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

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PART XXII: AUDITORS AND ACTUARIES

594.     This Part concerns the appointment, on a continuing, periodic or ad hoc basis, of auditors and actuaries by authorised persons. It imposes certain requirements, including a duty to disclose to the Authority information relevant to its functions under the Act. These provisions carry forward a number of similar provisions in existing legislation.

595.     There are some similarities between the roles of auditors and actuaries, and they are therefore dealt with together in this part of the Bill. However, there are also important differences, and these clauses will give the Authority the power to act in ways which will recognise the difference in the detailed roles and responsibilities of the two professions.

596.     Part X of the Bill gives the Authority various powers to gather information and investigate authorised persons, with clause 157 in particular providing a power to require an authorised person to provide the Authority with a report by an accountant or other expert on a particular aspect of his business. Part XXII deals primarily with the duties and responsibilities of auditors and actuaries, albeit in regard to their work in connection with authorised persons, rather than with authorised persons themselves.

Clause 330: Appointment

597.     Subsection (1) gives the Authority the power to make rules to require authorised persons to appoint an auditor or actuary, where they are not already under a statutory obligation to do so (for example under Companies Act requirements). Subsection (4) allows the Authority to make rules concerning the terms, conditions, qualifications for, and notification of such appointments. The Authority will also be able to make an appointment itself if one is not made or if it has not received any notification.

598.     Subsection (2) allows the Authority to make rules requiring any authorised person to produce periodic financial reports on its business, and to submit these for analysis and comment by an auditor or actuary.

599.     Subsection (5) provides that an auditor or actuary appointed to act on a continuing basis or to produce a periodic report must comply with the relevant rules made by the Authority. These rules may also give the auditor or actuary such powers as the Authority judges necessary for them to carry out their duties.

Clause 332: Information given by auditor or actuary to the Authority

600.     This clause concerns the duties and powers of auditors and actuaries of authorised persons to pass on information of regulatory importance to the Authority.

601.     Auditors and actuaries of authorised persons will be members of professional bodies and will therefore be subject to rules made by their respective bodies as to how they treat confidential information. Subsections (3) and (4) ensure that auditors or actuaries who, in good faith, pass on information or express their opinion to the Authority will not be in breach of any duty of confidentiality to which they might otherwise be subject. This protection applies whether or not the auditor or actuary acts in response to a request from the Authority.

602.     Subsections (5), (6) and (7) give the Treasury a power to set out the circumstances in which auditors and actuaries must pass on information to the Authority. This information may relate to the affairs of either the authorised person concerned, or other persons. So far as auditors are concerned, the Treasury are required by EC directives to set out in broad terms the circumstances in which such reports must be made, and it is intended to use this power to re-enact the rules necessary to comply with this requirement. No such requirement exists in respect of actuaries, and the Treasury are currently considering the case for making similar statutory rules.

Clause 333: Information given by auditor or actuary to the Authority: persons with close links

603.     This clause concerns the duties and powers of auditors and actuaries to pass on information of regulatory significance to the Authority about persons having "close links" with authorised persons, including parent and subsidiary companies of an authorised person.

604.     Subsections (2) and (3) ensure that auditors or actuaries of persons with close links to an authorised person, who, in good faith, pass on information or express their opinion to the Authority will not be in breach of any duty of confidentiality to which they might otherwise be subject. This protection applies whether or not the auditor or actuary acts in response to a request from the Authority.

605.     Subsections (5), (6) and (7) give the Treasury a power under which they can make rules setting out the circumstances in which auditors and actuaries must pass on information to the Authority. This information may relate to the affairs of either the authorised person concerned, or other persons.

Clause 334: Duty of auditor or actuary resigning etc. to give notice

606.     This clause places a duty upon all auditors and actuaries of authorised persons appointed as a result of statute to notify the Authority of certain events, for example where they resign before the end of the period for which they were appointed. Subsection (3) also requires an auditor or actuary to pass on any facts connected with his ceasing to act for the authorised person which he thinks ought to be brought to the Authority's attention, or to make a positive statement to the Authority that he is not aware of any such facts.

