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

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Clause 206: The scheme manager

417.     The clause requires the Authority to establish a company to manage the scheme and sets requirements as to the company's constitution, including that the chairman should be appointed by the Authority with the approval of the Treasury and that board members should act independently of the Authority.

Clause 207: The compensation scheme

418.     This clause imposes certain requirements about the Authority's rules establishing the scheme, to provide for compensation to be payable. It also makes it clear that customers may be eligible to make a claim against an authorised person even if the claim arises in relation to an activity for which that authorised person did not have permission. A claim relating to an appointed representative who is an exempt person by virtue of clause 37 may also qualify under the scheme. Claims would not, however, be eligible if they related to regulated activities carried on by a person who should be authorised but is not.

419.     The scheme will levy authorised persons to cover both the costs of compensation and its administrative costs.

420.     Subsection (5) means that in setting the levy, the scheme manager should try, so far as is practicable, to avoid cross-subsidy between sectors. The Authority proposes to maintain separate "sub-schemes" for insurance, deposit taking and investment business and has proposed that those groups might be further sub-divided into contribution groups. This would mean that, for example, building societies would not normally have to contribute to cost of failures in the insurance sector, or stockbrokers for failures among pensions advisers.

421.     Subsection (10) makes it clear that claims can only be made against the scheme in relation to a person who is authorised to carry on regulated activities in the UK under passporting arrangements if they were a member of this scheme. Under EEA passporting arrangements, an EEA firm need not join the compensation scheme where it is a member of an equivalent home State scheme which covers its activities here. However, such firms may join this UK scheme for "top up" cover where benefits payable under this scheme are higher. A number of other clauses in this Part apply to EEA firms only to the extent that they participate in the scheme.

Clause 208: General

422.     This clause clarifies the scope of the Authority's power to make scheme rules, but the power is not limited by the list.

423.     Subsection (1) provides, in particular, that the scheme may consist of a number of different compensation funds, for which levies can be raised from different sectors of the industry and different rules may be made as to the level of and eligibility for compensation.

424.     Subsections (2) to (4) enable the scheme to limit the eligibility of claimants according to a number of different factors, including where the event took place or where the claimant resides.

425.     Subsection (6) confers on the scheme manager a power to enter into arrangements with schemes established in other countries outside the EEA. Where, for example, a US firm does business in the UK and the level of compensation under the US scheme is lower than in the UK, the firm would be able to become a member of the UK scheme for the purposes of topping-up its cover. If the firm was unable to meet its liabilities, claimants might have a claim against both the US and the UK schemes. This power would enable the UK scheme to enter into an arrangement with the US scheme to avoid the need for the claimant to submit a claim to both schemes. It will be possible to make reciprocal arrangements under the power in subsection (1)(k).

Clause 209: Rights of the scheme in relevant person's insolvency

426.     Subsection (1) makes provision for the scheme to assume the rights of an eligible claimant to recover a debt from the authorised person. The authorised person's liability to the claimant would be extinguished or reduced, depending on whether the amount of compensation paid by the scheme had covered the whole of the debt. This means that where there were customers making claims in relation to the same firm, the scheme can pay compensation and then make a single claim against the assets of the authorised person for the full value of those claims, thereby reducing the inconvenience to the consumer and the administrative costs to the scheme. This provision is in line with section 54(2)(e) of the FS Act 1986.

427.     Subsection (2) allows the scheme to take on the voting rights of claimants at creditors' meetings where claimants have passed their rights to the scheme.

Clause 210: Continuity of long-term insurance policies

428.     The special nature of long-term insurance means that should an insurer go into liquidation, a simple payment of compensation may not necessarily be enough to enable policyholders to find alternative cover. This would be a problem especially where a person had developed health problems since taking out the original policy. The purposes of this clause, which carries forward special powers of the Policyholders Protection Board, is to enable the Authority to include in the scheme rules a requirement for the scheme to seek to the transfer the long-term business of a failing insurer to another company, or to secure the issue of substitute policies by another insurer.

