Select Committee on Delegated Powers and Deregulation Seventh Report



ANNEX

MEMORANDUM FROM HM TREASURY

INTRODUCTION

1.  This memorandum identifies provisions for delegated legislation in the Financial Services and Markets Bill. Certain of the delegated powers are to be exercised by the Treasury (or in a small number of cases the Lord Chancellor or the Secretary of State) by statutory instrument. The Bill also confers a range of powers on the Financial Services Authority (the Authority) to make rules and other legislative provisions governing the conduct of financial services business carried on in (or from) the United Kingdom.

2.  For completeness, the narrative contained in this memorandum describes each Part of the Bill. Where there are no legislative powers conferred on the Treasury, or ministers, under a particular Part of the Bill, that is noted in the text. Powers conferred on the Authority, or other bodies, are noted with appropriate cross references in the commentary.

3.  For each power or, where appropriate, groups of powers exercisable by statutory instrument, the memorandum explains:

  • the purpose of the delegated powers;
  • why matters are to be left to delegated legislation;
  • the way in which the Treasury proposes to use the power; and
  • the procedure selected for each power and why it has been chosen.

Unless otherwise stated, the powers described in the main body of this memorandum are exercisable by the Treasury.

4.  The introduction to Annex 1 explains why matters described in that Annex are to be left to delegated legislation made by the Authority and the procedures the Authority must follow when exercising the powers. That explanation is relevant to each of the delegated legislative powers conferred on the Authority. Annex 1 also describes in each case:

  • the purpose of the delegated powers; and
  • the Treasury's understanding of how the Authority proposes to use the relevant powers.

5.  Annex 2 gives similar explanations for those powers conferred on other bodies, namely the competent authority (under Part VI) and the ombudsman scheme operator (under Part XVI).

6.  The descriptions of the powers are normally arranged in the order that the powers appear. Powers contained in Schedules to the Bill will normally appear alongside the description of the Part to which they relate. In some cases, where powers are directly related, they are described together (with cross references in the text as necessary).

PREVIOUS CONSIDERATION OF THE BILL

7.  The Bill was introduced into the House of Commons in June 1999 and the House of Lords in February 2000. Before its introduction, it was the subject of public consultation, and exposed to scrutiny by three of Parliamentary Committees. The Treasury Select Committee considered a draft of the Bill and took evidence from the then Economic Secretary, Ms Patricia Hewitt MP. The Committee's report (Financial Services Regulation, Volumes I and II; House of Commons 73 I-II) and the Government's response to it (Financial Services Regulation: The Government's Response to the Third Report from the Committee of Session 1998-99; House of Commons 347) were published by the House of Commons.

8.  In addition, a joint committee of both Houses, chaired by Lord Burns, was constituted to scrutinise the draft Bill. That committee was also able to consider a progress report published by the Treasury in March 1999 in response to its public consultation on the Bill. The Burns Committee published its first report on 29 April 1999 (Draft Financial Services and Markets Bill: First Report; House of Lords, 50 I-II, House of Commons, HC328 I-II) and its second report on 2 June 1999 (Draft Financial Services and Markets Bill: Second Report; House of Lords, 66, House of Commons, HC465). The Government published its response to those reports in June 1999, at the time the Bill was introduced into Parliament.

9.  The Delegated Powers and Deregulation Committee reviewed a draft of the Bill while it was being considered by the Burns Committee. Paragraphs 20 to 23 of the Committee's submission to the Joint Committee, dated 31 March 1999, set out a number of recommendations. The Treasury welcomed and responded to the suggestions of the Committee in its published response to the Joint Committee in June 1999, and has subsequently been guided by the observations of the Committee as the Bill has developed. Annex 3 notes the recommendations made and indicates how the Treasury's response to that Committee's specific recommendations relating to the powers delegated under the Bill.

10.  The Government notes the valuable contributions made by each of those Committees to its work on developing the new regulatory framework established by the Bill. Many helpful recommendations were made which have helped substantially to improve the Bill in many respects. Further improvements have been made as a result of consideration in Standing Committee and Report Stage during the Bill's passage through the House of Commons.

THE DELEGATION OF POWERS

11.  The delegation of powers through the Bill reflects the inevitable complexity of financial regulation and the need, against a background of markets continuously developing, in some cases very rapidly, for regulation to be able to adapt effectively.

12.  In deciding whether the Bill ought to delegate legislative powers to the Treasury or the Authority, we have been guided by the established principle that the regulator is best placed to deal with the detail. It is this detail that will need to adapt in response to change, to ensure that it remains relevant to the current position. The Financial Services Authority (formerly the Securities and Investment Board) and the Self-Regulating Organisations currently have considerable discretion as to the way in which they exercise their powers in practice, as do other financial regulators. The Bill will rationalise the regulatory regime, but it does not seek to disturb the flexibility and responsiveness inherent in the existing arrangements. Where, as for the regulation of the insurance industry, the Bill delegates powers to the Authority that have previously been exercised by the Treasury through regulations, this reflects the fact that the responsibility for applying those regulations will pass to the Authority; the delegation of powers follows from the principle that those with the task of day-to-day regulation, and with the expertise that engenders, should maintain the detailed rules.

13.  Clearly, however, it is for Parliament to decide the overall scope of regulation, and to set the parameter within which the Authority and other bodies will have to operate under the Bill. That principle is enshrined in the Bill. Clause 20 provides that only those activities specified in an order made by the Treasury and approved by Parliament may be subject to regulation. The scope of the restriction on financial promotion under clause 19 will be set in the same way. In providing for the procedures whereby Parliament will approve or reject such orders, the Bill follows a standard approach, as currently laid down by section 2 of the Financial Services Act 1986; that is, for an affirmative resolution procedure to apply where it is proposed that the scope of regulation be expanded, and the negative resolution procedure to apply where it is proposed to restrict it.

FINANCIAL SERVICES AND MARKETS BILL

Financial regulation

14.  The Financial Services and Markets Bill establishes a new statutory framework for the regulation of financial services in the United Kingdom. The Bill establishes the Financial Services Authority (previously called the Securities and Investment Board) as the single regulator for financial services. The proposals were announced by the Chancellor of the Exchequer in May 1997. At that time, regulation had been undertaken by a number of different regulators:

  • the Securities and Investment Board
  • the Supervision and Surveillance Branch of the Bank of England
  • Insurance Directorate of the Department of Trade and Industry
  • the Self-Regulating Organisations under the Financial Services Act 1986 (most recently the Personal Investment Authority, the Securities and Futures Authority and the Investment Management Regulatory Organisation);
  • the Building Societies Commission
  • the Friendly Societies Commission
  • the Registry of Friendly Societies.

15.  Recognised Professional Bodies and Recognised Investment Exchanges, under the Financial Services Act 1986, and the Council of Lloyd's under the Lloyd's Acts have also had certain regulatory responsibilities.

16.  Since the announcement in May 1997, steps have been taken to transfer functions to the Authority in advance of the new legislation coming into force. The regulatory functions of the Bank of England were transferred to the Authority under the Banking Act 1998. In other cases, the Authority is performing functions on behalf of a number of other regulators under contractual arrangements. The majority of the staff of those regulators have formally transferred to the Authority.

17.  The regulatory framework established under the Bill will replace the existing frameworks under:

  • the Insurance Companies Act 1982
  • the Financial Services Act 1986
  • the Banking Act 1987

Regulation of mutual societies

18.  The Bill will also replace the financial regulatory frameworks established under:

  • the Credit Unions Act 1979
  • the Building Societies Act 1986
  • the Friendly Societies Act 1992

although a substantial part of the above enactments will need to remain in force as they also make provision in relation to matters such as the incorporation and registration of such bodies.

19.  In view of the close link between the registration and regulatory functions of the relevant regulators in respect of mutual societies, in addition to its financial regulatory functions under the Bill, the Authority will take over the continuing regulatory functions of the mutuals regulators under the enactments referred to in paragraph 17 above and under:

  • the Industrial and Provident Societies Acts
  • the Friendly Societies Act 1974

Overview of the Bill

20.  The Bill contains 30 Parts covering the substantive matters described briefly below. A fuller description of relevant parts is given below in the commentary on delegated powers. Further information can be found in the Explanatory Notes that accompany the Bill.

Part I - The regulator: This sets out the Authority's general duties and, with Schedule 1, makes provision about the constitution of the Authority and imposes requirements relating to matters such as its external accountability.

Part II - Regulated and prohibited activities: This sets out the prohibitions on persons other than authorised or exempt persons carrying on specified activities. Breach of a prohibition would constitute a criminal offence.

Part III - Authorisation and exemption and Part IV - Permission to carry on regulated activities: These parts establish a framework under which persons may become authorised and provides for the Authority to grant (and modify) their permission to carry on particular activities. It also makes provision for exemptions.

Part V - Performance of regulated activities: This sets out arrangements for the Authority to approve persons (normally employees) who perform functions on behalf of authorised firms, and confers certain disciplinary powers. It also gives the Authority powers to prohibit individuals from working in the industry.

Part VI - Official listing: This sets out the powers of the competent authority for listing (a function that is to be transferred from the London Stock Exchange to the Authority).

Part VII - Control of business transfers: This provides a court based procedure by which banks and insurance companies may transfer all or part of their business to another undertaking.

