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

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SCHEDULE 4: TREATY RIGHTS

759.     This Schedule gives effect in UK law to the rights of establishment and to provide services which belong to persons established in the other member States of the EEA (the EU plus Norway, Iceland and Liechtenstein) which go beyond those which are covered by the single market directives in banking, investment services and insurance (see Schedule 3).

760.     These rights allow persons who are authorised under the law of one member State to carry on an activity in the other member States so long as the relevant law of the home State provides equivalent protection to that of the host State and meets any EU minimum requirements applicable in that area of law. These rights are given precise effect for many financial services firms through the single market directives, and the member State laws giving national effect to them. However, as explained in relation to Schedule 3, the directives do not cover the full range of financial services or financial service providers. It is necessary, therefore, to provide an equivalent mechanism to permit persons from other EU member States to exercise their Treaty rights in the absence of formal directive passporting arrangements. The provisions in this Schedule, in conjunction with clause 18, provide for that mechanism.

761.     The Schedule does not seek to define the extent of Treaty rights, which are in any event the subject of extensive and developing case law in the EU, but sets the conditions that must be met for authorisation by this route in terms of the general principles described above. It requires home State confirmation of a firm's home State authorisation and provides for the Treasury to take the decision as to whether the particular laws of a particular member State provide the equivalent protection required.

762.     The firm is also required to give notice of their intention to exercise their Treaty rights and to provide such information as the FSA may require. Failure to give proper notice is a criminal offence, unless all reasonable precautions have been taken to avoid the commission of the offence. It is also an offence knowingly or recklessly to provide false or misleading information.

SCHEDULE 5: PERSONS CONCERNED IN COLLECTIVE INVESTMENT SCHEMES

763.     This schedule effectively deals with authorisation of collective investment schemes in two circumstances:

  • first, it affords authorisation to incoming passporters under the relevant directives, and

  • second, it deals with authorisation for certain types of oeic. The Treasury may prescribe additional conditions for qualification for automatic authorisation. A person who is authorised under this Schedule has permission to carry on regulated activities in connection with the scheme of which he is the operator or depositary.

SCHEDULE 6: THRESHOLD CONDITIONS

Part I: Section 38 Permission

764.     This Part sets out the minimum conditions against which an applicant for permission under clause 38 must be measured. Failure to meet one of the conditions is sufficient grounds for refusal to grant permission or for granting permission for a narrower range or definition of regulated activities than sought by the applicant. However, the fact that an applicant satisfies all the applicable conditions in this Schedule does not confer any automatic right to permission. The Authority retains some discretion to refuse an application even where all these conditions are satisfied.

765.     The conditions must also be met on an on-going basis by authorised persons and failure to meet one of the conditions is sufficient grounds for the exercise by the Authority of its power to vary an authorised person's permission under clause 43, and through that power, its power to withdraw an authorised person's authorisation under clause 38. However, the Authority may, from time to time, temporarily subordinate the need to ensure that the threshold conditions are met on a continuous basis in line with its statutory objective of protecting consumers.

Paragraph 1: Legal Status

766.     This paragraph sets out certain conditions for legal form. Clause 38 allows for authorised persons to be natural persons as well as companies, partnerships or other unincorporated associations. However, not all these forms are acceptable under EC law for authorised persons carrying on certain types of business.

767.     Thus insurance business is limited to bodies corporate, registered friendly societies or members of Lloyd's insurance market, and deposit-taking business is limited to bodies corporate or partnerships.

Paragraph 2: Location of offices

768.     This paragraph implements the requirement under the Post-BCCI Directive (directive 95/26/EC of 29 June 1995) that authorised persons should have their head office in the country in which they have their registered office. The Bill applies that requirement to all authorised persons including those based outside the EEA and/or who are not registered within the meaning of the directive. If they do not have a registered office (for instance if they are an individual or an unincorporated association), they must have their head office in the country in which they are authorised to, and actually do, carry on authorisable business. This requirement is aimed at ensuring that authorised persons organise their business in a way that can be effectively supervised. Part of the problem with BCCI was that it was incorporated in one State, Luxembourg, but had its head office in another, the UK.

