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

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Clause 387: Consequences of a direction under clause 385

697.     This clause sets out the procedure the Authority must follow if the Treasury directs them to implement a third country decision.

Clause 388: EFTA firms

698.     If a subsidiary of a firm from a country subject to a third country decision is already authorised in an EU member State then its entitlement to exercise passport rights (see explanatory notes to Schedule 3) to establish a branch or provide services in another member State is not affected if by the third country decision. This is not the case for subsidiaries of third country firms authorised in EEA States which are not also EU member States (Norway, Iceland or Liechtenstein), referred to in the Bill as "EFTA firms" (subsection (8)). EFTA firms may not exercise their passport rights following a third country decision relating to the country of their parent. This clause therefore gives the Treasury the power to make a determination that a particular firm does, or class of firms do, not qualify for automatic authorisation under Schedule 3. Subsections (6) and (7) set out the procedure the Treasury must follow if it makes such a determination.

Clause 389: International obligations

699.     This clause provides the Treasury with the general power to direct a number of bodies with powers under the Bill to take, or refrain from taking, any action which is either required by, or is incompatible with, the United Kingdom's international obligations. For example, if the Authority's rules on capital requirements were such that the UK's obligations under EC law were not being met, this clause would allow the Treasury to direct the Authority to change their rules so as to ensure compliance.

Clause 390: Tax treatment of levies and repayments

700.     This clause relates to levies and payments relating to the legal assistance scheme under Part IX, the compensation scheme under Part XV and the ombudsman scheme. This clause provides that such levies are to be treated as a tax deductable expense and for levy rebates made to authorised persons to be treated as trading receipts.

Clause 391: Gaming contracts.

701.     Legislation governing gaming contracts includes provisions for such contracts not to be legally enforceable. Some regulated activities involve entering into or performing contracts which could potentially be covered by this legislation, for example derivative contracts such as 'put options', and the effect of this clause is to make certain that such contracts are legally enforceable.

PART XXIX: INTERPRETATION

702.     This Part defines a number of the terms used in the Bill.

Clause 393: Carrying on activities in the United Kingdom

703.     This clause deals with the territorial scope of the authorisation requirement, and establishes its so-called "outward" application, whereby persons based in the UK who carry on regulated activities overseas need to be regulated in the UK. The clause reflects the provisions of the EC directives in determining when a person is to be considered to be carrying on regulated activities in the UK, and sets out four broad cases:

  • first, all persons who have their head or registered office in the UK, but who only carry on regulated activities in another EEA State, but are entitled to exercise rights under a single market directive as UK firms, and are carrying on in another EEA state regulated activities to which that directive applies, will need to be authorised in the UK;

  • second, all persons who have their registered offices (or head offices, where they do not have registered offices) in the UK, and operate as managers of schemes which are entitled to enjoy the rights conferred by a relevant Community Instrument will require authorisation where persons in another EEA state are invited to become participants in the schemes;

  • third, all persons who have their head or registered office in the UK, but who only carry on regulated activities in non-EEA states, will need to be authorised if they direct the day-to-day management of the activities from an establishment in the UK;

  • fourth, even if a person does not have a head or registered office in the UK and is not dealing with UK customers, he will still need to be authorised if the activity is carried on from an establishment maintained by him in the UK; and

704.     These provisions complement the so-called "inward" territorial scope of the Bill, whereby overseas persons who carry on regulated activities in the United Kingdom need to be regulated unless an exemption or exclusion applies. The "inward" scope of the Bill is implicit in the terms of clause 17, but it may also be further amplified or restricted by the order to be made under clause 20. This was addressed in the draft order published by the Treasury for consultation in February 1999 (Financial Services and Markets Bill: Regulated Activities - A Consultation Document).

Clause 394: Carrying on regulated activities by way of business

705.     The clause allows the Treasury to make orders to define "carrying on a regulated activity by way of business" for the purposes of clause 20. This would, for example, allow special provision to be made in the case of occupational pension schemes, as the Financial Services Act currently does. The clause would also enable different provision to be made in the case of different activities, if that was thought to be desirable in the light of the slightly different tests which apply under the existing legislation.