Part VIII - Penalties for market abuse: This confers powers on the Authority to impose penalties for market abuse.

Part IX - Hearings and appeals: This establishes the Financial Services and Markets Tribunal, as part of the Court Service.

Part X - Rules and guidance: This confers on the Authority powers to make rules for and give guidance to authorised firms.

Part XI - Information gathering and investigations: This Part gives the Authority powers to obtain information from authorised persons and gives the Authority and the Secretary of State powers of investigation.

Part XII - Control over authorised persons: This gives the Authority powers to approve the acquisition of control over an authorised person.

Part XIII - Incoming firms: Intervention by the Authority: This Part confers on the Authority certain powers in relation to EEA firms doing business in the United Kingdom.

Part XIV - Disciplinary measures: This Part confers on the Authority powers to take disciplinary action (in the form of public censure and penalties) against authorised firms for breaches of rules.

Part XV - Financial Services Compensation Scheme - This provides for the establishment of a single scheme for the payment of compensation to customers of authorised persons in financial difficulties. The scheme will be managed by an independent body.

Part XVI - Ombudsman scheme: This provides for the establishment of a single ombudsman scheme to resolve quickly and with the minimum formality, disputes between consumers and authorised firms. The scheme will be run by an independent scheme operator.

Part XVII - Collective investment schemes: This largely carries forward the existing arrangements under the Financial Services Act 1986 for collective investment schemes.

Part XVIII - Recognised investment exchanges and clearing houses: This creates a regulatory regime for investment exchanges and clearing houses.

Part XIX - Lloyd's: This creates special arrangements for the regulation of the business carried on at Lloyd's insurance market.

Part XX - Provision of financial services by members of the professions: This creates special arrangements for the regulation of members of certain professions carrying non-mainstream regulated activities as part of their professional services. Relevant firms will not need to be authorised but this Part gives the Authority oversight of such business.

Part XXI - Mutual societies: This confers powers on the Treasury to transfer functions relating to mutual societies to the Authority or the Treasury and, under Schedule 17, makes certain amendments to relevant enactments.

Part XXII - Auditors and actuaries: This imposes certain requirements on, and gives the Authority certain powers over, the auditors and actuaries of authorised persons.

Part XXIII - Public record and disclosure of information: This imposes a requirement on the Authority to maintain a public record of certain matters and imposes restriction on the use of confidential information received in connection with its functions under the Bill.

Part XXIV - Insolvency: This gives the Authority certain powers to petition for the winding up or bankruptcy of certain persons, including authorised persons, and confers a right to be heard during insolvency proceedings relating to authorised persons.

Part XXV - Injunctions and restitution: This makes arrangements for injunctions and restitution following regulatory breaches.

Part XXVI - Notices: This makes provision about certain procedural matters relating the Authority regulatory powers.

Part XXVII - Offences: This creates certain additional offences.

Parts XXVII-XXX - Miscellaneous, Interpretation and Supplemental: This contains various provisions, including those relating to regulations and orders and the Parliamentary control of statutory instruments.

PART I: THE REGULATOR

21.  This Part sets out the Authority's general duties and statutory objectives. Together with Schedule 1, it specifies statutory requirements for the Authority's constitution and status and the exercise of certain of its functions. It sets out arrangements which the Authority is required to make for consulting practitioners and consumers. It provides powers for the Treasury to commission reviews of the economy, efficiency and effectiveness with which the Authority has used its resources and to arrange independent inquiries into regulatory matters of serious concern.

22.  There are no delegated legislative powers conferred on the Treasury under this part or Schedule 1.

PART II: REGULATED AND PROHIBITED ACTIVITIES

23.  This Part provides the basic mechanism for defining the scope of regulation under the Bill and for establishing the extent of the prohibition on issuing unapproved financial promotions. This will be done by order made by the Treasury under clauses 20 and 19 respectively. These powers are discussed below.

24.  The part also provides that a person who acted in breach of a prohibition under clauses 17 and 19 would commit an offence, subject to the defences set out in those provisions. Clauses 24 to 28 specify that in certain circumstances a person who entered into an agreement in contravention of the prohibitions would be unable to enforce the agreement, unless a court decides that it would be just and equitable for the agreement to be enforced.

CLAUSE 19(4), (5) AND (7): RESTRICTIONS ON FINANCIAL PROMOTION

25.  Clause 19 introduces the financial promotion regime, under which a person must not, in the course of business, communicate an invitation or inducement to engage in an investment activity unless he is an authorised person or the content of the communication has been approved by an authorised person. "Engaging in an investment activity" will include "entering or offering to enter into an agreement the making or performance of which by either party constitutes a controlled activity" (clause 19(6)).

26.  Clause 19 replaces a number of different restrictions on promotion by unauthorised persons which can be found in the legislation to be replaced by the Bill. Primarily these are section 72 of the Insurance Companies Act 1982, sections 56 and 57 of the Financial Services Act 1986 and sections 32 to 34 of the Banking Act 1987. These contain a number of powers to make regulations either to impose restrictions or to make exemptions. The arrangements under clause 19 are intended to create a simpler regime, with a greater degree of harmonisation across sectors. It also seeks to remove increasingly artificial distinctions between advertising and cold calling.

27.  Clause 19(4) gives the Treasury the power to specify circumstances in which a person is to be regarded as acting or not acting in the course of business for the purpose of the financial promotion regime. Under clause 19(5) the Treasury may designate circumstances where the financial promotion prohibition does not apply.

28.  A draft Financial Promotion (Exemption) Order was published with a Treasury consultation paper "Financial Promotion - second consultation document" (issued in October, 1999), indicating that the intention is to retain the substance of the exemptions applying under the current legislation where appropriate, but also, where possible, to rationalise and clarify these exemptions.

29.  Clause 19(7) allows the Treasury to specify which activities constitute "controlled activities" for the purposes of the financial promotion regime. The intention is that "controlled activities" will generally equate to regulated activities under clause 20 of the Bill. However, while it is proposed that the order under clause 20 will exclude certain types of investments and activities, it is not thought that it would be appropriate to exclude the promotion of those activities. This is consistent with the approach taken in relation to the scope of the advertising regime under the Financial Services Act 1986.

30.  The first orders made under clauses 19(4), (5) and (7) will require an affirmative resolution, as will extensions of scope under clauses 19(4) and (7). It is intended that subsequent orders passed under clause 19(5) which have the effect of removing or restricting exemptions from the financial promotion regime will be subject to affirmative resolution as well. It is possible that in the future matters dealt with in orders made under this clause will require amendment. The increasing pace of information technology, which have particular impact in relation to a provision dealing with communications, seems to bear this out. It will also be necessary to ensure that the regime is able to be extended to cover new types of product that will undoubtedly appear on the market in the coming years. These amendments will be more readily accommodated in secondary than in primary legislation. Other orders made under these clauses may be passed by negative resolution. This pattern - of affirmative resolution procedures for an extension of the scope of the Bill and negative for restriction - is consistent with that for the scope of regulated activities, and is derived from section 2 of the Financial Services Act 1986 (see paragraph [32] below). It is also intended that by using a single statutory instrument to define controlled activities and exemptions, it will prove easier for firms and consumers to keep up to date about the scope of regulation. Inclusion of the relevant detail in the Bill would have led to a situation like that under the Financial Services Act 1986, Schedule 1 to which has been amended on a number of occasions by statutory instrument.

CLAUSE 20(1): THE CLASSES OF ACTIVITY AND CATEGORIES OF INVESTMENT

CLAUSE 394(1): CARRYING ON REGULATED ACTIVITIES BY WAY OF BUSINESS

31.  Clause 20(1) empowers the Treasury to specify by order, activities which are to be "regulated activities" for the purpose of the Bill. An activity can be specified only if it relates to an investment of a specified kind or, in the case of an activity which is specified for that purpose, if it is carried on in relation to property of any kind. This second case is necessary in order to deal with the position of collective investment schemes which can invest in any kind of property (for example ostriches or cargo containers) and not merely in the things which are likely to be specified as investments. Clause 394 empowers the Treasury to make provision as to the circumstances in which a person who would not otherwise be regarded as carrying on a regulated activity by way of business is to be regarded as doing so and as to the circumstances in which a person who would otherwise be regarded as carrying on such an activity by way of business is not to be regarded as doing so.

32.  A draft on an order to be made under clause 20(1), published by the Treasury in February 1999 for consultation, proposed that the activities to be regulated under the Bill should largely correspond to those which are currently regulated under the three broad legislative regimes covering banking, insurance and investment firms. At present, these provisions are found in three main statutes (the Financial Services Act 1986 (specifically Schedule 1 "Investments and investment business"), the Insurance Companies Act 1982 and the Banking Act 1987, and related regulations). However, some changes have been proposed, for example, to bring the Lloyd's insurance market and members of certain professions carrying on mainstream investment business more fully within the regulatory regime and within the scope of regulation by the Authority.

33.  Under the Financial Services Act 1986, amendments to Schedule 1 to the Act concerning the types of investment or investment activity which are subject to regulation under it may be made by subordinate legislation (section 2 of the Financial Services Act 1986). That power has been used on a number of occasions since the Financial Services Act 1986 was enacted. There is less difficulty with the scope of insurance business, which in any case is already defined in EC directives which are reflected in domestic law, and deposit-taking. However, the Treasury do not believe it would be helpful to specify different types of activity in different ways. Moreover, there is not always a clear distinction between those activities. For example, many long term insurance products classify as both insurance and investments, and so are regulated under both the Financial Services Act 1986 and Insurance Companies Act 1982. To prolong the different approaches would simply extend the existing confusion.