769.     Thus UK-incorporated companies and Scottish partnerships which have registered offices must have their head office in the UK, while firms constituted under the law of other member States of the EEA must have their head office in the State they are registered in. The same applies to authorised persons with registered offices (or equivalent) outside the EEA. For other categories of applicants or authorised persons who do not have a registered office or equivalent, it is necessary for their head office or principal place of business to be here in the UK.

Paragraph 3: Close links

770.     This paragraph requires the Authority to be satisfied that it can supervise an applicant or authorised person effectively, taking into account the structure of the group to which they belong, or the other firms to which they have relevant links, and the laws, regulations or administrative provisions of any non-EEA country to which they may be subject.

771.     "Close links" is defined in sub-paragraph (2) and this sets out the structures that are relevant for these purposes. These cover the authorised person (or applicant), any parent undertaking or subsidiary undertaking of theirs and certain undertakings connected to such parent or subsidiary. In addition, the holding or control of 20% of voting power by the authorised person (or applicant) in another body, or such a holding or control of voting power in the authorised person (or applicant), will constitute a close link for these purposes. These structures cover natural persons, and other forms of associations; and in such cases the relevant links are to be understood as referring to degrees of control that are equivalent.

Paragraph 4: Adequate resources

772.     This paragraph requires the Authority to be satisfied that the person has adequate resources, which has a wide meaning. The term adequate is intended to mean sufficient in terms of quantity, quality and availability, and resources is intended to include all material or financial resources, for instance capital, provisions against liabilities, holdings of or access to cash and other liquid assets. A person must also have effective means by which to manage risks.

Paragraph 5: Suitability

773.     This paragraph requires the Authority to be satisfied that the person is "fit and proper" to be permitted to carry on the relevant activities, taking account of connections with other persons, the range and nature of regulated activities he carries on (or proposes to carry on), and the overall need to be satisfied that his affairs are and will be soundly and prudently managed.

Part II: Authorisation

774.     This Part provides that the threshold conditions set out in paragraphs 1 to 5 are relevant to any additional Part IV permissions held, or applied for, by EEA or Treaty firms. However, the conditions are not relevant to an EEA or Treaty firm's qualification for authorisation under Schedules 3 or 4.

Part III: Additional conditions

775.     This Part enables the Authority to specify additional conditions for applicants or authorised persons whose head office is outside the EEA and who are seeking to carry on regulated activities in relation to insurance business.

SCHEDULE 7: TRANSFER OF FUNCTIONS UNDER PART VI

776.     The provisions of this Schedule, referred to in subsection (2) of clause 72 allow the Treasury to transfer some or all of the Competent Authority functions to another body if it is in the public interest. Three specific grounds covering the performance of the functions and competition issues are set out in paragraphs 3 to 6. These are particular situations in which the Treasury consider that they might exercise the power to transfer functions. The purpose of setting out these particular examples of public interest grounds in the legislation is to provide more certainty in this area. Any order the Treasury makes under this Schedule would be subject to debate in both Houses of Parliament. This is provided for in clause 404(1). Paragraph 7 allows the Treasury to make any necessary transitional provisions in any order transferring the functions.

SCHEDULE 8: NON-LISTING PROSPECTUSES

777.     This Schedule applies the provisions of Part VI so that they apply in relation to a non-listing prospectus as they apply to listing particulars. It makes a number of changes to those provisions to deal with the fact that securities which are the subject of non-listing prospectuses are not admitted to listing.

SCHEDULE 9: COMPENSATION: EXEMPTIONS

778.     This Schedule sets exemptions from the liability to pay compensation for false or misleading particulars in certain circumstances under clause 86. Paragraph 5 provides that a person is not liable to pay compensation for loss resulting from a statement in the listing particulars which reproduces a statement made, for example, in a public official document. Paragraph 6 provides that there is also no liability if the person against whom action is taken satisfies the court that the person who acquired securities did so in the knowledge that a statement in the listing particulars was false or misleading. In such a case the person suffering the loss would not have been misled.