Clause 335: Disqualification

607.     Where the Authority believes that an auditor or actuary has failed to comply with any obligations under this Bill, it may disqualify that auditor or actuary from acting for any particular authorised person, or class of authorised person. Any such disqualification may be lifted if the Authority is satisfied that the person concerned will in future comply with the obligations.

608.     Subsections (2) and (3) require the Authority to serve a warning notice and decision notice as set out in clauses 375 and 376, whilst subsection (5) confers a right to refer to the Tribunal any decision to disqualify.

Clause 336: Provision of false or misleading information to auditor or actuary

609.     This clause makes it a criminal offence for an authorised person, or an officer, controller or manager of an authorised person knowingly or recklessly to mislead an auditor or actuary appointed under the Bill.

PART XXIII: PUBLIC RECORD AND DISCLOSURE OF INFORMATION

610.     This Part requires the Authority to compile and maintain a public record of authorised persons. It also imposes safeguards for the protection of confidential information.

611.     The Authority, together with the Competent Authority for listing and the Secretary of State, will necessarily require access to a great deal of confidential information. The Bill provides them with powers to obtain this. It also contains safeguards to ensure that this information remains confidential, subject to allowing information to pass between them and other regulatory authorities where this is necessary for the performance of specific functions (for example, to assist in the investigation and prosecution of crime). The passage of information between authorities is subject to conditions relating to the purpose of disclosure and, in some cases, the identity of the person to whom the information is disclosed. These conditions are often referred to as "gateways". This area is already subject to detailed constraints under EC law. The Bill, together with the regulations to be made under the powers conferred by these provisions, will create a confidentiality regime very similar to those which exist at present in the different areas of banking, insurance etc., which are themselves very similar to each other. The creation of a single regulator will however allow some rationalisation of the existing structure.

Clause 337: The record of authorised persons etc.

612.     This clause places an obligation on the Authority to maintain a record of certain details about authorised persons and other categories of specified persons. The record must include details of the services provided by authorised persons, the addresses of authorised persons and other categories of specified persons, and any other information the Authority thinks is appropriate. The record must be available for inspection by members of the public, at a place and at times determined by the Authority. The Authority must allow members of the public to purchase a copy of the record, or a copy of part of it.

Clause 338: Restrictions on disclosure of confidential information by Authority etc.

613.     Subsections (2), (3) and (4) define what is, and what is not, to be regarded as confidential information. Subsection (1) makes clear that this information is not to be disclosed by a "primary recipient", or a person who has received the information from a primary recipient, without the consent of the person from whom it was obtained and, if different, the person to whom it relates. Subsection (5) lists primary recipients.

Clause 339: Exceptions from section 338

614.     This clause makes clear that, notwithstanding the restrictions in clause 338, confidential information may be disclosed if this is in accordance with regulations made by the Treasury. It also gives the Treasury the power to make such regulations. This power will be used to create various "gateways" between the primary recipients and other organisations for various specified purposes.

Clause 340: Disclosure of information by the Inland Revenue

615.     This clause creates a mechanism, or "gateway", through which information held by the Inland Revenue, which would otherwise be subject to a legal obligation of secrecy, may, in certain circumstances be passed to the Authority or to the Secretary of State. Subsection (2) makes clear that this disclosure may be made only by, or under the authority of, the Commissioners of Inland Revenue.

616.     Subsection (1) provides that Revenue information may be disclosed under this clause only for the purpose of assisting an investigator appointed by the Authority or the Secretary of State under clause 159 in his task, or to assist the Authority or the Secretary of State in taking a decision whether or not to appoint such an investigator. Once information has been disclosed, subsection (5) provides that it may only be used for the purposes of taking a decision whether or not to appoint an investigator, or to further an investigation, if an investigator has been appointed, or in any criminal proceedings or regulatory action, including proceedings before the Financial Services and Markets Tribunal, that may arise out of an investigation.