34.  The order under clause 20 will rationalise and clarify the existing legislation so far as is possible, whilst in substance retaining the current ambit of regulation.

35.  The scope of regulated activities under the Bill will be exhaustively defined by the order under clause 20(1), and Schedule 2 is designed to set the four corners of the Treasury's power to make those orders. The Schedule indicates the general range of activities and investments that the Treasury may include within an order under clause 20, but it does not exhaustively list them. It is therefore possible that other activities or investments may be brought within the scope of regulation under the Bill, but the general nature of the activities set out in schedule 2 serves as a limitation on the extent of the Treasury's power to bring further activities within the scope of the Bill. The resulting arrangement is not dissimilar to the combined effect section 2 of and schedule 1 to the Financial Services Act 1986. However, instead of proceeding by way of piecemeal textual amendment to primary legislation, the provisions of the Bill are designed to enable the definition of the activities which are to be regulated under the Bill to maintained in a single instrument which could be consolidated as changes are made. This is consistent with the approach described above in relation to financial promotion (clause 19).

36.  Clause 20 makes it clear that the prohibition applies to activities that are carried on by way of business. It is intended that the provision should normally have its natural meaning. However, clause 394 was introduced into the Bill at Report stage in the House of Commons, to give the Treasury a power to clarify the circumstances in which a person is to be taken to be carrying on an activity "by way of business". The exercise of Treasury's legislative powers in this area is under consideration, although it is expected that special provision will be made in relation to occupational pension schemes (as under section 191 of the Financial Services Act 1986 which has the effect that certain persons who do not carry on the business of engaging in investment activities nevertheless require authorisation), or to make special provision in the case of different regulated activities (special provision may be necessary to take into account the different scope of the business test currently applying under, for example, the Financial Services, Banking and Insurance Companies Acts). The Government accepts that it is appropriate for the "business test" to appear on the face of the Bill rather than, as originally proposed, in subordinate legislation. However, the detailed qualifications are more practically dealt with by order. This approach is consistent with that taken under clause 19(4) in relation to financial promotions.

37.  The first order under clause 20(1) must be passed by affirmative resolution (as must extensions). Orders which narrow the definition of regulated activities are subject to the negative resolution procedure. This reflects the position under section 2 of the Financial Services Act 1986. As is the case with section 2, the affirmative resolution procedure applicable is the one under which an instrument is laid after it has been made but ceases to have effect unless it is approved by resolution of each House within twenty eight days (discounting any time during which Parliament is dissolved or prorogued or during which both Houses are adjourned for more than four days). This procedure has been chosen to deal with the possibility that it might prove necessary urgently to bring an activity within the scope of regulation. However, by subjecting this power to an affirmative resolution procedure, it will ensure that both houses have ample opportunity to debate the scope of regulation under the Bill at the time it is to be brought into force, and thereafter, any extension of the Authority's remit into new areas of economic activity.

38.  Orders concerning the business test under clause 394(1), which along with an order under clause 20(1) will also define the scope of the prohibition, must be laid in draft and passed by affirmative resolution.

PART III: AUTHORISATION AND EXEMPTION

39.  This Part sets out who is to be authorised for the purposes of the Bill and how authorisation is obtained. It also deals with exemptions from the general prohibition for particular persons or classes of persons. The Bill provides for a single route to authorisation to operate in the financial services industry, replacing several existing regimes. Authorisation is significant since many of the arrangements applied by subsequent parts of the Bill, such as those relating to permission, rule making and disciplinary powers are effective only when a person is authorised. A person who is neither authorised (nor exempt) would not be subject to regulatory control by the Authority, but the Authority has powers under the Bill to investigate and prosecute a person in breach of the prohibition.

40.  The main route to authorisation is through an application for a permission under Part IV (see following section), but authorisation may also be obtained by virtue of:

  • Notification in accordance with the single market directives from the competent authorities under the relevant directive in another EEA member State. The directives in question are the 2nd Banking Coordination Directive for banks and other credit institutions, the Investment Services Directive for investment firms, and the 3rd Life and 3rd Non­life Directives for insurance undertakings. The person, who must come from, be incorporated in or formed under the law of another member State, is then referred to under the Bill as an "EEA firm" as defined in Schedule 3.
  • Exercise, in accordance with Schedule 4, of EU Treaty rights other than or beyond those governed by the single market directives in which case the person is then referred to under the Bill as a "Treaty firm". Again the person must come from, be incorporated in or formed under the law of another member State to qualify for authorisation under Schedule 4.
  • Exercise of rights under the EC Directive relating to collective investment undertakings to market in the UK collective investment schemes or product authorisation of certain open­ended investment companies ("oeics") under regulations to be made under Chapter IV of Part XVII.
  • Another provision of the Bill. For example, the Society of Lloyd's is authorised for the purposes of this Part by virtue of clause 308. The transitional provisions of the Bill when they are introduced could also expressly make a person authorised under the existing frameworks authorised for the purposes of the Bill.

CLAUSE 36: EXEMPTION ORDERS

41.  The Treasury may make exemption orders providing for specified persons or persons to be exempt for the purposes of clause 17 (the general prohibition). An exempt person would not commit an offence by carrying on any of the activities provided for in the exemption relating to them. Generally, it is not intended that a person would benefit from a blanket exemption for any regulated activity. An exempt person would therefore commit an offence by carrying on activities for which they were not exempt without first becoming authorised.

42.  The Exemptions Order under clause 36 (a draft of which was published for consultation in February 1999) broadly tracks the exemptions currently existing under the Banking Act 1987 (and associated regulations) and the Financial Services Act 1986. Examples of persons that will be exempt are: in respect of all regulated activity other than insurance business, the Bank of England; in respect of deposit taking, the National Savings Bank and local authorities; and in respect of various activities, as specified in particular articles of the Regulated Activities Order (also published in draft for consultation in February 1999), the National Grid plc, the Tourist Boards of England, Wales, Scotland and Northern Ireland, the National Debt Commissioners.

43.  Because those requirements relate specifically to activities which are to be set out in the order to be made under clause 20(1), it is thought to be inappropriate to set out the exemptions on the face of the Bill. That would mean that if the scope of regulated activities were to change, it would not be possible to extend the coverage of the exemptions to persons who would otherwise be brought within the regime, even if they already benefited from and exemption in relation to some other activity that had been proposed to be a regulated activity before the Bill had been passed. Apart from the concern over preempting the Treasury's discretion under the powers under clause 20(1), the Treasury believe it would be inappropriate to frame the exemptions in a way which would subject persons to regulation in future when regulation was totally unwarranted and unnecessary.

44.  An order under clause 36(1) would be subject to the negative resolution procedure. However, in the light of the approach taken in relation to orders under clauses 19 and 20(1), where the first order made under those powers and any subsequent extension of regulation is subject to affirmative resolution by both Houses, the Treasury are considering further the procedure that should apply to an order made under clause 36(1).

CLAUSE 37(1): APPOINTED REPRESENTATIVES

45.  Under clause 37(1), the Treasury may prescribe, by regulations, the sorts of business which can be carried on by appointed representatives. The appointed representatives regime under clause 37(1) broadly maintains the regime in section 44 of the Financial Services Act 1986. That enables persons who meet certain criteria, and who carry on regulated activities solely on behalf of a principle who accepts full responsibility for the actions of their agents, not to require authorisation and permission in their own right. A number of different types of person currently benefit from arrangements of this kind. Some insurance advisers act for insurance companies as tied agents. Such advisers may be self-employed or they may work for a firm that advises on life assurance as part of a wider service to its clients (for example many estate agents are able to offer advice on and arrange life insurance for their clients). Exemption is thought appropriate because in such cases the life insurance company accepts full responsibility for the agent and his actions. Part V of the Bill, which confers on the Authority powers in relation to employees of authorised firms and others who perform controlled functions on their behalf, would often apply to appointed representatives. That provides further protection for the consumer. A person who is currently an appointed representative under the existing arrangements, but who is authorised for other purposes (for example a building society may be authorised under the Building Societies Act 1986 to accept deposits, but exempt by virtue of appointed representative status under the Financial Services Act 1986) would in future seek permission under Part IV for all the regulated activities carried on by them. However, the Authority will be able to take into account their relationship with their principal when making rules and monitoring compliance with them.

46.  Under clause 37(1), the Treasury may prescribe detailed requirements that must be met for the exemption of appointed representatives who are permitted or required by their principals to carry on business of a prescribed description on their behalf. The Treasury has not yet taken a decision on the detailed content of statutory requirements relating to appointed representatives. However, it is probable that the provisions contained in section 44(4) and (5) (specifying provisions to be incorporated in the agreement appointing the representative) will be replicated in their present form in the regulations made in exercise of this power. Imposing such requirements in this way is thought appropriate because the regulations will be at a level of detail not suitable for inclusion on the face of this Bill. That is not least because they will almost certainly need to change in the light of regulatory experience, as well as to reflect any change in the scope of regulation over time. Regulations under clause 37 are subject to negative resolution. This is consistent with the approach taken elsewhere in the Bill in defining who is and who is not to be subject to regulation by the Authority.