Clause 395: Parent and subsidiary undertaking

706.     The definitions of parent and subsidiary undertaking for the purposes of the Bill are consistent with the definitions used in the single market directives.

707.     Although individuals are not themselves "undertakings", it is possible for an individual to have a relationship with an undertaking which would be classified as a parent/subsidiary relationship if they were an undertaking. Subsection (2) clarifies that for the purposes of the Bill such an individual is to be included as a parent undertaking. The undertaking with whom the individual has a parent/subsidiary relationship is to be included as a subsidiary undertaking.

708.     Subsection (2) also extends the definitions in relation to EEA bodies to cover any undertaking which would be treated as a parent or subsidiary undertaking under the law of the EEA state where the body is established.

PART XXX: SUPPLEMENTAL

709.     This Part contains various supplemental provisions. For example, provisions as to Parliamentary control over statutory instruments and provisions enabling the Treasury to make transitional provisions and consequential amendments. It also determines the name by which the Bill may be cited.

Clause 402: Consequential and supplementary provision

710.     This clause gives the Treasury a power, exercisable by order, to make incidental, consequential, transitional or supplemental provisions. The provisions which may be made include ones which appear to the Treasury to be necessary or expedient in order to give full effect to the Bill.

Clause 404: Parliamentary control of statutory instruments

711.     This clause sets out the procedure for making statutory instruments under the powers in the Bill. Most of the powers to make orders and regulations under the Bill are subject to the negative resolution procedure. The power to appoint a day for the commencement of particular provisions of the Bill under clause 405(2) is not subject to Parliamentary control. However, the affirmative procedure applies to the following powers:

  • the power initially to set the definition, or to extend the scope of, regulated activities under clause 20(1) (the type of affirmative procedure applicable to this power is set out in paragraph 26 of Schedule 2);

  • the power initially to specify the matters set out in clause 19(4), (5) and (7) (the meaning of certain elements of the basic restriction on financial promotion and the exceptions from that restriction);

  • any subsequent exercise of the power to specify the matters dealt with in clause 19(4) and (7) (the meaning of certain elements of the basic restriction on financial promotion) which has the effect of extending that restriction so as to apply in circumstances in which it did not previously apply;

  • the power to set the scope of price stabilising rules under clause 136(4);

  • the power under clause 183(a) to vary, remove from or add to the cases in which a person has control for the purposes of Part XII and the equivalent power in clause 183(d) in relation to the meaning of "controller" in clause 397;

  • an order under clause 394 defining the business test;

  • the power for the establishment and regulation of collective investment schemes in Great Britain taking the form of oeics under clause 256;

  • the power under paragraph 1 of Schedule 7 to allow any exercisable function conferred on the Competent Authority to be transferred in order for another person to exercise that function;

  • the power initially to determine the circumstances in which the carrying on of regulated activities by members of the professions is subject to the arrangements set out in Part XX (designation of professional bodies under clause 317 and restriction of exemption from the general prohibition under clause 318(6)) and any subsequent exercise of those powers so as to restrict those circumstances.

SCHEDULE 1: THE FINANCIAL SERVICES AUTHORITY

712.     Part I of this Schedule sets out requirements for the Authority's constitution and imposes certain obligations on it. Part II deals with the status of the Authority. Parts III and IV concern the Authority's powers to raise fees and impose penalties and certain other matters. Part IV also gives the Authority and those who work for it limited immunity from suit.

Part I: General

Paragraph 2: Constitution

713.     This paragraph requires the Authority to have a chairman and a governing body which includes the chairman. Both the chairman and the members of the governing body must be appointed and be liable to removal from office by the Treasury.

