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

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Clause 241: Scheme particulars rules

467.     These are rules which the Authority may make requiring the manager of an authorised unit trust scheme to give details of the scheme to the Authority and to publish or make available to the public on request certain particulars, including changes, concerning the scheme.

468.     The scheme particulars rules can provide for compensation to be paid to certain people (described as "qualifying persons") if they have suffered loss because of an untrue or misleading statement in the particulars or because of an omission from them. Qualifying persons include people who may have a beneficial, but not legal, interest in the scheme (for example, beneficiaries of a trust where the trustees hold units in the scheme).

Clause 242: Disqualification of auditor for breach of trust scheme rules

469.     The Authority may disqualify an auditor from auditing authorised unit trust schemes or authorised oeics if the auditor does not comply with the trust scheme rules. Warning and decision notice procedures will apply, as well as rights to refer a decision to the Tribunal.

Clause 243: Modification or waiver of rules

470.     This allows the Authority to modify or waive the application of any of the trust scheme rules or scheme particulars rules in respect of authorised unit trusts. If there is a modification or waiver of rules under this clause, certain of the provisions of clause139 (relating to the modification or waiver of various other of the Authority's rules and providing for the circumstances in which waivers or modifications will be granted) will apply.

Clause 244: Alteration of schemes and changes of manager or trustee

471.     Alterations to an authorised unit trust scheme or a change in the manager or trustee may not take place without the Authority's approval, or the Authority not notifying its disapproval. New managers or trustees must satisfy the requirements specified in clause 236.

Clause 245: Procedure when refusing approval of change of manager or trustee

472.     If the Authority proposes to refuse to approve the replacement of the trustee or manager, a warning notice must be given. If the Authority proposes to refuse to approve changes to the scheme, warning and decision notice procedures will apply and the matter can be referred to the Tribunal. The clause then makes provision for decision notices to be given and for reference to the Tribunal.

Clause 246: Avoidance of exclusion clauses

473.     This clause means that if a trust deed for an authorised unit trust scheme seeks to avoid the manager's or trustee's duty to exercise due care, the deed will be ineffective.

Clause 247: Revocation of authorisation order otherwise than by consent

474.     The Authority may revoke an order authorising a unit trust in the circumstances specified in the clause. These include any of the following situations:

  • the manager or trustee has contravened a requirement imposed by the Bill or the Authority's rules;

  • either of them has given the Authority misleading information;

  • the requirements for making an authorisation order (referred to in clause 236) are no longer met;

  • the scheme has been inactive for 12 months or more; or

  • it is desirable in the interests of participants to revoke the scheme's authorisation.

Clause 248: Procedure

475.     If the Authority wishes to revoke an authorisation order, it must go through the warning and decision notice procedure, giving notice to both the manager and trustee. Either of them may refer the decision to the Tribunal.

Clause 249: Requests for revocation of authorisation order

476.     The Authority can revoke an authorisation order where the manager or trustee requests it to, but it can also refuse to revoke authorisation where it considers that refusal would be in the interests of participants, or that the public interest requires an investigation before authorisation is revoked. Warning and decision notice procedures will apply as well and the decision may be referred to the Tribunal.

Clause 250: Directions

477.     The Authority may give directions requiring the manager of the scheme to cease the issue or redemption of units, or to require the manager and trustee of the scheme to wind it up by a particular date in the circumstances specified in the clause (which are broadly similar to those specified as grounds for revoking a scheme's authorisation under clause 247). If a person contravenes a direction under this clause, private persons who suffer loss as a result may be able to bring an action. Once a direction has been given, the Authority may revoke or vary that direction, either of its own accord, or on the application of the manager or trustee.

Clause 251: Applications to the court

478.     If the Authority is able to give a direction under clause250, it may apply to the court for an order removing and replacing the manager or the trustee, or simply removing them and appointing an authorised person to wind up the scheme.

