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

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Clause 287: Modification or waiver of rules

533.     This clause gives the Authority power to waive or modify the notification rules it can make under clause 286, at the request of the recognised body or with their consent. Subsection (4) sets out the circumstances in which the Authority may do this.

Clause 288: Notification: overseas investment exchanges and overseas clearing houses

534.     This clause requires overseas investment exchanges and clearing houses to produce a report at least once a year giving details of any events which have occurred over the year which may have an effect on competition, or which might affect the Authority's assessment of whether the requirements set out in clause 285 are satisfied. The Authority can also make rules requiring that additional information should be included in the report.

Clause 289: Authority's power to give directions

535.     This clause allows the Authority to direct a recognised body which has failed to satisfy the recognition criteria, or has failed to comply with other obligations under the Bill (for example those in this Part) to take steps to remedy that failure. The Authority can also give a direction to a recognised nominee in these circumstances. This is a new power which has been introduced to give the Authority a remedy to deal with problems which are not so serious as to merit withdrawal of recognition from the body concerned.

Clause 290: Variation of recognition order in relation to recognised nominee

536.     This clause will allow an investment exchange or clearing house which is already recognised to apply to vary the recognition order granted under clause 283 in order to add, change or remove a recognised nominee.

537.     Subsection (2) gives the Authority the power to direct the manner in which applications must be made and require the recognised body to provide it with such information as it needs to determine the application. The Authority will only be able to vary a recognition order if it considers that the recognition requirements will continue to be met following the variation of the order.

Clause 291: Revoking recognition

538.     This clause allows the Authority to revoke the recognition of a body which no longer wishes to remain recognised, or which no longer meets the recognition criteria or which has failed to comply with other obligations under the Bill.

Clause 292: Directions and revocation: procedure

539.     This clause sets out the procedure the Authority must follow when it proposes to give a direction or make a revocation order. This includes giving the recognised body, its recognised nominee, its members and third parties who might be affected the right to make written representations. Subsection (9) allows the Authority to give a direction without following these procedures if it considers that it is essential to do so and subsection (11) provides that these procedures do not apply where the Treasury have given a remedial direction to the Authority on competition grounds.

Clause 293: Complaints about recognised bodies

540.     This clause provides that the Authority must establish a procedure for the investigation of complaints against recognised bodies where the complaint is relevant to the question of whether the body should remain recognised or not.

Clause 294: Supervision of certain contracts

541.     This clause allows the Treasury, acting jointly with the Secretary of State, to make regulations which extend the provisions of Part VII of the Companies Act 1989, with any appropriate modifications, to certain non-investment contracts. Part VII of the Companies Act 1989 disapplies various provisions of insolvency law for market contracts in order to protect against systemic risk in the financial markets.

542.     Subsection (2) and (3) set out what kind of contracts can be covered by these regulations. There are two criteria:

  • first, the contracts must be settled by someone who is on a list maintained by the Authority for the purposes of this section. The Treasury, under subsection (4), has to approve the conditions set by the Authority for admission to this list and the arrangements for admission to and removal from the list;

  • second, the Treasury and the Secretary of State have to be satisfied that it is appropriate for the Authority to supervise the settlement arrangements for these non-investment contracts. In coming to a view, the Treasury and Secretary of State must have regard to the extent to which the contracts are dealt in by persons supervised by the Authority.

543.     Subsection (10) allows the Treasury and the Secretary of State, in making regulations under this clause, to apply any of the provisions of this Bill to the person settling these contracts. Without this power it would not be possible for the Authority to regulate such persons on a statutory basis, since they would be clearing non-investment contracts and so would not require authorisation or exemption.

Chapter II: Competition Scrutiny

Clause 295: Interpretation

544.     This clause describes the "regulatory provisions" (that is the rules, guidance, arrangements and particulars), practices and trading practices which are to be scrutinised under this Part to assess whether they have a significant anti-competitive effect as defined in this clause. "Trading practices" are the practices of members of the body which they are required to adopt as a result of their membership of the body concerned.

