour, race or ethnic or national origins in, or in connection with, the carrying on of any business; or

  • engaged in business practices appearing to the DGFT to be deceitful or oppressive, or otherwise unfair or improper (whether unlawful or not).

399.     Contravention of a restriction or prohibition is a criminal offence and contravention of a restriction is also grounds for imposing a prohibition. Schedule 9 sets out the procedure the DGFT must follow when imposing prohibitions or restrictions. This procedure follows that generally applicable in the CCA 1974 rather than in the other provisions of this Bill.

PART XIV: DISCIPLINARY MEASURES

400.     This Part gives the Authority powers to issue public statements or impose financial penalties in response to contraventions of rules or other requirements by authorised persons.

Clause 198: Public censure

401.     This gives the Authority the power to make a public statement concerning a contravention by an authorised person of any requirement imposed directly by the Bill, or under it, for example through the Authority exercising their rule-making power.

Clause 199: Financial penalties

402.     This enables the Authority to impose a financial penalty where it establishes that there has been a contravention by an authorised person of any requirement imposed by or under the Bill. The Authority may not both impose a penalty under this clause and withdraw the person's authorisation. A penalty imposed under this clause is payable to the Authority.

Clause 200: Proposal to take disciplinary measures

403.     This clause requires the Authority to issue a warning notice where it proposes to make a public statement about an alleged contravention or impose a penalty. The notice must include the statement the Authority proposes to make or the amount of the proposed penalty. The authorised person has an opportunity to make representations in accordance with clause 375.

Clause 201: Decision notice

404.     If having issued a warning notice, and heard any representations, the Authority decides at the end of the relevant period to proceed with the public statement or penalty, it must issue a decision notice in accordance with clause 376. This should also set out the terms of the proposed statement or the amount of the proposed fine (either of which may change in response to any representations made).

405.     The authorised person has a right to have the matter referred to the Tribunal, in accordance with the provisions of Part IX of the Bill. No action can be taken by the Authority during the period in which the person has the right to have the matter referred to the Tribunal or, where the matter has been referred, until the Tribunal hearing and any subsequent appeal have run their course.

Clause 202: Notice for payment

406.     Once the Authority has completed the procedure under clause 376, it may require payment under this clause. The authorised person has to pay the penalty within 14 days of receiving the notice imposing it. If the sum is not paid within this period, it may be recovered by the Authority as a civil debt.

Clause 203: Publication

407.     If, having gone through the appropriate procedures, the Authority decides to make a public statement under clause 198, subsection (1) provides that it must send a copy of the statement to the authorised person concerned and to any third parties to whom they copied the decision notice.

408.     The Authority must, unless certain conditions are satisfied, publish details of a decision to impose a financial penalty under clause 376(5). Under subsections (2) and (3) of this clause, the Authority may also publish prescribed details of a decision not to impose a financial penalty, but only if the authorised person concerned consents (the power to prescribe details lies with the Treasury).

409.     No such publication may take place during the period in which the person has the right to refer the matter to the Tribunal or, where the matter has been referred, until the Tribunal hearing and any appeal have run their course.

Clause 204: Statements of policy

410.     This clause requires the Authority to prepare and publish guidance on its policy concerning the imposition of penalties under clause 199 and the level of those penalties. Under subsection (7), the Authority must have regard to this published guidance when determining the level of penalties.

Clause 205: Statements of policy: procedure

411.     This clause requires the Authority to follow certain procedures when it issues a policy statement under clause 204. The procedures include a requirement to consult on its proposals.

PART XV: THE FINANCIAL SERVICES COMPENSATION SCHEME

412.     There are currently five compensation schemes operating in the financial services sector:

  • Building Societies Investor Protection Scheme

  • Deposit Protection Scheme

  • Friendly Societies Protection Scheme

  • Investors Compensation Scheme

  • Policyholders Protection Board

413.     This Part of the Bill provides for those existing schemes to be replaced with a single Financial Services Compensation Scheme, to be set up by the Authority. The Authority will have powers to prescribe the regulated activities to be covered by the scheme. Membership of the scheme will be compulsory for authorised persons carrying on relevant activities, except in the case of EEA firms that are members of equivalent schemes in their home State.

414.     The scheme will be managed by an independent scheme manager and will be funded by authorised persons. The existing schemes are to be dissolved and the relevant legislation establishing them, for example the Policyholders Protection Acts 1975 and 1997, would be repealed. Plans to integrate the existing schemes are underway.

415.     The compensation scheme will be able, as the current schemes do now, to compensate customers who suffer loss in various circumstances as a consequence of the inability of an authorised person to meet its liabilities. The scheme would not, other than in cases of the insolvency of an authorised person, provide compensation for a regulatory breach (for example the mis-selling of investments) where the liability would remain with the authorised firm.

416.     In December 1997 the Authority issued a consultation paper (Consumer Compensation; CP5) to seek the preliminary views of the various industry sectors and consumer groups. A further consultation paper (Consumer Compensation: A Further Consultation; CP24) was published in June 1999 setting out the Authority's current proposals and seeking views on issues such as the levels of compensation payable under the scheme.

 
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Prepared: 15 February 2000