714.     Sub-paragraph (4) provides for the acts of the Authority still to be valid irrespective of a vacancy in the office of chairman or any defect in an appointment to the governing body. This is to prevent the Authority's rules, and any action it takes in pursuit of its functions, being rendered invalid purely as a result of such a vacancy or defect.

Paragraph 3: Non-executive members of the governing body

715.     This paragraph provides that the Authority's governing body must include a majority of non-executive members and requires there to be a committee of the non-executive members of the governing body, the chairman of which is to be appointed by the Treasury.

Paragraph 4: Functions of the non-executive committee

716.     The non-executive committee has three specified functions. These are:

  • keeping under review the efficiency and economy with which the Authority uses its resources;

  • keeping under review its internal financial controls; and

  • determining the remuneration of the chairman and the executive members of the governing body.

717.     The committee's function of keeping the Authority's economic and efficient use of its resources under review must be undertaken by the whole committee. However, the function of reviewing internal financial controls and determining the remuneration of the chairman and executive members of the governing body may be performed by a sub-committee.

Paragraph 5: Arrangements for discharging functions

718.     This paragraph allows the Authority's functions, with the exception of its legislative functions, to be delegated below the level of the governing body. Legislative functions include rule-making, giving general guidance, issuing statements of principle or policy and issuing codes.

Paragraph 6: Monitoring and enforcement

719.     This paragraph requires the Authority to maintain arrangements for monitoring compliance with, and enforcing requirements imposed by or under, the Bill. The Authority may arrange for monitoring, but not enforcement, to be delegated to another body or person which it believes is competent, which might include, for example, a professional body. If it does so, the Authority remains responsible for ensuring that proper monitoring arrangements are in place.

Paragraph 7: Arrangements for the investigation of complaints

720.     The Authority is required to put in place a scheme, the "complaints scheme", for the prompt, independent investigation of complaints made against it. These might typically be complaints about the Authority's conduct towards an authorised person, the personal conduct of its staff or the way in which the Authority has dealt with a complaint about an authorised person. The appointment of the independent investigator requires a degree of tenure in office, a matter enhanced by the requirement to obtain the Treasury's approval of any dismissal.

721.     Sub-paragraphs (1) and (3) require the Authority to appoint an independent investigator whose appointment and removal will be subject to the approval of the Treasury.

722.     Sub-paragraph (4) requires the investigator be appointed on terms and conditions designed to ensure his independence from the Authority.

723.     Sub-paragraphs (5) to (9) and (14) provide for the Authority to consult on its proposals for the independent investigation of complaints.

724.     Sub-paragraph (10) to (13) provide that the Authority is required to publish details of the complaints arrangements themselves and the powers of the independent investigator. The Authority may charge a reasonable fee for providing a person with a copy of details published under this paragraph.

Paragraph 8: Investigation of complaints

725.     This paragraph is concerned with the operation of the complaints scheme. The Authority may decide not to investigate a complaint in accordance with the scheme where it considers the complaint would more appropriately be dealt with in another way, for example by reference to the Tribunal. However, the Authority is required to ensure that the independent investigator has the means at his disposal to conduct a full investigation of complaints referred to him and the investigator may choose to investigate complaints which the Authority has, itself, declined to pursue.

726.     Sub-paragraph (2) enables the investigator to publish his report if he considers that it ought to be brought to the attention of the public. If a report is critical of the Authority, sub-paragraph (5) and (6) require the Authority to inform the investigator and the complainant of the steps it proposes to take in response, and the investigator may require the Authority to publish all or part of that response.

Paragraph 9: Records

727.     The Authority must have satisfactory arrangements for recording its decisions and for the safe-keeping of those records which it considers should be preserved.

Paragraph 10: Annual report

728.     This requires the Authority to report at least once a year to the Treasury on the discharge of its functions and, in particular, the extent to which the statutory objectives have been met and its regulatory principles under clause 2(3) have been taken into account and such other matters as directed by the Treasury. It also requires the Treasury to lay the report before Parliament.