Clause 252: Procedure: giving directions and varying them otherwise than as requested

479.     If the Authority wishes to give a direction under clause 250, or to vary that direction other than in accordance with an application from the manager or trustee, it must, except in an urgent cae, first go through the warning and decision notice procedure, giving notice to each of the manager and the trustee. Either the manager or the trustee of the scheme may refer a decision to give a direction or to vary it to the Tribunal.

Clause 253: Procedure: refusal to revoke or vary direction

480.     If the manager or trustee applies to the Authority for it to revoke or vary a direction given under clause 250, but the Authority proposes to refuse to do so, the warning and decision notice procedures will apply. The decision may be referred to the Tribunal.

Clause 254: Procedure: revocation of direction and grant of request for variation

481.     If the Authority decides to revoke a direction under clause 250, or to vary a direction in accordance with a request, it must give written notice of that fact. The Authority may publish information about the revocation or variation of the direction.

Clause 255: Procedure in cases of urgency

482.     This clause gives the Authority an emergency intervention power to issue or vary directions. It avoids the requirement for a warning notice and provides simply for a decision notice to be issued instead (the decision notice can take immediate, but not retrospective, effect). The person to whom the decision notice has been issued may make representations to the Authority, following which the Authority must decide its course of action.

483.     If the Authority confirms or rescinds its original decision, it must give written notice to the manager and the trustee. If, however, the Authority decides to give a different direction or make a different variation, it must give a further decision notice. The recipient of a decision notice may then refer the matter to the Tribunal.

Chapter IV: Open-ended investment companies

Clause 256: Open-ended investment companies

484.     This clause creates the broad framework for Treasury regulations relating to the establishment, carrying on, and regulation, of oeics. It provides a wide-ranging and non-exhaustive list of matters which the regulations may provide for. These include imposing criminal liability, conferring functions on the Authority (including rule-making powers and power to waive or modify rules) and power to modify or exclude any statute or rule of law. In particular, the regulations may revoke the current regulations governing oeics and provide for transitional arrangements for "grandfathering" under those regulations.

Clause 257: Amendment of section 716 Companies Act 1985

485.     This clause amends the Companies Act 1985 ("Companies Act"), so that the prohibition on formation of companies with more than 20members other than under the Companies Act will not apply to oeics incorporated by virtue of the proposed Treasury regulations.

Chapter V: Recognised overseas schemes

Clause 258: Schemes constituted in other EEA States

486.     This clause relates to the ability of collective investment schemes constituted in other EEA States to "passport" into the UK. EEA schemes will be recognised if:

  • they satisfy requirements prescribed by Treasury regulations;

  • the operator of the scheme gives notice to the Authority of the proposal to invite UK persons to participate in the scheme; and

  • the Authority does not give notice that the way in which the invitation is to be made does not comply with the relevant UK law.

Clause 259: Representations and references to the Tribunal

487.     This clause sets out the procedure if the Authority gives notice that it does not consider that the proposed invitations will comply with UK law, and representations are made to the Authority in response. The procedures allow for rights of reference to the Tribunal where the Authority issues a decision notice confirming that the way in which the proposed invitations are to be made does not comply with UK law.

Clause 260: Disapplication of rules

488.     Rules made by the Authority will not generally apply to the operator, trustee or depositary of a recognised scheme under clause 235. The exceptions are financial promotion rules, and rules relating to the maintenance of facilities in the UK (under clause 276(1)).

Clause 261: Power of authority to suspend promotion of scheme

489.     Although it cannot suspend an EEA scheme's recognition, the Authority can suspend its promotion to the public if it appears that the operator has contravened financial promotion rules. Warning and decision notice procedures will apply and the Authority will be required to notify the scheme's home State authority if it decides to make a direction under this clause. The operator will have a right to refer the decision to the Tribunal. If a direction is given under this clause, the Authority must publish it.

490.     Under this clause, the Authority may also revoke, as well as vary, a direction suspending the promotion of an EEA scheme, where specified conditions are met.