Clause 211: Insurers in financial difficulties

429.     The Policyholders Protection Board is able to take measures to prevent an insurer going into full liquidation so that its existing policies can run their course. The special features of long-term (or "life") business are noted above. But even general insurance business (for example car or product liability insurance) can result in claims arising from events which may have happened several years earlier. This long tail of claims means that it can be difficult to crystalise the liabilities of an insurer in liquidation. The administration of insurance claims is costly and the delays for policyholders can be substantial while a liquidator seeks to work out the level of payments that can be made to creditors.

430.     Accordingly, this clause carries forward arrangements to enable the compensation scheme to give assistance to insurance companies in financial difficulties, either by transferring the insurance business to another insurer, or by enabling the continuance of insurance business by that firm. Before using this power, which is potentially of substantial benefit to policyholders, the compensation scheme must be satisfied that payments to the firm should not materially benefit other persons such as shareholders or company directors. It must also be satisfied that these measures would not cost more than the costs of compensation if the firm were allowed to go into default.

Clause 213: Scheme manager's power to require information

431.     The efficient settlement of claims will sometimes require the scheme to obtain information from a variety of sources. This clause provides the scheme manager with powers to require the provision of specified information which it considers necessary in order to be able to assess claims. Information may be required from the authorised person, or from a person who was knowingly involved in the events giving rise to the claim. Failure to comply with such a request for information, or a request under clause 214, may be punished as a contempt of court.

Clause 214: Scheme manager's power to inspect information held by liquidator

432.     This clause allows the scheme manager to inspect information held by the liquidator, administrator or trustee in bankruptcy of an insolvent relevant person. The scheme manager is only allowed to inspect documents rather than require them to be produced, which means that the cost of copying documents will be borne by the scheme and not by the liquidator. This should reduce costs to the liquidator, administrator or trustee in bankruptcy. The clause does not apply to the Official Receiver, or his Scotland and Northern Ireland counterparts.

Clause 216: Statutory immunity

433.     This clause provides immunity for the scheme and its staff from actions for damages except where they act in bad faith or where damages are sought under the Human Rights Act 1998.

Clause 217: Management expenses

434.     This clause ensures that the scheme may only recover from levies management expenses up to a certain limit. The limit must be set before the scheme includes management expenses in its calculations of the levies.

PART XVI: THE OMBUDSMAN SCHEME

435.     There are a number of ombudsman and arbitration schemes currently operating in the financial services sector:

  • Banking Ombudsman

  • Building Societies Ombudsman

  • FSA Complaints Handling Service

  • Insurance Ombudsman Bureau

  • Investment Ombudsman

  • Personal Insurance Arbitration Service

  • PIA Ombudsman

  • SFA Complaints and Arbitration Service

436.     Some of these schemes are provided for in legislation and others are purely voluntary schemes run by the industry concerned. This Part of the Bill provides for the creation of a single, compulsory ombudsman scheme for the speedy and informal resolution of disputes between authorised firms and their customers.

437.     The ombudsman's decision will be binding upon authorised firms but the complainant may choose whether or not to accept an ombudsman's determination and may instead pursue the matter in the courts.

438.     The new statutory scheme will replace the existing schemes. Plans to establish the new scheme are being put in place in advance of the enactment of the Bill. The detailed operation of the scheme will be determined largely by rules made by the Authority, on which it will be required to consult in accordance with the requirements under Part X. In December 1997, the Authority published a consultation paper (Consumer Complaints; CP4) with proposals for the exercise of their powers under the Bill. In August 1998 it issued a further paper (Policy Statement on Consumer Complaints: The New Financial Services Ombudsman) which reported on the steps being taken in the light of consultation. The Authority and the Financial Services Ombudsman Scheme Limited published a joint consultation paper in November 1999 (Consumer Complaints and the New Single Ombudsman Scheme; CP33)

Clause 219: The scheme and the scheme operator

439.     This makes clear that the object of the scheme is to resolve disputes involving consumers quickly and with minimum formality. This is a key characteristic of existing schemes. The operator of the Ombudsman Scheme must be a body corporate.