729.     Sub-paragraph (2) requires that the report of the Authority must be accompanied by a report by the non-executive members of the governing body and allows the Treasury to direct that any other reports or information, including material prepared by third parties such as an auditor's report, also accompany it. The Authority issued a press release on 6 July 1999 setting out the proposed contents of its annual report, as agreed with the Treasury.

730.     Sub-paragraphs (4) to (6) allow the Treasury to direct the Authority to comply with provisions of the Companies Act which would otherwise not apply to it dealing with accounts and their audit. The direction may modify provisions under that Act in their application to the Authority. This is to ensure that the Authority is required to prepare audited accounts which are open to inspection irrespective of any exemptions which are made under that Act which would otherwise apply to the Authority.

Paragraph 11: Annual public meeting

731.     The Authority must hold an annual public meeting to consider the most recent report of the Authority, within three months of its publication. The meeting should allow for a general discussion of the contents of the annual report and give those attending an opportunity to put questions to the Authority on the discharge of its functions. Paragraph 12 requires the Authority to publish a report of the proceedings of the meeting.

Part II: Status

Paragraph 13: Status

732.     This has the effect that the Authority does not act on behalf of the Crown and that none of its staff are Crown servants.

Paragraphs 14 and 15: Exemption from requirement of "limited" in Authority's name

733.     The Authority is a company limited by guarantee. These paragraphs exempt the Authority from having to include "limited" in its name, as would normally be required under the Companies Act. They also provide for the Secretary of State to remove that exemption if it is inappropriate for it to continue.

Part III: Fees

Paragraph 16: Penalties

734.     This paragraph provides that in determining its policy with regard to the level of penalties to impose under powers in the Bill, the Authority may take no account of its expenses or anticipated expenses. It clarifies that there is to be no link or incentive to fund the Authority by levying penalties on the regulated community.

735.     Sub-paragraph (2) requires the Authority to operate a scheme to ensure that penalties paid to the Authority are to be applied for the benefit of authorised persons. The Authority is required to consult on these arrangements.

Paragraph 17: Fees

736.     This provides for a rule-making power for the Authority to raise fees for what it does in the discharge of its functions under the Bill. It may use the fees to meet its expenses, to repay borrowing incurred in preparing for the assumption of functions under the Bill and by virtue of the Bank of England Act 1998 and to maintain adequate reserves.

737.     The Authority may not take into account any penalties which it has received, or expects to receive, in setting the fees under the Bill.

Paragraph 18: Services for which fees may not be charged

738.     Fees may not be charged when a person gives notice of their intention to exercise passporting rights under Schedule 3 or to persons approved under the employed persons regime in Part V.

Part IV: Miscellaneous

Paragraph 19: Exemption from liability in damages

739.     This paragraph provides immunity for the Authority 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. Similar immunity is granted to the independent investigator appointed under paragraph 7, and by clause 284 it is also granted to recognised investment exchanges and clearing houses in respect of liabilities to their members.

Paragraph 20: Disqualification for membership of House of Commons

740.     Serving members of the Authority's board are disqualified from membership of the House of Commons. Paragraph 19 makes similar provision in respect of the Northern Ireland Assembly. Provision in respect of the Scottish Parliament and the Welsh Assembly are made respectively in the Scotland Act 1998 and the Government of Wales Act 1998.

SCHEDULE 2: REGULATED ACTIVITIES

741.     This Schedule does not define what activities are regulated under the Bill. The regulated activities will be those activities which are prescribed using the power conferred by clause 20. The Schedule sets out a list of "activities" and "investments" which, together, indicate the broad scope of activities which are potentially regulated under the Bill. The scope of the Bill is not strictly limited by the Schedule, but rather by the overall object and purpose of the Bill. However, the general nature of the activities set out in the Schedule serves to inform and therefore indirectly limit the extent of the Treasury's power to bring further activities within the scope of the Bill.

742.     It is within this overall object and purpose that the power under clause 20 to prescribe the regulated activities operates. Orders made under clause 20 will be an exhaustive statement of the regulated activities.