SCHEDULE 3: EEA PASSPORT RIGHTS

SCHEDULE 3, PARAGRAPHS 13(1)(B)(III), 14(1)(B), 16, 17, 19(1)(B) AND 20

47.  Schedule 3 is concerned with the implementation of the single market directives relating to banking, insurance and investment services. The directives in question are listed in paragraph 3 of the Schedule. Part I of the Schedule contains various definitions. Part II concerns "EEA firms" exercising "EEA rights" in the United Kingdom. Part III concerns United Kingdom firms exercising such rights in other member States.

48.  The directives were first implemented by a number of statutory instruments (Banking Co-ordination (Second Council Directive) Regulations 1992 (SI 1992/3218), Insurance Companies (Third Insurance Directives) Regulations 1994 (SI 1994/1696), Friendly Societies Act 1992 (Amendment) Regulations (SI 1994/1984), Investment Services Regulations 1995 (SI 1995/3275)). These contained a mixture of textual, and non-textual, amendment to existing primary legislation (mainly Consumer Credit Act 1974, Insurance Companies 1982, Building Societies Act 1986, Financial Services Act 1986, Banking Act 1987 and Friendly Societies Act 1992) as well as a significant number of free-standing provisions.

49.  The directives include provision harmonising the minimum criteria for authorisation of persons carrying on those activities and they set out procedures which must be observed by authorised persons who wish to exercise one or other of two distinct freedoms under the Treaty establishing the European Community. These are the freedom of establishment in another member State (under article 43 of the Treaty) and the freedom to provide services directly into the territory of another member State (under article 49). The directives also include provision as to the extent to which local rules can be applied to relevant activities when carried on by a person outside the State in which he is authorised.

50.  Once a firm has been authorised in the EEA State in which it is situated (its "home State"), then it is not required to obtain authorisation in another member State (the "host State") in order for it to carry on the activities covered by the directives within that member State. An EEA firm may exercise its entitlement under the single market directives to establish a branch, or provide services, in the host State and the procedures set out in this Schedule ensure that the host State regulator is notified of the EEA firm's activities in its territory.

Part II of Schedule 3

51.  Under paragraph 13 of the Schedule, the conditions for exercising the right to establish a permanent establishment (a "branch") in the United Kingdom (the "establishment conditions") require the Authority to have received a notice from the EEA firm's home State regulator. Under paragraph 14, the conditions for providing services in the United Kingdom other than through a permanent establishment (the "services conditions") involve similar notice conditions. The contents of these notices depend on the circumstances of the EEA firm and on the terms of the single market directive concerned.

52.  Given the differences between the detailed requirements of the directives, Part II contains a number of powers for the Treasury to prescribe by regulations the notice, and other, requirements, relating to incoming EEA firms. Since these provisions implement directives, it is not intended that there will be major differences between the provisions currently in force and those to be made in exercise of these powers. Indeed the Treasury's powers will be constrained to do only what is required or permitted by the Directives in each case.

  • Paragraph 13(1)(b)(iii) contains a power for the Treasury to prescribe additional information to be contained in a consent notice received from the home State regulator of an EEA firm from another member State, in order that the firm may satisfy the establishment conditions. It is intended that the regulations will require that the notice contain a certification by the home State regulator to the effect that the EEA firm is authorised to carry on the activities to which the consent relates and information as to any compensation scheme to which the firm belongs. Different requirements will be imposed depending on the activity being carried on. For example, information will be required as to the capital resources of a credit institution (see, for example, paragraph 2 of Schedule 2 to the Banking Coordination (Second Council Directive) Regulations 1992 or paragraph 2 of Schedule 3 to the Investment Services Regulations 1995).
    • Paragraph 14(1)(b) contains a power for the Treasury to prescribe information to be contained in a home State regulator's notice in order that the service conditions may be satisfied in relation to -
      • an investment firm (as defined in Article 1.2 of the investment services directive), or
      • an undertaking pursuing the activity of direct insurance (within the meaning of the first life insurance or non-life insurance directive).

The type of information to be required in the notice differs to some extent to the information referred to in the previous indent and, again, there are different conditions depending on the activity being carried on.

  • Paragraph 16 contains a number of powers for the Treasury to make regulations.
    • Under sub-paragraph (a), regulations may be made to the extent necessary to ensure that the split required by the directives between home State and host State regulation is observed.
    • Under sub-paragraph (b), regulations may be made setting out when, and in what manner, an EEA firm must notify the Authority of any changes to the details of the operations it is carrying on in the UK - see, for example, paragraph 4 of Schedule 2 to the Banking Coordination (Second Council Directive) Regulations 1992 or paragraph 4 and 5 of Schedule 3 to the Investment Services Regulations 1995.
    • Under sub-paragraph (c), regulations may deal with the cessation of an EEA firm's operations and the consequences for its authorised person status under the bill.
  • Paragraph 17 contains a power for the Treasury to prescribe the circumstances in, and procedure by, which a qualifying financial institution which is a subsidiary of the kind mentioned in article 18.2 of the second banking co-ordination directive, may cancel its authorisation under Schedule 3 and apply for a Part IV permission under the Bill.

53.  Regulations under each of the provisions in Part II of Schedule 3 will be subject to negative resolution procedure. This is appropriate for the imposition of detailed requirements in accordance with the single market directives, and reflects the existing vires for imposing such requirements.

Part III of Schedule 3

54.  Part III confers power on the Treasury to prescribe certain requirements in relation to the exercise of passport rights by United Kingdom firms. The Authority as home State regulator is also able to specify by rules its own procedural requirements for UK firms wishing to exercise their EEA rights, and these are dealt with separately.

  • Paragraph 19(1)(b) contains a power for the Treasury to prescribe the terms of the consent notice to be given by the Authority to the relevant host state regulator where a UK firm is carrying on services in another member State. This is the reverse of the procedure described under Part II and it is intended that it will contain equivalent provision - see, for example, paragraph 3 of Schedule 6 to the Investment Services Regulations 1995.
  • Paragraph 20 contains powers for the Treasury to make regulations in relation to the ongoing supervision of certain firms.
    • Under sub-paragraph (1), the Treasury may make such provision as they consider appropriate in relation to a UK firm's exercise of EEA rights. In particular, they may provide for the application (with or without modification) of any provision of, or made under, the Act in relation to the firm's activity. This is intended to ensure that the Authority's powers adequately extend to cover subsidiaries of the kind mentioned in Article 18(2) of the second banking coordination directive.
    • Under sub-paragraph (2)(a), the Treasury may prescribe notifications to the Authority that must be made by UK firms as to changes in the details of their operations in other member States - see, for example, paragraph 5 and 6 of Schedule 6 to the Investment Services Regulations 1995. If the Treasury require the Authority to give consent to any change, the Treasury may prescribe under paragraph 20(3) the grounds on which the Authority may refuse consent. Paragraph 20(2)(b) allows provision to be made as to the consequences of the firm's failure to comply with regulations requiring notification of changes.

Regulations under each of the provisions in Part III of Schedule 3 will be subject to negative resolution procedure. Again, this is appropriate for powers which enable the Treasury to ensure that the United Kingdom's obligations under the single market directives can be met.

PART IV: PERMISSION TO CARRY ON REGULATED ACTIVITIES

55.  This Part governs the way in which a person can obtain permission to carry on regulated activities. It is through obtaining one or more permissions that authorisation is generally obtained under clause 29(1). As explained in the preceding Part, this route to authorisation does not apply to the EEA firms that qualify for authorisation by virtue of Schedule 3 or the Treaty firms that qualify by virtue of Schedule 4. Such firms may however seek additional permission under Part IV if they wish to carry on activities not covered by the arrangements under Schedules 3 or 4.

56.  It will be for the Authority to decide in individual cases how widely or narrowly a person's permission should be defined. It may simply permit a person to carry on long term insurance business, or it may be more specific and permit a person only to give advice and only in relation to particular types of investment, such as personal pensions. The permission can also be used to impose restrictions on a firms activities, for example by specifying the maximum amount of premium income that an insurance company may write in a particular year.

CLAUSE 45(1)(B) AND (3)(B) AND (C): EXERCISE OF POWERS IN SUPPORT OF OVERSEAS REGULATOR

57.  This clause, which reproduces an existing power under section 128C of the FS Act 1986, enables the Authority to cancel or vary a permission on its own initiative on behalf of an overseas regulatory authority.

58.  The power in subsection (1)(b) enables the Treasury to prescribe by regulations the sort of authority that it should be open to the Authority to help. Broadly speaking, the power would be used to specify the Authority's counterparts in other jurisdictions. This power has been proposed so that it is possible for the regulations to take into account any changes to the regulatory framework overseas - a number of countries have already followed the United Kingdom's example of creating a single financial services regulator. Others may follow. It is necessary to provide this certainty for the Authority so that it would not face a risk of challenge if it acted in the way required of it by an overseas regulator. Such a risk would otherwise arise because the Authority's discretion to act may otherwise be fettered.