545.     Subsection (3) lists the "permitted purposes" referred to in clauses 296 and 297.

Clause 296: Examination of rules and guidance

546.     This clause provides that an investment exchange or clearing house cannot be recognised by the Authority unless the Treasury, following a report from the DGFT, has given its approval. Approval must be withheld if the Treasury considers that the applicant's proposed regulatory provisions:

  • will have an anti-competitive effect greater than is necessary to achieve a permitted purpose; or

  • may bring about the abuse of a dominant market position, either by the applicant institution, or by its members. (Such abuse may occur where the person is dominant in a particular market as a result of having a large market share.)

547.     Subsection (4) provides that if the DGFT is of the opinion that the regulatory provisions will not have a significant anti-competitive effect, then the Treasury may not withhold approval of the application.

Clause 297: Continuing scrutiny

548.     This clause gives the Treasury the power to give a remedial direction following an adverse report about a recognised body by the DGFT. The Treasury may give a direction only if it concludes that the body's regulatory provisions or practices or the trading practices of its members:

  • have an anti-competitive effect greater than is necessary to achieve a permitted purpose; or

  • amount to an abuse of a dominant market position, either by the applicant institution, or by its members.

549.     Such a direction may take one of three forms. It may require the Authority:

  • to withdraw recognition from the body concerned;

  • to direct the body to make changes to ensure that any anti-competitive effect is no greater than is necessary for the permitted purpose; or

  • to prevent the person concerned from continuing with behaviour which amounts to an abuse of a dominant position.

Clause 298: Initial report by Director General of Fair Trading

550.     This clause requires the Authority to send to the DGFT and to the Treasury all the regulatory provisions or other information received in support of an application for recognition. The DGFT must then take a view and inform the Treasury whether, and if so why, any of these provisions produce a significant anti-competitive effect, or amount to an abuse of a dominant position.

Clause 299: Further reports by Director General of Fair Trading

551.     This clause requires the DGFT to keep all recognised investment exchanges and clearing houses under continuing competition scrutiny. To facilitate this, it provides that the Authority must copy to the DGFT and the Treasury any new or amended rules or guidance which it receives from a regulated body under clause 286(5), together with the statements provided under clause 286(8) as to the effect these changes might have on competition. If, at any time, the DGFT forms the view that any regulatory provision, practice or trading practice has a significant anti-competitive effect, or results in an abuse of a dominant position, then he must report this to the Treasury.

552.     Subsection (5) provides that if the DGFT concludes that a new regulatory provision notified to him will not have a significant anti-competitive effect, or will not amount to an abuse, then he has discretion as to whether to report this to the Treasury.

Clause 300: Reports: supplementary

553.     Subsections (1) and (2) provide that, if the DGFT does make a report to the Treasury under clause 299, his report must include the reasons for his conclusion.

554.     Subsection (3) provides that the DGFT has discretion whether or not to publish any report he makes under clause 299(5), whereas subsection (4) provides that the Treasury must publish any report it receives from the DGFT which says that there is a significant anti-competitive effect or an abuse of a dominant position. In each of these cases, subsection (5) requires that any confidential information relating to a person other than the investment exchange or clearing house in question should, so far as practicable, be removed from the report before publication.

Clause 301: Investigations by the Director General of Fair Trading

555.     This clause confers powers on the DGFT to enable him to carry out his functions under clauses 298 and 299. The DGFT will be able to request relevant documents from any person, and to request relevant information from any business. Subsection (4) makes it clear that these powers do not extend to communications which are legally privileged.

556.     Subsections (5) and (6) provide that if a person fails to produce the information or documents required, then the DGFT may report the matter to the court. If the court is satisfied that there was no reasonable excuse for this failure, the person may be dealt with as if he had been in contempt.

Clause 302: Procedure on exercise of certain powers by the Treasury

557.     This clause provides that if the Treasury has received an adverse report from the DGFT, whether at the application stage or later, and is considering taking action in response to this, then it must invite the body concerned, and any other interested parties, to make representations prior to its taking a decision not to approve recognition, or to give the Authority a remedial direction. Representations may be made in relation both to the contents of the DGFT's report, and to the steps, if any, that the Treasury might take in response.