Clause 220: Compulsory jurisdiction

440.     It will be compulsory for firms authorised by the Authority to submit to the jurisdiction of the scheme. The scheme's compulsory jurisdiction may only be applied to persons who were authorised at the time the activity to which the complaint relates was carried out, and the rules must have been in force at that time. The Authority will make rules determining which activities of authorised persons fall within the compulsory jurisdiction. These activities must either be regulated activities as specified by the Treasury under clause 20 or other activities which are not regulated, but could be made regulated activities under that clause. The Authority is expected to include most of the financial services activities of authorised persons. For example in the case of insurance companies the jurisdiction of the scheme is likely to include the marketing of general insurance products even though it is not the Government's current intention that this activity should be regulated. The Authority would on the other hand be free not to include certain activities, for example kinds of professional business where it is unlikely that retail customers would ever be involved.

441.     If an activity is included in the compulsory jurisdiction of the scheme, the ombudsman will be able to consider all disputes which arise from the carrying on of that activity by the authorised person. For example if deposit-taking is specified as an activity covered by the compulsory jurisdiction of the scheme, the ombudsman will be able to consider all disputes arising from the operation of a bank account such as the withdrawal of money from a cash machine, or a stopped cheque.

442.     The clause also sets the circumstances in which a complaint can be dealt with, namely that the complainant meets the relevant eligibility criteria (set by the Authority) and has asked the ombudsman to consider the case. The scheme is not able to deal with complaints made by authorised persons, except in circumstances specified in the rules.

Clause 221: Voluntary jurisdiction

443.     Firms which are not authorised by the Authority will be able to join the scheme on a voluntary basis. Under the voluntary jurisdiction, the ombudsman scheme will be able to deal with complaints which are related to unregulated financial services activities. If an unregulated activity is subject to the compulsory jurisdiction for authorised persons, complaints about that activity when carried on by unauthorised persons can be brought within the scope of the ombudsman scheme (provided that the unauthorised person was a member of the scheme at the time to which the complaint relates, and that the rules were in force at that time). For example, the activities of consumer-credit firms who are not also authorised persons could be dealt with under the voluntary jurisdiction.

444.     The scheme's voluntary jurisdiction rules can only relate to activities which are subject, or could be made subject, to the compulsory jurisdiction rules. The voluntary jurisdiction can be applied to authorised persons where a complaint relates to an activity which could be, but has not been, made subject to compulsory jurisdiction rules.

445.     Voluntary jurisdiction rules can be made by the scheme operator with the approval of the Authority. The rules will also define which complainants are eligible.

Clause 222: Determination under the compulsory jurisdiction

446.     The ombudsman will make a decision about the complaint on the basis of what he considers is fair and reasonable in the circumstances. The scheme operator has the power under paragraph 15 of Schedule 16 to specify what matters can be taken into account when determining what is fair and reasonable. The complainant may accept or reject the award by a date set by the ombudsman. If he accepts the decision the ombudsman's award is binding on the respondent. The clause also sets out the procedures to be followed by the ombudsman.

Clause 223: Awards

447.     If a complaint under the compulsory jurisdiction is determined in favour of the consumer ("the complainant"), the firm ("the respondent") may be ordered to pay compensation up to a maximum limit which may be set by the Authority. The limit may be different for different kinds of complaint. The Authority may specify a separate limit for compensation which can be awarded for losses of a kind for which a court does not have a power to award damages for breach of contract, such as for distress and inconvenience. The ombudsman can only make a binding award up to the limit set by the Authority, but he may recommend a greater amount as fair compensation. The respondent may also be ordered to take steps to rectify the matter complained of, and this can be enforced through the courts by the complainant, if necessary.

Clause 224: Costs

448.     This clause allows the scheme operator to make rules concerning the costs which can be awarded by the scheme. These rules are subject to some constraints. Where a complaint is settled in favour of the consumer, the rules could allow the firm concerned to be required to meet the costs of both the consumer and the scheme. A consumer could only ever be required to meet the costs of the scheme, and then only if the ombudsman believes that their conduct has been improper or unreasonable, if they have been responsible for an unreasonable delay, or if their complaint was considered to be vexatious or frivolous. The clause also makes provision for recovery of costs by the scheme operator.