SCHEDULE 10: OFFERS OF SECURITIES

779.     In accordance with EC law requirements, clause 82 requires a prospectus to be approved and published where any person offers securities to the public in the United Kingdom for the first time when an application for listing has been made. Clause 98 provides that whether securities are offered to the public in the UK is to be determined in accordance with this Schedule. This Schedule therefore defines an offer to the public, subject to certain exemptions which are set out in accordance with derogations in EC law.

SCHEDULE 11: TRANSFER SCHEMES: CERTIFICATES

780.     Schedule 11 sets out the details of the certificates which the court must be satisfied have been obtained under clause 106(3).

781.     Part I deals with insurance business transfers. The certificate requirements are all necessary to implement the insurance directives. For all insurance business transfers, a solvency margin certificate is required under paragraph 2. This certifies that the transferee has the necessary margin of solvency (defined in sub-paragraph 2(4)). It must be issued by the home State regulator in the case of an EEA firm under Schedule 3, the Swiss supervisory authorities in the case of a Swiss insurance company, and the Authority in all other cases.

782.     If the transfer concerns a UK authorised person authorised under the insurance directives and the business to be transferred is conducted from a branch in another member State, a certificate is needed under paragraph 3 to the effect that the host State regulator has been duly notified and has responded (or the 3 month period allowed for response under the directives has elapsed).

783.     If the transfer is of long-term life business including policies (other than reinsurance policies) involving policy-holders from other member States, and it involves a UK authorised person authorised under the first life directive, then a certificate is needed under paragraph 4 to the effect that the relevant authorities for those other member States have been duly notified and have consented (or the 3 month period allowed for response under the directives has elapsed).

784.     If the transfer concerns a UK authorised person authorised under the first non-life directive, and the business to be transferred is general insurance which includes policies (other than reinsurance policies) concerning risks arising in other member States, a certificate is needed under paragraph 5 to the effect that the relevant authorities for those other member States have been duly notified and have consented (or the 3 month period allowed for response under the directives has elapsed).

785.     Part II deals with banking business transfers. All such transfers require a financial resources certificate under paragraph 8. This certifies that the transferee has or will have adequate financial resources. It must be issued by the 'relevant authority'. In a case where the transferee is a person authorised under Part IV or Schedule 4, this is the Authority. Where the transferee is an EEA firm under Schedule 3 it is the home State regulator. Where the transferee is neither, it is the relevant authority in the place in which the transferee has its head office.

786.     If either the transferor or transferee is an EEA firm under Schedule 3, a certificate is also required under paragraph 9 to the effect that the home State regulator has been duly notified and has responded (or the 3 month period allowed for response under that paragraph has elapsed).

SCHEDULE 12: THE FINANCIAL SERVICES AND MARKETS TRIBUNAL

787.     This Schedule makes provision further to that contained in Part IX as to the constitution and operation of the Tribunal.

Paragraph 2: President

788.     This paragraph requires the Lord Chancellor to select one of the members of the panel of chairmen, with qualifications as specified in paragraph 2(3), to be the President of the Tribunal. Apart from his general responsibility for the Tribunal's functions under paragraph 2, it is the President's responsibility under paragraph 6 to establish standing arrangements for the selection of panel members to sit on the Tribunal to hear particular cases. The standing arrangements must provide for the selection of at least one member of the panel of chairmen in each reference to the Tribunal, but may in addition provide for the selection other members of either panel. The Tribunal is empowered to appoint experts to assist it where necessary under paragraph 7(4). Paragraph 2 gives the Lord Chancellor the power to appoint a Deputy President, in addition to a President. If appointed, the Deputy President is to have such functions in relation to the Tribunal as the President may assign to him, and he is able to exercise any function of the President where he is absent or otherwise unable to act.

Paragraph 3: Panels

789.     This paragraph requires the Lord Chancellor to appoint the members of two panels, defined in paragraph 1 as the "panel of chairmen" and the "lay panel", from which members of the Tribunal for a particular case will be drawn. Members of the former must have appropriate legal qualifications as specified in paragraph 3(2), at least one being suitably qualified in Scotland.