Clause 262: Schemes authorised in designated countries or territories

491.     Schemes managed in, and authorised under, the law of non-EEA territories can be recognised under this clause. In order to be recognised, the relevant territory needs to be designated by an order made by the Treasury, and the Authority must give its approval to the scheme being recognised. The Treasury may not make an order designating a territory unless it is satisfied that the relevant overseas law under which the scheme is authorised and supervised affords at least equivalent protection to that provided by the UK law on collective investment schemes.

492.     In considering whether to make an order designating a country or territory under this clause, the Treasury must ask the Authority for a report on the law and practice of the country or territory in question and on any arrangements it has made to cooperate with the authorities there.

Clause 263: Procedure

493.     If the Authority proposes to refuse to approve a scheme under clause 262, it must give the operator a warning notice. The decision notice procedure will apply, and the decision may be referred to the Tribunal.

Clause 264: Individually recognised overseas schemes

494.     This clause allows the Authority to recognise schemes which are not managed in an EEA country or a designated territory.

495.     In order to be recognised, the Authority must be satisfied as to various matters, including the adequacy of protection for the participants in the place where the scheme is established, the adequacy of the constitution and management and of the powers and duties of the operator, trustee and depositary (if any), and that those persons are either authorised (with appropriate permissions) or, if not authorised, fit and proper persons. In addition, overseas schemes will only be recognised under this clause if they are oeics or schemes where the operator is a body corporate.

Clause 265: Matters that may be taken into account

496.     This clause specifies matters which the Authority can take into account when considering whether the operator, trustee or depository of an individually recognised scheme is fit and proper.

Clause 266: Applications for recognition of individual schemes

497.     The Authority has broad scope to specify the form and content of applications (which must be made by the operator) and to seek additional information before determining an application.

Clause 267: Determination of applications

498.     This clause sets out the time periods which will apply for the determination of an application. Completed applications are to be determined within six months.

Clause 268: Procedure when refusing an application

499.     The Authority must go through the warning and decision notice procedure if it proposes to refuse an application. The applicant may refer the refusal to the Tribunal.

Clause 269: Alteration of schemes and changes of operator, trustee or depository

500.     Changes to the scheme itself cannot be made unless the operator has given notice to the Authority, and the Authority has either approved the proposal, or not notified its disapproval. As for the replacement of the operator, trustee or depositary, at least one month's notice must be given to the Authority either by the person being replaced, or the person proposing to replace him, but there is no express provision for the Authority to approve or disapprove the replacements.

Clause 270: Rules as to scheme particulars

501.     The Authority may make rules imposing duties on the operators of recognised schemes which are constituted in designated territories under clause 262 or which are individually recognised under clause 264. These rules broadly correlate to scheme particulars rules for authorised unit trusts.

Clause 271: Revocation of recognition

502.     Recognition of schemes constituted in designated territories or individually recognised schemes can be revoked in the circumstances set out in this clause. These are broadly similar to the grounds for revocation under clause 247.

Clause 272: Procedure

503.     If the Authority proposes to revoke recognition under clause 271, the warning and decision notice procedure will apply. Notice must be given to the operator, and if any, the trustee and depositary. The decision may be referred to the Tribunal.

Clause 273: Directions

504.     Instead of proposing to revoke recognition under clause 271, the Authority can effectively direct that a scheme's recognition will be suspended.

Clause 274: Procedure

505.     Where the Authority proposes to give a direction under clause 273, the warning notice and decision notice procedure will apply. The notices will need to be given to the operator and, if any, the trustee or depositary. Decisions can be referred to the Tribunal.

Clause 275: Procedure in cases of urgency

506.     If the Authority considers that it should give a direction to suspend recognition under clause 273 as a matter of urgency, it may do so by giving a decision notice. The recipients of the decision notice can then make representations to the Authority. Procedures broadly similar to those set out in clause 255 (concerning urgent suspension of authorised unit trusts) will apply.

Clause 276: Facilities and information in the UK

507.     The Authority may make rules requiring operators of all recognised schemes to maintain facilities in the UK. It may also require the operator of a recognised scheme to include explanatory information in financial promotions which name the scheme.