743.     The Schedule is in three parts. The first Part describes certain activities which when carried on in relation to "investments" may be regulated. The second describes the "investments". The third makes further provisions as to the scope of the order-making power under clause 20.

744.     The activities, which in each case include offering or agreeing to carry on the activity as well as actually carrying it out, are:

  • dealing in investments, which includes buying, selling, subscribing for or underwriting investments. It covers a person acting as either principal or agent. In relation to insurance, dealing also includes carrying out a contract of insurance;

  • arranging deals in investments on behalf of others, or making arrangements which enable other persons to deal;

  • accepting deposits;

  • safeguarding or administering assets for another person, or arranging for their assets to be safeguarded or administered;

  • managing assets on behalf of another person, where those assets are or may include investments;

  • giving advice on the buying, selling, subscribing for or underwriting of an investment or about the exercise of any right conferred by an investment to buy or sell, subscribe or otherwise convert an investment (examples of conversions on which advice might be given would include a corporate bond which, in certain circumstances, could be converted into, or redeemed in return for a share of the equity in the company concerned);

  • establishing, operating or winding up a collective investment scheme, including acting as trustee, or depositary or sole director of certain types of scheme;

  • sending, or causing to be sent, instructions by means of a computer based system as to the transfer of investments. This element would cover computer-based clearing systems such as that operated by CREST.

745.     Part II of the Schedule is an indicative list of the investments relevant to the question whether an activity could be brought within regulation under clause 20. These are:

  • stocks and shares in companies incorporated in the UK or elsewhere, or in unincorporated bodies constituted under the law of any territory;

  • instruments creating or acknowledging indebtedness, such as loan stock, certificates of deposit, debentures and bonds, including debt issued by Governments, local authorities or international organizations of which the UK or any other EU member State is a member, such as the United Nations or the OECD;

  • instruments, such as warrants, conferring a right to subscribe in other types of investment (including investments which are not yet in existence or which, like ordinary shares in a company, are not individually identifiable);

  • instruments which confer contractual or property rights to underlying investments and which can be traded or transferred without reference to the party holding the underlying investments. Explicit inclusion of this element reflects the established practice whereby a public issue of securities might be made by issuing the securities themselves to a third party, which would issue certificates (which may confer only a proportionate property right to a security) to the subscribing public, which are then tradeable as if they were the underlying securities themselves;

  • units in, or securities issued by, collective investment schemes and open-ended investment companies;

  • options to buy or sell property;

  • futures, which are contractual rights to buy or sell a commodity or property at a future date and at a price agreed at the time that the contract is made (though the price might still be contingent on other factors). This includes both bilateral "forward" contracts as well as standardized futures contracts traded on a futures exchange such as London International Financial Futures Exchange ("LIFFE");

  • contracts for differences and other contracts whose value depends on fluctuations in the value of some factor such as property or index, for example interest rate swaps;

  • contracts of insurance;

  • membership and potential membership of a Lloyd's syndicate and the underwriting capacity of such a syndicate;

  • deposits, that is contracts under which money is paid other than in return for goods or services and on the basis that it will be repaid, with or without interest, on demand or at some specified times or circumstances;

  • loans secured on land, such as mortgages;

  • any other right or interest in any other investment.

746.     Part III makes provision as to the scope of the order-making power under clause 20. The first order to be made under that clause must be subject to an affirmative resolution procedure - that is, it must be laid before Parliament after being made, and it will cease to have effect if it is not approved by a resolution of each House within 28 days of being made. The same procedure will apply where an order under clause 20 has the effect of extending the scope of activities to be regulated under the Bill.

SCHEDULE 3: EEA PASSPORT RIGHTS

747.     This Schedule gives effect in UK law to the single markets in banking, investment services and insurance as provided for by the relevant directives: the 2nd Banking Coordination Directive, the Investment Services Directive and the 3rd Life and Non-Life Directives.