Clause 225: Ombudsman's power to require information

449.     The efficient settlement of complaints under the compulsory jurisdiction will sometimes require the scheme to obtain information from the parties to the dispute. This clause provides the scheme operator with powers to require parties to the complaint to provide specified information which it considers necessary for the fair determination of the complaint. It is not expected that these powers will be used on a routine basis. The Authority will also have powers to make rules requiring authorised persons to cooperate with the scheme. It will be in the interests of the complainant to cooperate.

Clause 226: Powers of court where information required

450.     This clause provides that a failure to comply with a requirement to provide information made under clause 225 may be dealt with as if it were a contempt of court.

Clause 227: Data protection

451.     This clause inserts new subsection (4A) into section 31 of the Data Protection Act 1998. This is needed to ensure that the scheme operator does not have to disclose information it has obtained when considering a complaint brought under the ombudsman scheme, if disclosure would prejudice the performance of its functions.

Clause 228: Industry funding

452.     This clause provides for the Authority to be able to levy fees on authorised persons to meet both the costs of establishing the scheme, and the costs of running the compulsory jurisdiction. The costs of the voluntary jurisdiction will be met by fees set as part of the voluntary jurisdiction rules.

PART XVII: COLLECTIVE INVESTMENT SCHEMES

453.     This Part comprises six chapters concerning collective investment schemes, including unit trusts, open-ended investment companies and overseas schemes. It includes provisions relating to the authorisation of schemes, their trustees, managers and operators and also to the rules applicable to them. The Part also makes provision for overseas collective investment schemes which may be promoted in the UK:

  • Chapter I provides the relevant definitions for this Part. It also gives the Treasury the power to specify by order that certain arrangements will not constitute a collective investment scheme. A draft of an order proposed to be made under this clause was published by the Treasury for consultation in February 1999 (Financial Services and Markets Bill: Regulated Activities - A Consultation Document).

  • Chapter II prohibits authorised persons from promoting participation in a collective investment scheme unless an exemption applies. Whilst the provisions broadly continue the basic prohibition on authorised persons promoting collective investment schemes contained in the FS Act 1986, changes have been made to reflect the new financial promotion regime set out in clause 19.

  • Chapter III contains the provisions relating to authorised unit trust schemes. These broadly follow the provisions of the FS Act 1986, although the Authority is to be given the power to approve changes to an authorised unit trust's investment and borrowing powers. New provisions are also included to deal with rule waivers and modifications, and to grant operators and trustees of authorised unit trust schemes the right to refer matters to the Tribunal in certain circumstances.

  • Chapter IV contains provisions which not only enable the Treasury broadly to continue the current regime concerning oeics, but also to make regulations concerning the establishment and regulation of other forms of oeic in the UK. At present, oeics which are incorporated and authorised in the UK must invest solely in transferable securities. The new provisions in the Bill will allow the Treasury to make regulations concerning the creation and operation of a wider range of authorised oeics, so that they can invest in assets other than simply transferable securities. Should the demand exist, the Treasury may also, under the new provisions, make regulations concerning the incorporation of unauthorised oeics. This might, for example, be done in order to allow the formation of common investment funds for charitable purposes, or in the context of ethical investments.

  • Chapter V broadly carries forward the existing provisions of the Financial Services Act and allows three kinds of overseas scheme to be "recognised" and marketed in the UK. First, schemes constituted in other member states which meet particular requirements; second, schemes authorised in designated territories; and third, schemes constituted in other territories, but which are individually recognised.

  • Chapter VI sets out the powers of investigation which will apply in relation to authorised unit trust and overseas schemes. It is intended that the principal provisions concerning investigations of oeics will be set out in the proposed Treasury regulations under Chapter IV.

Chapter II: Restrictions on promotion

Clause 231: Restrictions on promotion

454.     This clause contains the basic marketing prohibition and some exemptions from it. The main exemption is for schemes which are marketed other than to the general public. Other exemptions include promotions made in respect of authorised unit trust schemes, authorised oeics and recognised overseas schemes. The marketing prohibition applies to communications which originate outside the UK if the communication is capable of having an effect in the UK.