59.  To include a list of specified institutions in the list would be inflexible in a changing environment. Institutions - or kinds of institutions may need to be added or removed from time to time if there were a change to the regulated activities prescribed by the Treasury for the purposes of the Bill under clause 20(1). In addition, the list would be very detailed and so inappropriate in the Treasury's view for inclusion on the face of this Bill.

60.  Subsection (3)(b) and (c) enables the Treasury to specify in regulations the circumstances in which in considering whether to exercise its powers under subsection (1) it must do so in order to comply with a Community obligation. The need to be able to specify the relevant authorities (including by reference to their functions) and the reasons why the Treasury have proposed that these things should be specified in regulations, are the same as apply in the case of the power under subsection (1)(b) as described above.

61.  As these arrangements are necessary to enable the Authority to comply with international obligations to cooperate, it is thought appropriate for regulations under this clause to be subject to the negative resolution procedure.

PART V: PERFORMANCE OF REGULATED ACTIVITIES

62.  This Part confers on the Authority a range of powers which will enable it to ensure that people who work for authorised persons for certain purposes are fit and proper to perform the functions for which they have been engaged. While the focus of regulation under the Bill is primarily on authorised firms, the Part gives the regulator powers over the appointment of certain categories of employee and to impose penalties for misconduct. Under the existing regulatory framework, there is considerable variation between the arrangements applying to employees working in different sectors.

63.  The Part seeks to harmonise these arrangements. It provides a power for the Authority to prohibit unfit individuals from carrying out specified functions within the financial services sector. It also provides for:

  • the Authority to require its approval to be obtained before a person may perform specified functions,
  • the Authority to issue statements of principle with which approved persons must comply, and codes of conduct elaborating on the statements, and
  • a disciplinary regime for those who fail to comply with the principles.

64.  This Part also provides for firms and individuals concerned to refer matters to the Tribunal if the Authority:

  • issues a prohibition order,
  • refuses an application to vary or revoke a prohibition order,
  • refuses an application for approval,
  • takes disciplinary action, or
  • withdraws approval.

65.  The Part is primarily directed at the employees of authorised firms. However, it extends beyond employees to include, for example, directors, appointed representatives (see clause 37 above) and other contractors of an authorised person, and extends to bodies corporate where relevant. If for example, a life insurance company entered into a marketing agreement with a firm of estate agents to sell life insurance, the agency and relevant sales staff giving investment advice might need prior approval. Part V would also cover "matrix managers" who carry out certain functions, often on a fairly informal basis, for a group of companies even though technically they are "employees" of a sister company rather than of the authorised person for whom they carry out relevant functions. Such arrangements are increasingly common in multi­national groups.

66.  The Part confers one delegated power on the Treasury. Certain other powers are conferred on the Authority and these are considered in Annex 1.

CLAUSE 71(2): ACTIONS FOR DAMAGES

67.  Clause 71(1) provides that certain contraventions under Part V are actionable at the suit of a private person who suffers a loss as a result of the contravention. The relevant contraventions are where:

  • an authorised (or exempt) person fails to take reasonable care to ensure an individual who is subject to a prohibition order under clause 55(2) does not perform a function covered by the order (clause 55(5)); and
  • an authorised person fails to take reasonable care to ensure that no person performs a controlled function on his behalf, or on behalf of a contractor of his, without the approval of the Authority (clause 58(1) or (2)).

68.  The right of action provided for is similar to that under section 62(1)(d) of the Financial Services Act 1986. The power to make regulations under clause 71(2) enables the Treasury to define "private person" for the purposes of subsection (1), and is essentially the same as the power to make regulations defining "private investor" under section 62A(4) of the 1986 Act. That term is defined in the Financial Services Act 1986 (Restriction of Right of Action) Regulations 1991 (SI 1991/489). There is a similar power in clause 141 (relating to contravention of the Authority's rules). The Treasury had originally proposed, in the draft of the Bill previously considered by the Committee, that the power to make this definition should be delegated to the Authority. That power has been changed to a regulation making power of the Treasury in line with the Committee's recommendation.

69.  The group of persons affected by the Bill will be wider than under the Financial Services Act 1986 Act, since "private persons" will encompass depositors and policyholders, as well as investors. This makes it more likely that the definition may need to be refined from time to time. Broadly it is intended to cover individual retail consumers who are acting in a non-professional capacity. However, it might be appropriate to extend the right as now, to include other persons or associations, such as clubs, who do not carry on a business. It might also be thought appropriate at some time to extend the definition so as to cover certain categories of small firm in certain circumstances. It is not, however, the Treasury's intention to alter significantly the existing meaning of "private investor" (other than to cover depositors and policyholders), nor does the Treasury believe that the terms of the power would permit a significantly different definition.

70.  Regulations under this provision will be subject to the negative resolution procedure, consistent with the procedure applying to regulations made under section 62 of the Financial Services Act 1986.

PART VI: OFFICIAL LISTING

71.  EC law requires each member State to nominate or create a Competent Authority to maintain an official list of securities, to regulate the admission of securities to the official list, and to monitor issuers' adherence to the listing rules (as explained below) thereafter. In the UK these functions are currently exercised by the London Stock Exchange ("LSE"). The Government has announced that as a result of the LSE's decision to seek to demutualise, it would no longer be appropriate for it to remain as the UK's Competent Authority for listing. The Economic Secretary announced in Standing Committee on 28 October 1999 that the Bill would be amended to name the Financial Services Authority as the Competent Authority in place of the LSE. Appropriate amendments will be made to the Bill in the light of this change.

72.  The provisions of this Part implement the requirements of relevant EC directives. These provisions replace those currently set out in Part IV of the FS Act 1986.

73.  There is no requirement for issuers of securities, for example companies issuing new shares, to apply for admission to the Official List. However, admission to the official list signals that certain standards regarding the financial status and history of the company have been met; that adequate information about a security has been made available to investors at the time of application; and that information about the performance and plans of the issuer will continue to be made available on a continuing basis so long as the company has securities listed on the official list.

74.  In carrying out its functions the competent authority makes rules which govern the admission of securities to listing, the continuing obligations of issuers, the enforcement of those obligations and the suspension and cancellation of listing. These rules are collectively known as "listing rules". They are currently published by the LSE, as the UK's Competent Authority, in the "yellow book". The competent authority also has a role in scrutinizing prospectuses and circulars where there is no application for admission to the official list.

75.  The Part confers a number of powers on the Treasury that are exercisable by statutory instrument. Delegated powers conferred are also conferred on the competent authority. These are described in Annex 2.

SCHEDULE 7: TRANSFER OF FUNCTIONS UNDER PART VI

SCHEDULE 7, PARAGRAPH 1

76.  Schedule 7 of the Bill is introduced by clause 72(2). Paragraph 1 of Schedule 7 allows the Treasury, by order, to transfer the competent authority functions, in whole or part, to another body than that which is currently exercising the functions. The reason behind taking this proposed power is to ensure that the competent authority functions can be transferred where it is in the public interest to do so. For example, if the London Stock Exchange had taken the decision to seek to demutualise after the Bill had received Royal Assent, the Treasury would have been likely to have used the power in paragraph 1 of Schedule 7 to transfer the function. The power would be retained in case it was thought appropriate at some future time to transfer to the function to a body other than the Authority.

77.  The purpose of these provisions is to provide a defined power which sets out the type of circumstances in which a transfer might be desirable. For example, it may be that another body would be able to carry out some or all of the functions more efficiently and effectively than the body currently exercising the function.

78.  Under the current Bill provisions a transfer can be made under paragraph 1 of Schedule 7 if the competent authority agrees to the transfer, if one of the circumstances in paragraphs 3 to 6 apply, or if the Treasury are satisfied that it is otherwise in the public interest. Any order under this power is subject to an affirmative resolution procedure as provided for in clause 404. The circumstances envisaged in Schedule 7 in which a transfer may be made currently reflect the London Stock Exchange's dual role as a recognised investment exchange as well as the competent authority. The Economic Secretary announced to the Standing Committee on 28 October that the power to transfer the competent authority function would remain in the Bill but that changes would be made to the provisions of paragraphs 3 to 6 of schedule 7 in the light of the proposed amendment to clause 72(1).

CLAUSE 73(3)(B): THE OFFICIAL LIST

79.  Clause 73 places a duty on the competent authority to continue to maintain the official list. Currently the official list is made up of securities which can only be admitted under the statutory provisions of Part IV of the Financial Services Act 1986 and securities which are admitted by the competent authority in the exercise of ordinary private law powers. Once the Bill is in force there will be a single statutory regime for admission of securities and other instruments to the official list.

80.  In view of the extension of the statutory regime to cover an unrestricted range of securities and other instruments, there is a power in clause 73(3)(b) for the Treasury to provide by order that anything which falls within a particular description or category may not be admitted to the official list. This power is needed since there will be no list of securities or other instruments set out in the legislation (as is the case in section 142 of the Financial Services Act 1986) which are governed by the statutory regime. Potentially, therefore, the competent authority could admit any security or instrument to the official list under the statutory provisions of Part VII. Rather than take a power to set out what can be admitted to the official list, the power in clause 73(3)(b) allows the Treasury to say what cannot be admitted.