Chapter III: Exclusion from other UK competition law

Clause 303: Monopoly situations etc

558.     This makes clear that in carrying out investigations into possible complex monopoly situations under the Fair Trading Act 1973, the Competition Commission must not take into account the effects of any regulatory provisions or practices of recognised investment exchanges or clearing houses, or trading practices of their members, nor of any action taken in compliance with these.

Clause 304: The Chapter I prohibition

559.     This clause makes clear that the prohibition of agreements preventing, restricting or distorting competition within the UK in Chapter I of the Competition Act 1998 does not apply to the constitution of a recognised investment exchange or clearing house or to a body which has applied for recognition; nor to the regulatory provisions of a recognised body; nor to a decision or practice of a recognised body, in respect of its regulatory functions; or to the trading practices of a member of a recognised body.

Clause 305: The Chapter II prohibition

560.     This clause makes clear that the prohibition of abuse of a dominant position in a market which may affect trade in the UK in Chapter II of the Competition Act 1998, does not apply to the regulatory provisions or practices of a recognised investment exchange or clearing house, nor to the trading practices or conduct of its members, to the extent that these are required by the body's regulatory provisions.

PART XIX: LLOYD'S

561.     This Part of the Bill makes a number of provisions which supplement other parts of the Bill to bring the Society of Lloyd's (the "Society") within the general regulatory framework. These provisions are needed to reflect the unique legal status of the Society and its members, and the functions of the Council of Lloyd's (the "Council"), the governing body of the Society, under the Lloyd's Acts 1871-1982, in relation to the Lloyd's community.

562.     Lloyd's is currently regulated for solvency purposes by the Authority in accordance with the arrangements under Part IV of the ICA 1982. The FS Act 1986 provides an exemption for Lloyd's and underwriting agents as respects investment business carried on by them in connection with or for the purposes of insurance business at Lloyd's. For most purposes, regulation of the Society has been undertaken by the Council.

563.     The Bill gives the Authority considerable discretion as to how it discharges its obligations for the regulation of Lloyd's. In December 1998, it published its proposals for public consultation (The future regulation of Lloyd's; CP16). The Authority published a feedback statement setting out its proposals in the light of that consultation in June 1999. Detailed proposals setting out the new solvency and reporting requirements for Lloyd's were published in December 1999.

564.     The external regulation of the Lloyd's community by the Authority is achieved by a number of different provisions in the Bill. By virtue of this Part, the Society - a body corporate - is to be authorised to carry on certain regulated activities. The permission will be defined by the Authority, as if it had been granted under Part IV. Primarily, the permission will cover making arrangements which enable members to carry out contracts of insurance. The activities of managing and members' agents (or "underwriting agents") will become regulated activities for the purposes of the Bill, and so underwriting agents will need to be authorised and have relevant permission under Parts III and IV. Having been authorised, the Society and agents will be subject to the full range of the Authority's powers under the Bill, including its rules and its powers of investigation and discipline and, ultimately, the power to withdraw authorisation, as is the case with other authorised persons under the general provisions of the Bill.

565.     Members of Lloyd's will benefit from an exemption from the need to be authorised in relation to their insurance business at Lloyd's. They will, nonetheless, be subject to regulatory arrangements as directed by the Authority under powers contained in this Part, and subject to the powers of the Council. As a minimum, the Authority will need to require the members to meet the solvency requirements laid down under the relevant EC Directives. A member of Lloyd's would, however, need permission to carry on any other regulated activity, for example advising on investments.

Clause 307: Authority's general duty

566.     The current intention is that Lloyd's should not be subject to full regulation by the Authority when the Bill is enacted. Certain regulatory functions will be left with the Council. However, the Authority will at any time be able to take a greater degree of direct responsibility for regulation if it considers it appropriate and this clause, therefore, places a duty on the Authority to keep matters under review.

Clause 308: The Society: authorisation and permission

567.     This clause makes the Society an authorised person, without it needing to submit an application. This is needed because, unlike most other current businesses, Lloyd's does not have an authorisation from an existing regulator that can be grandfathered.