617.     Subsection (5) provides that onward disclosure of information received under this clause is prohibited, except in the case of proceedings before a court or the Tribunal arising out of an investigation, or if this is done with a view to the institution of such proceedings, or if it takes place with the consent or the authority of the Commissioners of Inland Revenue. Subsection (6) makes clear, however, that this does not prevent disclosure of information to a person to whom it could have been disclosed under subsection (1).

Clause 341: Offences

618.     This clause makes clear that unauthorised disclosure or use of confidential information is a criminal offence, subject to the defences provided for in subsection (6), and sets out the penalties for these offences. These provisions reproduce the existing offences in this area.

Clause 342: Removal of other restrictions on disclosure

619.     This clause enables the Treasury to make regulations permitting disclosure of information held by third parties to the Authority to assist it in carrying out its functions. It also enables regulations to be made to allow the disclosure of information by various other entities carrying out functions under this Bill, for example the compensation scheme manager, in order to assist with these functions. The purpose of this clause is to enable the Treasury to create gateways, for example overriding confidentiality obligations to which the prescribed persons are subject, if it is appropriate that such persons should be able to disclose information either to the Authority or to third parties for the purposes of functions connected to the Bill.

PART XXIV: INSOLVENCY

620.     Insolvency and winding up are relevant to regulation for two reasons. First, there are implications for existing customers if a financial service business becomes insolvent. Second, winding up may itself be part of the appropriate regulatory response to events. Thus it may be desirable to wind up a company to protect not just the interests of customers who have entered into contracts with it, but also those who might do business with it in future, if it continued to trade. Subject to the particular provisions of Part VII of the Companies Act 1989 for transactions carried out on regulated markets, the general law of insolvency applies, and will continue to apply, to most financial services businesses, as it does to other businesses. However, it is supplemented by provisions which allow the various existing regulators, alongside creditors, to petition the court for the winding up of an authorised business on the grounds of insolvency, and, alongside the Secretary of State, to petition the court to wind up an authorised business on the grounds that this would be just and equitable.

621.     Different arrangements apply to certain mutual societies. These arrangements under the relevant legislation, for example the Building Societies Act 1986, will continue to apply to relevant societies, with functions transferred in that case from the Building Societies Commission in accordance with the provisions of Part XXI.

622.     The insolvency provisions of the Bill are intended to build upon these existing arrangements, establishing, so far as is practicable, a common approach across all sectors. Clauses 344, 345, 346, 354, 359 and 362 provide the Authority with the power to ask the court to initiate various insolvency procedures. Clauses 344, 345, 349, 350, 352, 358 and 361 make clear that the Authority has the right to be heard by the court in insolvency proceedings instigated by third parties. Clauses 356, 363, 364, 365 and 366 carry forward provisions of existing legislation dealing with the insolvency of insurance companies (which because of the particular nature of insurance business, must in some respects be dealt with in a different way to other authorised persons).

623.     At the same time, the new legislation will fill a number of gaps in the coverage of the existing regime. Clause 346 will allow the Authority to ask the court to make an administration order in respect of authorised businesses, as an alternative to winding up. Clause 359 will give the Authority powers to petition the court to declare bankrupt an insolvent sole trader providing financial services. And clauses 347 and 353 make changes to the insolvency regime for insurance companies.

624.     Part XV (Financial Services and Markets Compensation Scheme) is also relevant to customers of authorised firms in financial difficulties.

Voluntary arrangements

Clause 344: Authority's powers to participate in proceedings: company voluntary arrangements

625.     Current insolvency legislation allows companies in financial difficulties to propose a voluntary arrangement with creditors; that is, for creditors to agree to take a proportion of what they were owed as a final settlement of their debts. If agreed, such an arrangement is binding on all creditors who were aware of the proposal, subject to their right to ask the court to intervene if the arrangement seems improper or unfair. This clause gives the Authority the right to apply to the court in the same way as a creditor, and also makes clear that the Authority may be represented in any such proceedings initiated by a creditor.