81.  The Treasury have no current intention of exercising the power in clause 73(3)(b). It is intended to be a reserve power which the Treasury would only propose to use where they felt that the competent authority was proposing to admit a security or other instrument to the official list which the Treasury did not feel should be admitted. The Treasury might exercise this power if, for example, they felt that a particular type of instrument would pose undue risks for investors. For example, it may be that certain types of instrument are not ones on which investors can practically come to an informed assessment as to their value. If the competent authority were proposing to admit this type of security, the Treasury might use their power to prohibit the admission.

82.  As with other powers provided for under Part VI, as described below, this power is exercisable by statutory instrument subject to the negative resolution procedure. This is thought by the Treasury to be appropriate because of the detailed nature of the things that may be specified under these powers. It is also consistent with the current position for equivalent existing powers.

CLAUSE 74(3): APPLICATIONS FOR LISTING

83.  Clause 74 provides that only applications for listing which are made by, or with the consent of, the issuer and meet the requirements imposed by the competent authority may be granted. The competent authority can refuse an application for listing where it considers that granting it would be detrimental to the interests of investors.

84.  Clause 74(3) provides that no application for listing can be entertained by the competent authority in respect of securities issued by a body of a prescribed kind. It is intended to use this power in order to replicate the provision of section 143(3) of the Financial Services Act 1986, which provides that no application for listing shall be made in respect of securities to be issued by a private company or by an old public company within the meaning of section 1 of the Companies Consolidation (Consequential Provisions) Act 1985 or the Companies Consolidation (Consequential Provisions) (Northern Ireland) Order 1986.

85.  The reason for taking this power, which is exercisable through the negative resolution procedure, rather than continuing to specify these bodies in the legislation, is that now that the range of things which can be admitted to listing under the statutory regime has expanded, it might in future become appropriate to exclude from the official list securities issued by other types of issuer (not necessarily companies). However at the outset the intention is to exercise the power merely to prescribe the types of companies mentioned above, so as to preserve the existing position under the Financial Services Act 1986. This power supplements that in clause 73(3) which provides that particular securities or other instruments cannot be admitted to listing.

CLAUSE 77(3): LISTING PARTICULARS AND OTHER DOCUMENTS

86.  Clause 82, in accordance with EC law, requires that listing rules must provide that no new securities for which an application for listing has been made may be admitted to the official list unless a prospectus has been approved by the competent authority and published. Clause 85 makes provision for a prospectus to be approved in cases where there is no application for listing (for the purposes of ensuring mutual recognition in another EEA State). However in circumstances where a prospectus is not required before listing, for example because the securities have already been offered to the public, clause 77 allows the competent authority to make listing rules which provide that securities can only be admitted to the official list after the publication of listing particulars.

87.  Listing particulars are documents which contain information on the nature and circumstances of the applicant and on the securities to be listed. The content is determined by the listing rules which must give effect to the relevant EC requirements.

88.  Clause 77(3) gives the Treasury the power to make regulations, under the negative resolution procedure, which set out who is responsible for listing particulars (and, through the provisions of clauses 84 and 85, for prospectuses). Those responsible for listing particulars or prospectuses are subject to obligations under this Part and are liable to pay compensation under clause 86 (subject to the exemptions in Schedule 9) to a person who has acquired securities to which the prospectus or particulars apply and who has suffered loss as a result of false or misleading information or omission of important information. The reason for taking a power here is to cater for the admission of new types of securities to the official list. For example, a change was made to section 152 of the Financial Services Act 1986, which currently sets out the persons who are responsible for listing particulars, by the Electricity (Northern Ireland Consequential Amendments) Order 1992. In future a change of this sort could be made by way of an order under clause 77(3).

89.  Subject to the need for any such changes in future, the Treasury intend to use this power to replicate the provisions of section 152. Broadly speaking section 152 provides that the following people are responsible for listing particulars: the issuer; the directors and named future directors of the issuer (where the issuer is a body corporate); and those who have accepted responsibility or authorised the contents of any part of the particulars. Sections 154A and 156A make some minor modifications to this in the case of prospectuses, although the Treasury intend to review these to ascertain whether they are necessary.

CLAUSE 85(4): APPROVAL OF PROSPECTUS WHERE NO APPLICATION FOR LISTING

90.  As mentioned above, clause 85 allows listing rules to provide for a prospectus relating to securities which are to be offered to the public in the UK for the first time and which are not the subject of an application for listing to be, nevertheless, submitted to and approved by the competent authority. Such prospectuses are termed "non-listing prospectuses". The purpose of this provision is to take advantage of the possibility offered by EC law (Council Directive 89/298/EEC Articles 12 and 21) for a prospectus to be approved by the competent authority in such cases. A prospectus thus approved in one member State carries with it the advantage of mutual recognition in other member States, with whose laws it must be recognised as complying. The order making power under this clause would enable the Treasury to specify requirements that would need to be met for a non-listing prospectus to be approved.

91.  Similar provision is currently contained in section 156A of the Financial Services Act 1986. Section 156A(2)(b) provides that listing rules may make provision as to the timing and manner of the publication of such a prospectus subject to the provisions of the Public Offer of Securities Regulations 1995 (S.I. 1995/1537). The Treasury intend to use the power in clause 85(4) to achieve the same effect as regards listing rules made under clause 85(3)(b). The power is needed to avoid the primary legislation referring expressly to secondary legislation, which may of course change in the future. An order under this power would be subject to the negative resolution procedure.

CLAUSE 98(1): INTERPRETATION OF PART VI

92.  Clause 98 sets out a number of definitions applicable to Part VI of the Bill. Clause 98(1) allows the Treasury to prescribe by regulations the meaning of "approved exchange" and "issuer".

93.  The reason for taking these powers is, again, to avoid the need to refer to secondary legislation in the primary legislation. Section 142 of the Financial Services Act 1986 provides that an approved exchange means a recognised investment exchange approved by the Treasury for the purposes of the Public Offers of Securities Regulations 1995. Issuer is, in part, defined by reference to the provisions of Schedule 1 to the Financial Services Act 1986 which sets out a number of categories of investment to which the Financial Services Act 1986 applies. There will be no equivalent list in the Bill, because the scope of the Bill's application will instead be determined by the regulated activities order to be made under clause 20 (which will set out the regulated activities to which the Bill applies). It will be necessary for regulations made under this power in clause 98 to define who is an issuer in relation to different types of securities, either by reference to the regulated activities order or independently. This power is not dissimilar to that under clause 71 and 141 which enable the Treasury by regulations to define more precisely the kinds of people who fall within certain descriptions used in the Bill.

SCHEDULE 10: OFFERS OF SECURITIES

SCHEDULE 10, PARAS 8(2), 16(3) AND (4), 17(1) AND (2), 20(2), 21(C), 22, 23 AND 25

94.  Clause 82 requires a prospectus to be approved and published where any person offers securities to the public in the UK for the first time. Clause 98(5) provides that whether securities are offered to the public is to be determined in accordance with Schedule 10. Schedule 10 defines an offer to the public, which is subject to certain exemptions which take advantage of derogations in EC law (Council Directive 89/298/EEC). It carries forward the derogations set out in Schedule 11A to the Financial Services Act 1986.

95.  The Treasury's powers in schedule 10 relate to the scope of the derogations. Similar to the case with clause 98 above, the powers in paragraphs 8(2) and 17(2) are needed as a result of the lack of anything in the Bill equivalent to Schedule 1 to the Financial Services Act 1986. The terms that may be defined under those powers are:

  • Paragraph 8(2) - "public authority"; and
  • Paragraph 17(2) - "convertible securities".

96.  The powers in paragraphs 16(3) and (4), 17(1), 21(c), 22, 23 and 25 are included to avoid the need to refer to secondary legislation (the Public Offer of Securities Regulations 1995, S.I. 1995/1537) in the primary legislation.

97.  The relevant matters that may be prescribed by regulations under the relevant provisions are:

  • Paragraph 16(3) - the definition of "connected with";
  • Paragraph 16(4) - definitions of "group" and "relevant trustee";
  • Paragraphs 17(1) and 21(c) - the ability to specify, in addition to requirements under Part VI of the Bill, other regulations in accordance with which publication had been made;
  • Paragraph 22 - particular types of securities with a maturity of less than one year.
  • Paragraph 23 - securities issued on behalf of a government, local authority or public authority; and
  • Paragraph 25 - the definition of "shares".

98.  The power in paragraph 20(2) is to provide flexibility to cope with technological developments. Paragraph 20 provides an exemption from the requirements to issue a prospectus for Euro-securities (as defined in paragraph 20(3)) where no advertisement other than an advertisement of a prescribed kind has been issued. At present paragraph 1(r) of schedule 11A of the Financial Services Act provides that the exemption applies as long as the Euro-securities "are not the subject of advertising likely to come to the attention of persons who are not professionally experienced in matters relating to the investment". The Treasury intend to use the powers in schedule 10 to maintain the effect of Schedule 11A of the Financial Services Act 1986.

PART VII: CONTROL OF BUSINESS TRANSFERS

99.  This Part provides a new mechanism for transferring, with the sanction of the courts, all or part of the business of certain kinds of authorised persons. In broad terms, the mechanism covers transfers of insurance and transfers of banking business. The mechanism, as it relates to transfers of insurance business, replaces the existing mechanisms under sections 49 ­ 52B of, and Schedule 2C to, the Insurance Companies Act 1982, which implement requirements in certain insurance directives.