568.     Subsection (3) limits the activities for which the Society will have permission, at the time it becomes authorised, in broad terms to arranging deals in insurance contracts, syndicate participation and connected activities. The precise terms of the permission will depend on the activities specified for the purposes of clause 20(1). Subsection (4) gives the Authority a power, where it considers it appropriate, to limit the scope of the permission, at the time the authorisation comes into force, or at any time thereafter. Lloyd's would apply for an extension of that permission in accordance with Part IV.

Clause 309: Direction by Authority

569.     This clause confers on the Authority power to give directions applying the general prohibition to members of Lloyd's or applying core provisions to members. This power can be used in relation to a member of Lloyd's, or members taken together, though they will not, at least at the outset, be authorised persons. Directions under this clause may specify the extent to which the "core provisions" of the Bill, as set out in clause 310, will apply to them and would impose requirements directly on the members which the Authority will be able monitor and enforce. The Authority could, for example, apply to members general rules requiring persons carrying out contracts of insurance to appoint an actuary to assess the extent of their liabilities. It could also require members to be authorised if it considers that appropriate.

Clause 310: The core provisions

570.     The core provisions which the FSA may decide to apply to members of Lloyd's under clause 309 relate to:

  • the performance of regulated activities;

  • rules and guidance;

  • information gathering and investigations;

  • control over authorised persons;

  • auditors and actuaries;

  • notices.

Clause 311: Exercise of powers through the Council

571.     This clause gives the Authority an alternative mechanism to its power of direction under clause 309. Instead of, or in addition to, giving a direction to the members of Lloyd's, the Authority can direct the Society of Lloyd's or the Council to use their powers - such as the byelaw making powers of the Council under Lloyd's Act 1982 - to impose obligations on members. It would, therefore, be open to the Authority to set solvency requirements for Lloyd's members, perhaps specifying in a direction only the high level requirements required by the EC Directives; the Council would then make byelaws specifying the detailed arrangements in accordance with the requirements of the direction. The Council would then be responsible for enforcing its byelaws and for demonstrating to the Authority that the relevant requirements had been met. When exercising this power, the Authority may additionally impose requirements on the Council or the Society.

572.     Subsection (5) also allows the Authority to use this power to direct the Council in respect of managing and members' agents, rather than exercising powers against them directly as authorised persons.

573.     Subsection (6)(a) makes it clear that if the Authority chooses to give directions in this way, it is not precluded from using its other regulatory powers under the Bill.

Clause 312: Consultation

574.     This clause sets out the procedure for giving a direction under clauses 309 and 311. The procedures are similar to those that apply to other rule making functions.

Clause 313: Former underwriting members

575.     This clause disapplies the general prohibition from former members of Lloyd's. It gives the Authority powers to impose requirements on former members of Lloyd's, including members who decide to leave in the future, in relation to the insurance business carried on by them while they were members of Lloyd's until all their insurance liabilities have been discharged. A former member of Lloyd's would need to obtain permission from, and be authorised by, the Authority in order to carry on any other regulated activities under the Bill.

Clause 314: Requirements imposed under 313

576.     This clause requires the Authority to follow the specified procedures when exercising the powers set out in clause 313. The arrangements are consistent with other notice arrangements under the Bill and they including giving former names on whom requirements are imposed the opportunity to make representations. Subsection (8) confers a right on former names to refer a matter to the Tribunal in certain circumstances.

PART XX: PROVISION OF FINANCIAL SERVICES BY MEMBERS OF THE PROFESSIONS

577.     This Part introduces arrangements whereby professionals (solicitors, actuaries and accountants) who (a) are not carrying on mainstream regulated activities but (b) are members of designated professional bodies, will be exempt from the requirement to obtain permission from the Authority in order to carry out certain regulated activities. Additional tests are set out in clause 318 which must be met in order for the professional to qualify for the exemption.

578.     The arrangements under this Part include the safeguard of arms-length oversight by the Authority of the way in which the professional bodies supervise and regulate exempt professionals, and the way in which such professionals carry on regulated activities. This will involve, amongst other things, the Authority monitoring the effectiveness of the complaints and redress arrangements of designated professional bodies.

579.     In addition, the Authority will be able to ban members of the professions who benefit from the exemption from carrying on regulated activities, where the circumstances demand this. The Authority can also direct that the exemption can be cut back on a more general class basis (so that, for example, certain categories of professional, carrying on certain types of activities, will no longer benefit from the exemption).