748.     Under the directives, credit institutions (a term embracing both banks and building societies), investment firms and insurance companies (which includes friendly societies) with head offices in any member State of the European Economic Area (EEA), that is the 15 States of the EU plus Norway, Iceland and Liechtenstein, have rights to carry on certain activities in other member States by virtue of their "home" State authorisation. These rights are often referred to as their "passport" and cover a range of financial services (some of which may only be conducted by firms which are authorised under these categories), which include deposit-taking, writing and carrying out life or general insurance.

749.     Under the 2nd Banking Coordination Directive, subsidiaries of credit institutions which meet certain criteria set out in article 18, paragraph 2 of that directive may also have passport rights, and are therefore included in the definitions of EEA firms and UK firms in this Schedule.

750.     The authorities in the member States, other than the home State, where these passporters are carrying on business under their passports (referred to as the host State authorities) may only impose limited regulations on the conduct of business under the passport, in accordance with the established principle of the "general good". This requires those rules to be proportionate, non-discriminatory and non-duplicative of home State rules with equivalent effect. Conduct of business rules generally come within the host State remit. The home State retains full responsibility for authorising the passporting firms and conducting their overall prudential supervision (that is, supervising their financial soundness and ensuring that they and their controllers are fit and proper to conduct such business).

751.     The passport may be exercised in order to establish a permanent place of business, referred to in the directives as a "branch" irrespective of the number of sites involved, or in order to provide cross-border services without a permanent place of business. Indeed the passport may be exercised in order to provide services, perhaps different services, by these two means in parallel.

752.     The business activities covered by the passport do not necessarily correspond exactly to the activities which are regulated under the law of any member State, although certain activities, such as deposit-taking, insurance business or the core investment services defined under the Investment Services Directive, must be regulated, and will all be regulated activities under the order made under clause 19. There are therefore activities for which firms may have rights to conduct in other member States by virtue of the passport, but which are not necessarily central to the definition of those firms which qualify for the passport. There may equally be activities which are covered by the passport, but which are not regulated activities in every member State.

753.     A good example is lending. Lending, in conjunction with deposit-taking, is a defining characteristic of what is a credit institution and therefore of who may qualify for passport rights under the 2nd Banking Coordination Directive. However, the directives do not require that lending should be regulated, though they do require the regulation of deposit-taking. The passport under that directive therefore not only covers lending, but qualification for that passport depends on it being part of the business of the firm. However, lending is not covered by the other directives (indeed insurance companies are prohibited from carrying on the business of lending unless it is ancillary to their insurance business) and it does not need to be regulated by member States. It is not currently a regulated activity in the UK, apart from lending which falls under the CCA 1974.

754.     This Schedule, in conjunction with clause 27, therefore defines the firms from other EEA member States, which may qualify for authorisation via this route, and the procedures which, in accordance with the various directives, must be followed (see paragraphs 12 to 14 in Part II).

755.     Part III of the Schedule gives effect to the outward passport entitlements of UK credit institutions, investment firms and insurance companies. For the reasons referred to above, those qualifying for the passport form a narrower class than all persons who have their head office in the UK and who are authorised by virtue of having a Part IV permission. For example, not all banks and building societies are necessarily credit institutions, though the vast majority are. Equally the definition of an investment firm for the purposes of the Investment Services Directive is restricted to a firm which is authorised to carry on the business of providing for third parties the core services defined under that directive.

756.     Paragraphs 18 and 19 set out the procedure and conditions on which the Authority may grant the passport to those UK firms who qualify.

757.     The Schedule also gives the Treasury powers to make regulations governing the continuing regulation of both EEA firms and UK firms.

758.     Paragraph 20 enables the Authority to intervene in respect of a UK firm's consumer credit business in another member State. Paragraph 21 similarly enables the Authority to intervene in the business carried on in other member States of subsidiaries qualifying for the outward passport under Article 18(2) of the 2nd Banking Coordination Directive. Such subsidiaries need not be authorised persons in their own right.

 
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Prepared: 15 February 2000