100.  Under the arrangements provided for in this Part, a qualifying business transfer would be subject to scrutiny by the Authority and need the approval of the court.

CLAUSE 103(1): REQUIREMENTS ON APPLICANTS

101.  Clause 103(1) confers on the Treasury a power to make regulations with regard to the steps that the applicants (either transferor or transferee) must take before the court can approve the transfer. Subsection (2) requires the court to be satisfied that any regulations made under subsection (1) have been complied with by the parties.

102.  It is proposed that the regulations would set out steps aimed at ensuring that the proposed transfer is brought to the attention of the Authority, the depositors or other customers affected by the transfer, the members of the companies and of the public in general. It is also the intention that the regulations would require advertisements to be placed in newspapers, copy documents to be sent to relevant depositors and documents to be open to inspection at the parties' premises for a certain period of time and certain other matters currently covered by in paragraph 2(2) of Schedule 2C of the Insurance Companies Act 1982 (as inserted by regulations made under the European Communities Act 1972) in respect of long-term (life) insurance business transfers. For insurance companies such requirements are necessary for directive purposes. It is envisaged that the same arrangements, so far as they are relevant and practicable, will apply for transfers of banking business.

103.  Subsection (3)(b) clarifies that regulations under subsection (1) may provide that all or some of the requirements set out in them may be waived by the court. At present a court considering an application for a long-term insurance business transfer has discretion under paragraph 2(2) to waive requirements for, among other things, publication in 2 national newspapers in the UK, or in another EEA member State as otherwise required, or for a statement setting out the terms of the proposed scheme and containing a summary of the independent actuaries report that is required for these transfers.

104.  Although the current requirements for insurance business transfers are set out in paragraph 2(2) of Schedule 2C, the Treasury believes that it is right that these requirements should be specified in regulations. These requirements are detailed and technical and will in future need to be capable of applying to general and long term business, as well as to banking business. Moreover they are liable to require adjustment over time to reflect changing technology (for instance in the means by which general notice must be given). In addition it may be necessary to make changes to the requirements from time to time, including to enable the Treasury to maintain consistency for all transfers, for example in the event of changes to the insurance regime as a result of EC directive requirements, to apply equivalent changes to the banking arrangements.

105.  Regulations made under this clause will be subject to the negative resolution procedure. This is appropriate given the technical nature of the provision and the limited scope of provision made in exercise of the power.

PART VIII: PENALTIES FOR MARKET ABUSE

106.  This Part confers power on the Authority to impose penalties for market abuse. The Bill sets out the kinds of behaviour which will constitute market abuse and places a duty on the Authority to produce a code which will help to determine whether particular behaviour amounts to market abuse. This code will carry evidential weight, and in certain circumstances will provide a defence, or "safe harbour", against allegations of abuse. This Part also gives the Treasury the power to prescribe the coverage of the regime by specifying both the markets, and the investments traded on those markets, to which it applies. It sets out the procedures the Authority must follow when proposing to impose a penalty. It also confers a right to refer a decision to impose a penalty to the tribunal.

109(4) AND (5): MARKET ABUSE

107.  Clause 109 sets out the behaviour which constitutes market abuse. In order to be abuse, behaviour has to:

  • be behaviour of a particular kind (as set out in subsection (2))
  • be behaviour which is likely to be regarded by a regular user of the market as a failure on the part of the person (A) engaged in the behaviour to observe the standards which the regular user would reasonably expect of a person in A's position; and
  • takes place in relation to qualifying investments traded on a market to which the clause applies.

108.  Clause 109(4) contains a power for the Treasury to prescribe by order, under the negative resolution procedure, which markets the section applies to and which investments are qualifying investments in relation to those markets. Subsection (5) allows the Treasury to prescribe different investments or descriptions of investment in relation to different markets or descriptions of markets. It is appropriate to have a regulation making power here to cope with changes in the organisation of markets (as new markets come up or existing markets change) and in the changing economic importance of the markets to the UK and thus in the case for covering them with the market abuse regime. The Treasury has published a draft of an order to be made under these powers, naming the six currently recognised UK investment exchanges as the markets prescribed for the purposes of clause 109(5).

PART IX: HEARINGS AND APPEALS

109.  This Part establishes the Financial Services and Markets Tribunal. Various clauses in the Bill provide a right to refer a matter to the Tribunal once the Authority has notified the person concerned of its decision. This Part sets out the procedural framework for referrals to the Tribunal and for appeals from the Tribunal to the Court of Appeal, or in Scotland to the Court of Session, on a point of law. Clause 123(2) gives the Lord Chancellor a general power to make rules for the Tribunal's operation. That power, which is exercisable by statutory instrument, is discussed below. Schedule 12 sets out further details of the Tribunal's constitution and operation.

110.  This part also confers on the Lord Chancellor a power to establish a scheme to provide subsidised legal assistance in proceedings before the Tribunal for individuals on whom the Authority seeks to impose a penalty for market abuse under part VIII of the Bill.

CLAUSE 123(2): THE FINANCIAL SERVICES AND MARKETS TRIBUNAL

111.  Clause 123(2) gives the Lord Chancellor a general power to make procedural rules for the Tribunal's operation. The rules will set out the detailed procedure by which a person may refer a decision of the Authority to the Tribunal.

112.  The rules will cover the process of making a reference, up to and including the Tribunal hearing, as well as the procedure for applying permission to appeal to the Court of Appeal or Court of Session against the Tribunal's decision. Clause 124(1)(b) and (2), clause 128(6) and Schedule 12 paragraph 9 all refer to specific things that can be included in the procedural rules made under clause 123.

113.  The rules will contain a substantial amount of detailed procedural provision which it would not be appropriate to include in the primary legislation. To do so would overburden the Bill and would lead to inflexibility. Setting the rules out in secondary legislation allows the rules to be changed, in the light of experience of their operation, or to take account of new legislation or judicial decisions. It also has the advantage of providing a convenient and manageable document for the use of those operating and appearing before the Tribunal.

114.  For these reasons it is standard practice for procedural rules of this kind to be made by secondary legislation (subject, as here, to negative resolution).

115.  The power is to be delegated to the Lord Chancellor because the Tribunal will be part of the Court Service which is run by the Lord Chancellor's Department. The Lord Chancellor will also appoint members of the Tribunal panels. Conferring the power to make the procedural rules on the Lord Chancellor ties in with these other responsibilities, all of which ensure that the Tribunal is fully independent. It also ensures that the rules for this Tribunal can be kept in line with those operating in other areas of the court system. The Tribunal will also be one of the tribunals over which the Council on Tribunals will have statutory oversight by virtue of the Tribunals and Inquiries Act 1992.

116.  The Lord Chancellor's Department are consulting the Treasury on the draft rules and there will also be full public consultation on the rules. The Lord Chancellor's Department intend to issue a consultation document in March 2000.

CLAUSE 125: LEGAL ASSISTANCE SCHEME

117.  Clause 125 enables the Lord Chancellor to make regulations establishing a scheme for legal assistance. This will cover Tribunal cases involving individuals upon whom the Authority seeks to impose a penalty for market abuse. The Government has given a commitment to provide for such a scheme, in order to meet the possibility that such cases might be characterised as involving the determination of a criminal charge for the purposes of Article 6 of the European Convention on Human Rights.

118.  The task of determining the details for the functioning of the scheme has been delegated to the Lord Chancellor's Department. This delegation of power has been envisaged because the scheme will in many ways resemble that for criminal legal aid which is also under the Lord Chancellor's jurisdiction. The Lord Chancellor will be able to ensure that, although it will be free-standing and will not form part of legal aid under the Access to Justice Act, the legal assistance scheme is kept in line with any relevant developments in legal aid more generally.

119.  Some examples of the type of matters to be provided for under the regulations are mentioned in clause 126(1). It is envisaged that, once a reference has been made to the Tribunal, legal assistance would be made available for representation at any Tribunal hearings (including any necessary preparatory work). Applications for legal assistance would be determined by the Tribunal, applying an interests of justice test and a means test. As clause 126(2) makes clear, it would be possible for legal assistance to be granted subject to conditions, for example a condition that the person granted the assistance should make a contribution to the costs of legal representation. The Lord Chancellor proposes to consult on detailed proposals for the scheme.

120.  There will be a number of other detailed matters which will need to be explained in the regulations, including procedures for contesting decisions, assessing costs, making payments, and enforcing contributions. It is not appropriate for all these details to be set out on the face of the Bill. The exercise of the power will confer rights on individuals and, as such, is exercisable subject to negative resolution.

121.  The delegated powers concerning the funding of the scheme will allow the Authority to make rules requiring payments by authorised persons to cover the cost of the legal assistance scheme for a forthcoming period as forecast by the Lord Chancellor's Department. This rule making power of the Authority is covered in more detail in Annex 1.

PART X: RULES AND GUIDANCE

122.  This Part of the Bill confers powers upon the Authority and the Treasury to set regulatory requirements for firms authorised under the Bill. It also gives the Authority power to issue guidance on requirements imposed by or under the Bill. The powers delegated under this Part are for the most part exercisable by the Authority as described in detail in Annex 1. However, this Part confers on the Treasury a small number of powers described below that are exercisable by regulations.

CLAUSE 134: INSURANCE BUSINESS: REGULATIONS SUPPLEMENTING AUTHORITY'S RULES.