Chapter VI: Investigations

Clause 277: Power to investigate

508.     The Authority or the Secretary of State can appoint a person to carry out investigations concerning collective investment schemes. The provisions do not generally extend to the investigation of oeics, as provision concerning those investigations is expected to be contained in the proposed Treasury regulations.

509.     The person carrying out the investigation has powers to investigate other persons or matters where necessary or relevant. The provisions concerning the conduct of investigations set out in clause 161 will generally apply and statements made to the investigator may be admissible in proceedings in the circumstances set out in clause 165. Persons will not be required to disclose privileged communications or information subject to the bankers' duty of confidentiality. The provisions of clause 168 will also apply, so that failure to comply with a requirement imposed in connection with an investigation will be an offence, and persons who are convicted as a result of an investigation may be liable to pay the Authority's costs.

PART XVIII: RECOGNISED INVESTMENT EXCHANGES AND CLEARING HOUSES

510.     This Part provides for the regulatory regime for recognised investment exchanges and clearing houses. These recognised bodies are exempt from the need to be authorised. This regime is similar to that which exists under the FS Act 1986.

511.     Chapter I of this Part:

  • gives the Treasury the power to set the requirements that such bodies have to meet in order to be recognised;

  • sets out the application procedures and supervisory arrangements for recognised bodies, including conferring powers to revoke recognition and to direct recognised bodies to take steps to meet the recognition requirements;

  • allows the Treasury, jointly with the Secretary of State, to extend special protection from insolvency law to organisations clearing certain non-investment contracts.

512.     Chapter II provides for competition scrutiny of recognised bodies. This places a duty on the DGFT, and gives him powers, to investigate and report on any significant anti-competitive effect of these bodies' rules, guidance and practices, or any abuse of a dominant market position. It allows the Treasury, on receipt of such a report, to direct, through the Authority, that appropriate changes are made to such rules, guidance or practices, if they are satisfied either that the anti-competitive effect is greater than is necessary to achieve various permitted purposes, or that a dominant position is being abused. Chapter III disapplies the general domestic competition law as it affects the matters covered by the Bill regime. Chapter IV contains definitions of key terms.

Chapter I: Exemption

Clause 278: Exemption for recognised investment exchanges and clearing houses

513.     Subsection (1) defines what is meant by a recognised investment exchange and clearing house.

514.     Subsections (2) and (3) set out the scope of the exemption for recognised bodies, or their recognised nominees, from the need to be authorised in order to carry on regulated activities which it carries on as an exchange or clearing house. Exchanges, or their recognised nominees, are also exempt as respects anything they do for the purposes of, or in connection with, the provision of clearing services. (More details on recognised nominees are contained in the notes to clause 280.)

Clause 279: Qualification for recognition

515.     Subsection (1) allows the Treasury to set recognition requirements by regulations. Recognition requirements are the requirements which must be satisfied by an exchange or clearing house in order both to become recognised, and to remain recognised. In February 1999, the Treasury published draft regulations for public consultation (Financial Services and Markets Bill: Draft Recognition Requirements for Investment Exchanges and Clearing Houses).

516.     Subsection (2) provides that if the regulations made under subsection (1) contain provisions relating to the default rules of a recognised body, then the Treasury has to have the approval of the Secretary of State before making the regulations. (The Secretary of State is responsible for insolvency policy.)

517.     Subsection (3) defines default rules. These are rules which provide for action to be taken to close out market contracts in the event of a default. These are necessary to protect against systemic risk in the financial markets. If contracts could not be closed out in an orderly and speedy manner, a default by one market participant could spread quickly to large numbers of market participants.

518.     Subsection (4) defines market contract by reference to Part VII of the Companies Act 1989. Market contracts in this context are those entered into by the exchange or clearing house or by the members of an exchange.

Clause 280: Application by an investment exchange

519.     This clause allows an organisation to apply for recognition as a recognised investment exchange and sets out the information that the applicant must send to the Authority.