Paragraph 4: Terms of office

790.     This paragraph provides that the terms of office of the panel members (including the President and any Deputy President) are to be determined by the terms on which they are appointed by the Lord Chancellor. The Lord Chancellor is also to have the power to remove them on grounds of incapacity or misbehaviour. The President and panel members may resign at any time, and they may be reappointed at the end of their terms. Paragraph 5 gives the Lord Chancellor similar powers to determine the remuneration of such persons and gives the Lord Chancellor the power to retain and pay administrative staff to support the Tribunal and to meet other expenses.

Paragraph 9: Tribunal Procedure

791.     This paragraph indicates some of the matters concerning the conduct of cases referred which may be determined by rules made by the Lord Chancellor under clause 123. As subsection (4) of clause 123 provides, this list does not limit the Lord Chancellor's powers. Under paragraph 8, the Tribunal must sit at such times and in such places as the Lord Chancellor may direct. Paragraph 10 enables the President of the Tribunal to give directions as to the practices and procedures to be followed by the Tribunal.

Paragraph 11: Evidence

792.     This paragraph sets out the powers of the Tribunal to require people to attend and give evidence, or produce documents, and makes it a criminal offence not to comply without reasonable excuse. The statutory maximum for a fine which a person can be liable on summary conviction for is currently £5,000.

Paragraph 12: Decisions of the Tribunal

793.     Under this paragraph the Tribunal may reach a decision unanimously or by majority, but must indicate which was the case in the document which it is obliged to issue setting out its decision. This document must include a statement of its reasons, and a copy must be sent to each party to the reference.

Paragraph 13: Costs

794.     The Tribunal will have discretion under paragraph 13 to award costs against any party to its proceedings where the Tribunal considered that the party concerned had acted vexatiously, frivolously or unreasonably. It will also have specific power to award costs against the Authority where it considers the Authority's decision was unreasonable.

SCHEDULE 13: ROLE OF THE COMPETITION COMMISSION

795.     This schedule is concerned with the role of the Commission. It is introduced by clause 153.

Paragraph 1: Provision of information by the Treasury

796.     This paragraph provides that the Treasury may give information and assistance to the Commission on matters falling within the investigation. For example, the Treasury may wish to tell the Commission about its view of the UK's international obligations in a particular area, or gives its view of the systemic risk implications of changing regulating provisions or practices.

Paragraph 2: Consideration of matters arising

797.     This paragraph provides that the Commission has to have regard to any cost-benefit analysis produced by the Authority on the regulating provisions or practices in question and to any representations made by other persons with a substantial interest.

Paragraph 3: Applied provisions

798.     This paragraph applies provisions of the Fair Trading Act and other competition legislation which give the Commission powers to investigate and which make it an offence to provide false or misleading information to the Commission.

Paragraph 4: Publication of reports

799.     This paragraph concerns the publication of reports by the Commission. When it publishes a report the Commission, like the Director under clause 151, must so far as is practicable exclude any matter which relates to the affairs of a person which might seriously prejudice that person's interests. Subsection (4) provides that such information does not need to be excluded from the version of the report which is required to be sent to the Director, the Treasury and the Authority under subsection (10) of clause 153.

SCHEDULE 14: INFORMATION AND INVESTIGATIONS: CONNECTED PERSONS

800.     Under clause 156(6) the Authority may require information or documents from a person who is connected with an authorised person, including, in addition to those listed in the clause itself, the persons related to an authorised person in any of the ways set out in this Schedule. These are:

  • employees and agents of the authorised person;

  • officers and managers if the authorised person is a body corporate, unincorporated association, building society or friendly society;

  • officers, managers and agents of the authorised person's parent undertakings, if the authorised person is a body corporate; and

  • managers and members, if the authorised person is a partnership .

801.     In a similar way, clause 162(4) enables investigators appointed to undertake investigations under clause 158 to require persons connected to the person under investigation to attend and answer questions or provide information or documents. Again, this includes persons related to the person under investigation in any of the ways set out above, plus persons who, at the time the investigation is concerned with, were partners, managers, employees, agents, appointed representatives, bankers, solicitors, accountants or actuaries of:

  • the person being investigated;

  • that person's parent undertaking or subsidiary;

  • a fellow parent of a subsidiary of the person under investigation; or

  • a fellow subsidiary of a parent undertaking of that person.