Clause 345: Authority's powers to participate in proceedings: individual voluntary arrangements

626.     In England and Wales and in Northern Ireland insolvency law provides that an individual who is in financial difficulties may apply to the court for a moratorium during which he may prepare a proposal to his creditors for settlement of his debts. Whilst this moratorium is in force the individual is protected against the presentation of a bankruptcy petition.

627.     Subsection (1) of this clause provides that the Authority is entitled to be heard by the court on an application for such a moratorium, if this is made by an individual who is an authorised person. Subsections (3) and (4) provide that the Authority is entitled to send a representative to attend and speak at any meeting of creditors summoned to consider a proposal which a debtor brings forward, and that it shall be informed of the results of any such meeting. Subsection (5) goes on to provide the Authority with the same rights as creditors to challenge in court a decision by the meeting to agree a creditor's proposal, or to challenge the implementation of an agreed proposal, if it believes that this is in some way unfair or irregular, whilst subsection (6) provides that the Authority is entitled to be heard by the court if any other person makes such a challenge.

Administration orders

Clause 346: Petitions

628.     General insolvency law provides for the court to place a company or partnership into administration, that is to allow it to continue in business, under the supervision of an administrator, as an alternative to winding it up. This clause allows the Authority to ask the court to do this in respect of present or former financial services businesses and appointed representatives or persons who are or have carried on financial services business without authorisation, where it would be in consumers' interests for the business to remain in being, rather than be wound up. It also provides that for such persons failure to pay money due to consumers on time shall count as sufficient evidence to allow the initiation of administration proceedings.

Clause 347: Insurance companies

629.     At present, the law prohibits insurance companies from being put into administration. When insolvency law first made provisions for administration in 1985, it was not clear whether this procedure would be appropriate for insurance companies, given the special nature of insurance business. Experience has shown that it may be helpful to make this option available, so this clause gives the Treasury the power to make an order removing the prohibition. It is intended to make use of this power, but before doing so the Treasury will consult on the details of the order.

Clause 349: Authority's powers to participate in proceedings

630.     This clause makes clear that when a creditor or other third party asks the court to place in administration a person who is doing or has done financial services business, or an appointed representative or persons who are or have carried on financial services business without authorisation, then the Authority shall have the right to be represented at the hearing. It also gives the Authority the right to receive any information or proposals sent by the administrator to creditors, to attend and speak at any meeting of creditors called to discuss the administration, and to have the same rights as creditors to ask the court to intervene, if it considers that the administration is being carried out improperly or unfairly. It also gives the Authority the same power that creditors have, under section 425 of the Companies Act where a scheme is proposed to settle some or all of the debts of a company in administration, to ask the court that this be put to a vote of creditors.

Receivership

Clause 350: Authority's powers to participate in proceedings

631.     This clause provides that when a receiver is appointed in respect of a company which is or was an authorised person, or an appointed representative, or which is or has been carrying on regulated activities without authorisation, then the Authority is entitled to be represented at any hearing at which the receiver applies to the court for directions. It also provides that the Authority has the right to receive any information or proposals sent by the receiver to creditors and to attend and speak at any meeting of creditors called to discuss the winding up.

Voluntary winding up

Clause 352: Authority's powers to participate in proceedings

632.     This clause gives the Authority the right to be represented at any court proceedings to wind up voluntarily a financial services company, other than an insurance company carrying on long term business. It also provides the Authority with the same powers that creditors have to ask the court to decide any questions arising out of the winding up, or to order that a scheme, under section 425 of the Companies Act, to settle some or all of the debts of the company, should be put to a vote of creditors.