455.     The term "promotion otherwise than to the general public" is amplified in subsection (7) and includes promotions which are designed, so far as possible, to reduce the risk of participation by persons for whom it would be unsuitable. The prohibition on marketing to the general public will not therefore necessarily be breached if a promotion is inadvertently received by a member of the general public.

Clause 232: Single property schemes

456.     A single property scheme is, broadly, a collective investment scheme which relates to a single building or a group of buildings managed as a single enterprise. The clause gives the Treasury power to make regulations exempting the promotion of participation in single property schemes to the general public from the prohibition in clause 231. If the Treasury make regulations under this clause, the Authority may then make rules imposing duties on the operator and trustee or depositary of schemes exempted under the regulations.

Clause 233: Restriction on approval of promotion

457.     This is a new provision designed to prevent an authorised person from approving a financial promotion under clause 19 if the authorised person would not himself be permitted to make the communication under clause231.

Clause 234: Actions for damages

458.     If an authorised person contravenes a requirement under clause231 or 233, a private person who suffers loss as a result may claim damages.

Chapter III: Authorised unit trust schemes

Clause 235: Applications for authorisation of unit trust schemes

459.     Applications for an order declaring a unit trust scheme to be authorised must be made to the Authority by the manager and trustee of the scheme. The manager and trustee must be different persons. The clause gives the Authority broad scope to determine the form and content of the application, including further information to be contained in it.

Clause 236: Authorisation orders

460.     If the conditions referred to in the clause are met, the Authority may make an authorisation order declaring a unit trust scheme to be authorised. The conditions reflect certain requirements specified in the UCITS Directive which establishes a passporting regime whereby certain types of authorised collective investment scheme established in one EEA State may generally be entitled to equivalent authorisation in others. The clause includes requirements that:

  • the manager and trustee must be bodies corporate which are independent of each other and incorporated in the UK or another EEA State

  • they must be authorised persons holding the appropriate permissions;

  • the scheme must comply with the requirements of the trust scheme rules (referred to at clause 240, below); and

  • participants must be able to have their units redeemed at a price related to net asset value of the scheme property or be able to sell their units on an exchange at a similar price.

Clause 237: Determination of applications

461.     This clause sets out the time limits within which applications should be determined (and specifies that completed applications shall be determined within six months). Applicants may withdraw their application at any time before the Authority makes a determination.

Clause 238: Procedure when refusing an application

462.     If the Authority wishes to refuse an application, it must issue each of the manager and trustee with a warning notice. The warning and decision notice procedures contained in clauses 375 and 376 will then apply. Either of the manager or the trustee may refer a refusal to the Tribunal.

Clause 239: Certificates

463.     If an authorised unit trust scheme meets with the requirements of the UCITS Directive, the manager or trustee of the scheme can request that the Authority issue a certificate to that effect. The certificate will be needed if the authorised unit trust scheme is to "passport" into other European jurisdictions.

Clause 240: Rules

464.     This clause permits the Authority to make rules (known as the "trust scheme rules") concerning the constitution, management and operation of authorised unit trust schemes. These cover broadly the same matters as constitution and management regulations under section 81 of the FS Act 1986, although the arrangements under the present legislation whereby the Treasury retains a degree of control over certain constitution and management matters (such as the investment and borrowing powers of authorised unit trusts) are to be departed from, so that the Authority now has direct responsibility for these matters.

465.     The trust scheme rules are binding on the manager, trustee and participants independently of any provisions contained in the trust deed. Participants can seek to enforce the trust scheme rules against the manager or trustee as if the rules were provisions contained directly in the trust deed.

466.     The Treasury has the power to modify the Authority's rule-making powers if there is a change in the company law relating to the rights of beneficial, but not legal, owners of shares. This would enable the rights of nominee holders in authorised unit trusts to be aligned to those of shareholders in companies should the need arise.

 
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Prepared: 15 February 2000