520.     Subsection (2) allows the applicant for recognition to ask for the recognition order to declare a person to be its recognised nominee. A recognised nominee is a body which carries out functions on behalf of a recognised body which would, if the recognised body itself was carrying them out itself, come within the scope of its exemption. It is not a recognised body itself, and all of the duties and responsibilities under the Act continue to apply to the recognised body. If the order is made, the recognised nominee as well as the recognised body will be exempt from the requirement to be authorised.

Clause 281: Application by a clearing house

521.     This clause allows an organisation to apply for recognition as a clearing house and sets out the information that the applicant must send to the Authority. As is the case for investment exchanges under clause 280, this clause also allows a clearing house to apply for the recognition order to cover a recognised nominee.

Clause 282: Applications: supplementary

522.     This clause allows the Authority to seek additional information, in whatever form it requires, in respect of any application for recognition. It also allows the Authority to require verification of that information.

Clause 283: Recognition orders

523.     This clause allows the Authority to make a recognition order if it is satisfied that the applicant meets the recognition requirements. The Authority is not obliged to make a recognition order in this circumstance and subsection (5) allows the Authority to take any information into account, and not just information concerning the recognition requirements, when deciding whether to grant recognition.

524.     Subsection (2) provides that the Authority can only make a recognition order where the applicant has asked for the order to cover its recognised nominee (under clauses 280(2) or 281(2)) if it is satisfied that the recognised body will meet the recognition requirements in that case.

525.     Subsection (4) requires the Treasury to give their approval before the making of a recognition order. The Treasury may not do this (under clause 296) unless they are satisfied that the rules, guidance and arrangements of the investment exchange or clearing house are not unjustifiably anti-competitive.

526.     Subsection (7) requires the Authority to notify an applicant of a refusal to grant recognition, giving reasons for the refusal and giving an opportunity to make representations. This follows the procedure for revocation of recognition in clause 292. Subsection (8) provides that these procedures do not apply where the Treasury have refused approval for recognition on competition grounds under clause 296.

Clause 284: Liability in relation to recognised body's regulatory functions

527.     This clause gives recognised investment exchanges and recognised clearing houses and any recognised nominee immunity against legal action for damages in respect of anything done or omitted in the discharge of the recognised body's regulatory functions. This immunity does not apply where the act or omission was in bad faith or where it was unlawful as a result of section 6(1) of the Human Rights Act 1998. Section 6(1) says that it is unlawful for a public authority to act in a way which is incompatible with a convention right.

Clause 285: Overseas investment exchanges and clearing houses

528.     This clause modifies the application procedures and requirements where the applicant concerned is an overseas investment exchange or clearing house.

529.     In order to be recognised, an overseas applicant does not need to comply with the recognition requirements made by the Treasury under clause 279. Instead, subsection (2) provides that the Authority may make a recognition order in respect of an overseas applicant if the requirements set out in subsection (3) are met. These requirements are that investors are afforded protection equivalent to that which they would have had if the overseas body were required to comply with the recognition requirements; that there are adequate default procedures; that the applicant is able and willing to cooperate with the Authority; and that adequate arrangements are in place enabling the Authority to cooperate, for example through the sharing of information, with the overseas body's home State supervisor.

530.     Subsection (5) makes some changes as to how other provisions of this Part work in respect of overseas bodies given that the relevant requirements which they have to meet are those set out in subsection (3) rather than the recognition requirements made by the Treasury.

Clause 286: Notification requirements

531.     Subsections (1) to (4) allow the Authority to make rules requiring a recognised body to give it notice of, and information about, specified events or information about the recognised body or its recognised nominee which the Authority reasonably requires to carry out its functions. The Authority can also specify when, and in what form, the information should be provided.

532.     Subsections (5) to (8) place a duty on the recognised body to give the Authority immediate notice of new rules and guidance, or of changes to existing rules and guidance. The recognised body must attach a statement to any such notice stating whether the change is likely to have any effect on competition. Recognised bodies are also required to notify the Authority of changes to their clearing arrangements. Subsection (9) provides that these duties do not apply to recognised overseas bodies. They are placed under different obligations under clause 288.

 
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Prepared: 15 February 2000