Clause 353: Insurance companies carrying on long-term business

633.     At present, legislation prohibits absolutely the voluntary winding up of insurance companies carrying on long term, or life assurance, business. The reason is that if such companies went into voluntary liquidation the rights of endowment policyholders would accrue, so that they would be entitled only to the current value of their policy, and not to the terminal bonuses they would expect if their policies ran on to the end of their term. This clause removes this absolute prohibition, but provides that voluntary winding up can only take place with the Authority's prior permission. This will allow the Authority to ensure that winding up will only proceed subject to arrangements being made to meet the legitimate expectations of policyholders.

Winding up by the court

Clause 354: Winding-up petitions

634.     This clause provides that the Authority may ask the court compulsorily to wind up any company or partnership which is doing or has done financial services business or which is or has carried on financial services business without authorisation, or any appointed representative. As with the other provisions in this part which empower the Authority to initiate proceedings, this enables the Authority to act on behalf of consumers, who could in theory take action themselves, but may in practice lack the resources and expertise to do so. The court may agree to this in cases where the business cannot pay its debts, or where it decides that it would be "just and equitable" to wind up the business. The Authority might make an application under the latter ground if, for example, a business had been guilty of such serious rule breaches that the Authority had found it necessary to cancel its permission in order to protect the public. This clause also provides that for such businesses failure to pay money due to consumers on time can count as sufficient evidence to allow the initiation of insolvency proceedings.

Clause 355: Winding-up petitions: EEA and Treaty firms

635.     This clause makes clear that the Authority can only petition for the winding up of a business which is authorised in another EEA state, and is entitled to provide financial services in the UK because of that authorisation, when it has been asked to do so by the home State regulator concerned. This is because the issues that generally arise in relation to the winding up of a business are issues which are primarily the concern of the home State regulator, rather than of the host State where the business is being carried on.

Clause 358: Authority's powers to participate in proceedings

636.     This clause makes clear that when a creditor, or other third party, asks the court to wind up a person who is doing or has done financial services business, or an appointed representative, then the Authority has the right to be represented at the hearing, and at any subsequent hearing. It also provides that the Authority has the right to receive any information or proposals sent by the liquidator to creditors and to attend and speak at any meeting of creditors called to discuss the winding up, and to have the same rights as creditors to ask the court to intervene. It also gives the Authority the same power that creditors have, under section 425 of the Companies Act where a scheme is proposed to settle some or all of the debts of a company being wound up, to ask the court that this be put to a vote of creditors.

Bankruptcy

Clause 359: Petitions

637.     Clause 354 reproduces the existing regulators' powers to ask the courts to wind up companies or partnerships doing financial services business. The present clause creates a new power in respect of sole traders doing financial services business. The Authority will be able to petition for the bankruptcy of such persons, or in Scotland, for the sequestration of their estate, if they are or appear unable to pay their debts to consumers. It should be noted, however, that here, as in insolvency law generally, inability to pay debts is the only ground on which a sole trader can be made bankrupt - there is no equivalent to the provision covering companies and partnerships that these may be wound up because the court feels it is "just and equitable" to do so. This is because sole traders' business affairs are not legally distinct from their personal finances.

Clause 361: Authority's powers to participate in proceedings

638.     This clause makes clear that when a creditor, or other third party, asks the court to make a bankruptcy order for, or in Scotland to sequestrate the estate of, an individual who is doing or has done financial services business, then the Authority shall have the right to be represented at the hearing, and at any subsequent hearing. It also provides that the Authority has the right to receive any report sent by an insolvency practitioner to creditors and to attend and speak at any meeting of creditors called to discuss the bankruptcy.

Provisions against debt avoidance

Clause 362: Authority's right to apply for an order

639.     The Insolvency Act 1986 provides creditors, liquidators and administrators of insolvent persons with the right to ask the court to set aside transactions which appear to have been entered into to defraud creditors (that is, where assets are transferred as a gift, or sold at less than their full value, with the intention of putting them beyond the reach of creditors). This clause provides the Authority with an equivalent right to make an application to the court in relation to transactions entered into in the course of financial services business.

 
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Prepared: 15 February 2000