802.     The term subsidiary undertaking and parent undertaking are defined in clause 355.

SCHEDULE 15: PROHIBITIONS AND RESTRICTIONS IMPOSED BY THE DIRECTOR GENERAL OF FAIR TRADING (DGFT)

803.     This Schedule sets out the procedures the DGFT must follow when he exercises his powers under clauses 196 and 197 to impose a prohibition or a restriction, or vary an existing restriction without the consent of the firm, on the conduct of consumer credit business by an EEA firm. This procedure follows that which applies to the exercise of comparable powers in relation to persons licensed under the CCA 1974. If the EEA firm is carrying on consumer credit business here without a licence on the basis of its passport under the single market directives then the DGFT will need to rely on the powers in clauses 196 and 197 to control that business when necessary.

804.     The first step is for the DGFT to inform the firm that he proposes to impose the prohibition or restriction, or vary the existing restriction, and give the reasons for this. He then has to allow the firm at least 21 days to make representations, which may be made either in writing or orally.

805.     The second step is for the DGFT, having taken account of any representations received, to notify the firm of his decision and send a copy of the notification to the FSA and the firm's home State regulator. If the DGFT decides to proceed with a prohibition, a new restriction or variation of an existing one, he may also direct that the firm carries into effect credit agreements made before such action came into force.

806.     The firm may then appeal against the DGFT's decision to the Secretary of State, under section 41 of the CCA 1974. This gives the Secretary of State discretion to dispose of such an appeal as he thinks just (including making directions about payments of costs).

SCHEDULE 16: THE OMBUDSMAN SCHEME

807.     This Schedule contains further details concerning the constitution and powers of the Financial Services Ombudsman Scheme.

Paragraph 3: Constitution

808.     This sets requirements as to the scheme operator's constitution. These include that the chairman of the scheme operator must be appointed by the Authority with the approval of the Treasury. The scheme operator must be independent of the Authority.

Paragraph 6: Status

809.     This confirms that the scheme operator, its staff and the ombudsmen do not exercise their functions on behalf of the Crown.

Paragraph 7: Annual Report

810.     The scheme operator has to publish an annual report of its activities and also a report from the Chief Ombudsman.

Paragraph 8: Guidance

811.     The scheme operator can disseminate appropriate information free of charge. This could include guidance on the scheme's procedures or advice on how to deal with disputes before coming to the scheme.

Paragraph 9: Budget

812.     In order for there to be external scrutiny of the scheme's finances, the scheme operator's budget has to be approved by the Authority.

Paragraph 10: Exemption from liability in damages

813.     The efficient operation of the scheme could be significantly disrupted if its actions were subject to frequent legal challenge. This paragraph provides immunity for the scheme operator and its staff from actions for damages, similar to the immunity enjoyed by the Authority.

Paragraph 11: Privilege

814.     This ensures that evidence produced during proceedings under the compulsory jurisdiction is protected against actions for libel or slander.

Paragraph 13: Authority's procedural rules

815.     This requires the Authority to make procedural rules for the operation of the compulsory jurisdiction of the scheme. In respect of rules governing how authorised persons deal with complaints, it extends the Authority's rule-making powers under Part X of the Bill to matters which are not regulated activities.

Paragraph 14: The scheme operator's rules

816.     This requires the scheme operator to make other procedural rules for the compulsory jurisdiction. It provides, in particular, for rules to be made which allow an ombudsman to dismiss a complaint without consideration of its merits, for example where he deems the complaint to be frivolous or vexatious, and for the early stages of the handling of a complaint, for example a conciliation stage, to be handled by a member of the scheme operator's staff other than an ombudsman.

Paragraph 18: Terms of reference to the scheme

817.     This provides that the scheme operator has power to set terms of reference for its voluntary jurisdiction dealing with matters for which rules may be made under the compulsory jurisdiction. The terms of reference must be approved by the Authority.

 
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Prepared: 15 February 2000