580.     The Authority is also empowered to make rules requiring exempt professionals to disclose to their clients the fact that they are not regulated by the Authority.

Clause 316: Authority's general duty

581.     This clause obliges the Authority to keep itself informed about the way in which designated professional bodies supervise and regulate the carrying on of regulated activities by their members. It also requires the professional bodies to cooperate with the Authority so as to enable the Authority to fulfil its duty of arms-length oversight.

Clause 317: Designation of professional bodies

582.     This clause gives the Treasury the power to designate bodies for the purpose of clause 316. Bodies will only be designated where they actively regulate their members' provision of financial services.

Clause 318: Exemption from the general prohibition

583.     This clause sets out the tests which need to be met in order for a professional to qualify for the exemption, including:

  • the professional must be a member of a professional body which is designated by the Treasury;

  • the professional must not receive a commission from a third party in respect of the regulated activities unless he accounts to his client for it;

  • the regulated activities must be provided in a way that is incidental and complementary to the provision of professional (for example, legal, actuarial or accountancy) services;

  • the regulated activities must not relate to sensitive products (for example, life insurance). What amounts to a "sensitive product" is to be specified by the Treasury.

Clause 319: Directions in relation to the general prohibition

584.     This clause allows the Authority to direct that the exemption from the general prohibition is not to apply to certain classes of professional. The Authority may only exercise this power, however, where it is satisfied that it is desirable to do so in the interests of clients (a non-exhaustive list of factors to which the Authority must have regard in reaching that judgement is set out in the clause).

Clause 320: Orders in relation to the general prohibition

585.     This clause enables the Authority to make an order which would have the effect of banning specified persons who are not fit and proper to carry on regulated activities; it is consistent with the regime under clause 55.

Clause 321: Consultation

586.     This clause sets out the procedure for consulting on a direction. The procedure is consistent with that applying to similar arrangements in other parts of the Bill.

Clause 322: Procedure on making or varying orders under section 320

587.     This clause sets out the procedure which will apply to such an order - essentially, the warning and decision notice procedure applied throughout the Bill should be adhered to, and the person who is the subject of the order can refer the matter to the Tribunal.

Clause 323: Rules in relation to persons to whom the general prohibition does not apply

588.     Clause 323 allows the Authority to make rules requiring exempt professionals to disclose to their clients that they are not authorised. It also requires the professional bodies to make rules designed to ensure that those members who benefit from the exemption will not carry on regulated activities which are not complementary to providing particular professional services to a particular client. In order to be effective, those rules must be approved by the Authority.

PART XXI: MUTUAL SOCIETIES

589.     This Part gives the Treasury powers by order to transfer the functions of the Building Societies Commission, the Friendly Societies Commission and the Chief Registrar of Friendly Societies and functions under the Industrial and Provident Societies Acts and the Credit Unions Act 1979. These transfers will be achieved by orders made under clauses 324 to 329.

590.     It is envisaged that the powers will be exercised to ensure that the functions which relate to the registration and regulation of societies under the existing legislation will be transferred to the Authority. For example, the functions to be transferred to the Authority are likely to include the power to require, or approve, a transfer of the business of a mutual society to another society or to a company.

591.     The existing legislation also confers power on the Building Societies Commission, Friendly Societies Commission and the Chief Registrar, often subject to the consent of the Treasury, to set requirements as to the registration and constitution of such societies. Such powers are exercised by statutory instrument. Those powers are different in character from the financial regulatory powers of the Authority under the Bill. It is proposed that such functions will transfer to the Treasury.

592.     These transfer provisions also include power for the Treasury to dissolve the existing bodies, it being envisaged that all their functions will have been transferred. The Treasury will be able to make supplemental provision, for example, to transfer the property, rights and liabilities of bodies which are being dissolved or to amend the existing legislation in the light of the transfer of functions. For example, where the existing legislation divides functions as between the different parts of the United Kingdom, some consolidation may be required to reflect the fact that the Authority is a single corporate entity.

593.     Schedule 17 makes certain amendments to the legislation governing mutuals.

 
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Prepared: 15 February 2000