123.  Clause 134(1) enables the Treasury to make regulations for the purpose of preventing certain persons from doing anything to lessen the effectiveness of "asset identification rules". The persons to whom the regulations may be applied are parent undertakings (who may not themselves be authorised persons) of an insurance company, and who fall within a class to be prescribed. These regulations may in particular prohibit the payment of a dividend or the creation of mortgages or charges over the assets of the insurance company. The power under clause 134(4) enables the Treasury to specify that mortgages or charges created in contravention of the circumstances prescribed in regulations would be void. The measure is designed to ensure that insurance companies cannot distribute their current assets to their parent companies, or otherwise improperly use their funds, in a way that would be detrimental to policyholders. This power will enable the Treasury by regulations to carry forward certain regulatory requirements, currently provided for under the Insurance Companies Act 1982 (for example sections 29 and 31) and the Friendly Societies Act 1992. This is necessary because the matters to be provided for under the regulations will affect the rights of persons other than the insurance company concerned. However, the kinds of requirements to be imposed, would on the face of it, otherwise have been of a kind which it might be expected would appear in general or insurance business rules.

124.  Given the nature of the powers, the detail required and the need for the requirements to be updated from time to time, it was thought more appropriate that the requirements should imposed by the Treasury by statutory instrument, rather than being delegated to the Authority as part of a rule making power, or set out in an inflexible way in the Bill. Inclusion on the face of the Bill would have made it impossible to disapply the requirements where they were not necessary. The Bill does however make it quite clear, the extent to and the purpose for which the Treasury may use the power. The requirements are necessary for directive purposes, and for the proper protection of the interests of policyholders.

125.  Regulations under this clause are to be subject to the negative resolution procedure.

CLAUSE 136: PRICE STABILISING RULES

126.  Under clause 136, the Authority may issue price stabilising rules with specific reference to, amongst other things, the circumstances and manner in which action may be taken for the purpose of stabilising the price of investments of specified kinds. Price stabilising techniques are used in the case of new issues of securities to the public and large secondary offers in order to stabilise the price of the securities around the time of the issue or offer. These techniques are necessary to avoid significant fluctuations in the price immediately following a new issue or offer.

127.  The Authority's powers apply to authorised persons carry forward the current powers in relation to setting price stabilisation rules under section 48(7) of the Financial Services Act 1986. The purpose of the power conferred on the Treasury is to enable them to limit the scope of the rule-making function. This continues the current regime under section 48(8). The need to limit the powers of the Authority may change with market developments, both domestically and overseas. Changes may need to be made to cut back or enhance the Authority's rule-making powers under this clause. Such changes can be made more easily through secondary legislation. However, the nature of the power is such that the Treasury believes it appropriate for regulations under clause 136 to be subject to an affirmative resolution procedure.

CLAUSE 137: FINANCIAL PROMOTION RULES

128.  Clause 137 enables the Authority to make rules applying to authorised persons regarding financial promotion. Rules in this area may, in particular, make provision for the form and content of communications subject to the financial promotion regime, as well for the approval by authorised persons of the communications of others. The Treasury may, however, make regulations imposing limitations on the Authority's ability to make rules in this context.

129.  This power has been made available primarily in order to enable the Treasury to limit, if it ever became necessary, the Authority's rule-making capacity on the promotion by authorised persons of investments in inappropriate cases, such as the marketing of deposits or general insurance. In these circumstances, it is intended that the Authority will only be able to make rules requiring certain disclosures to be made and also rules prohibiting authorised persons describing their authorisation by the Authority in misleading terms.

130.  Clause 137 regulations are subject to the negative resolution procedure.

CLAUSE 141: ACTIONS FOR DAMAGES

131.  Under clause 141, contravention by an authorised person of a rule is actionable at the suit of a private person who suffers loss as a result of the contravention. The Treasury is empowered to make regulations defining "private person" for the purpose of this clause. A similar power is conferred on the Treasury under clause 71(2).

132.  The right of action provided for is similar to that under section 62(1)(d) of the Financial Services Act 1986. The powers to make regulations under this clause are essentially the same as the power to make regulations defining "private investor" under section 62A(4) of the 1986 Act. That term is defined in the Financial Services Act 1986 (Restriction of Right of Action) Regulations 1991 (SI 1991/489).

133.  The power is discussed further under clause 71(2) above. This exercise of this power is also subject to the negative resolution procedure, in line with the recommendation of the Delegated Powers and Deregulation Committee in its submission to Lord Burns' Committee.

PART XI: INFORMATION GATHERING & INVESTIGATIONS

134.  This Part sets out the powers of the Authority to require the production of information and documents, to require reports to be compiled, to conduct investigations and to obtain access to premises. Many of these powers are also held concurrently by the Secretary of State in recognition of the DTI's responsibilities in relation to company law and investigations.

135.  The powers provided for in this Part are in addition to the specific powers conferred on the Authority by other provisions of the Bill to request information from unauthorised persons in particular circumstances, such as in connection with an application for authorisation or recognition. They enable the Authority to require information on an ad hoc basis and therefore supplement the Authority's ability to make rules requiring authorised persons to provide it with information on a routine basis under its general rule­making power (clause 129).

136.  Under clause 168, failure to comply with any requirement imposed using any of the powers in this Part can be certified to the court and dealt with by the court as if the defaulter were in contempt.

137.  No delegated legislative powers are conferred on the Treasury or the Authority under this Part.

PART XII: CONTROL OVER AUTHORISED PERSONS

138.  Part XII of the Bill contains a number of provisions regarding the acquisition of control in a UK authorised person. If a person proposes to acquire control above a certain threshold, or increase his control beyond other particular thresholds, or reduce that control, he must notify the Authority and the Authority must give its approval. Notification is also required where a controller becomes aware that they have passed a threshold without prior notification. The purpose of these provisions is to ensure that persons do not have control when the Authority does not consider them fit and proper to do so.

139.  The requirements for notification are enshrined in the Single Market Directives. The directives also impose some particular procedural requirements where the competent authorities in different member States are involved.

CLAUSE 174: DUTY OF AUTHORITY IN RELATION TO NOTICE OF CONTROL

140.  The procedure set out in this clause relates to cases where a notice of control has been given. These cases are set out in clause 169(1) and (2).

141.  The Single Market Directives impose detailed requirements on the competent authorities of each member State to consult with one another in certain circumstances. Thus, the Authority is required to consult the home State regulator of an investment firm or a credit institution based in another member State if that person proposes to acquire a holding which would make them the parent or controller of the UK authorised person. The same obligation to consult also applies to the parent or controller of such an investment firm or credit institution.

142.  The power in Clause 174, which will be subject to the negative resolution procedure, will enable the Treasury to incorporate these requirements into the legislation as appropriate.

143.  The provisions of the different directives allow some room for different interpretations. It is also the case that the consultation requirements only apply in relation to firms covered by the directives whereas Part XII of the bill applies to all UK authorised persons. The power will enable these differences in approach to be reflected and will allow account to be taken of future changes in the requirements of the directives. If appropriate, it will also mean that consultation may be required in relation to the broader category of authorised person covered by the bill (and not just those covered by the Directives).

CLAUSE 179: NOTICES OF OBJECTION UNDER SECTION 178: PROCEDURE

144.  The procedure set out in this clause relates to cases where a person already has control (covering both cases where a person should have notified but has not and cases where notification took place but some subsequent event has given rise to cause for concern).

145.  The power resembles that provided for in Clause 174. If a person is authorised in another member State, or is the parent or controller of such a person, and he acquires a holding which would make him the parent or controller of a UK authorised person, the Authority will be required to consult with an authorised person's home State regulator if it is minded to give that person a notice of objection. This order will also be made by negative resolution procedure.

CLAUSE 183: POWER TO CHANGE DEFINITIONS OF CONTROL

146.  According to the Single Market Directives, any person who crosses one of a number of thresholds (i.e. who becomes a minority or 10, 20, 33 or 50 per cent controller) comes under an obligation to notify this to the regulator. The same thresholds apply to increases and decreases of control. The powers conferred by 183 (a), (b) and (c) enable the Treasury to amend the scope of the obligations in order to take account of varying requirements as established under future European legislation applying any changes to authorised persons covered and not covered by the directives alike. The power conferred by clause 183(d) will allow the minimum thresholds which apply for the purposes of the general bill definition of controller in clause 397 to be kept in line with any changes in the directives, if this is appropriate.

147.  The powers are exercisable subject to the negative resolution procedure.

PART XIII: INCOMING FIRMS: INTERVENTION BY AUTHORITY

148.  This Part confers power on the Authority and, in certain cases, the Director General of Fair Trading to intervene in the business of EEA and Treaty firms who are, or have been, automatically authorised by virtue of Schedules 3 and 4. These firms are referred to in the Part as "incoming firms". This power, which is referred to as the power of intervention, does not apply in respect of persons who are authorised solely by virtue of having a permission under Part IV. Nor does it apply in respect of the additional Part IV permissions that may be held by incoming firms. The Part sets out the grounds on which the power is exercisable and the procedures for exercising it.

CLAUSE 186: EXERCISE OF POWERS IN SUPPORT OF OVERSEAS REGULATOR

149.  This clause enables the Authority to exercise its intervention power at the request of, or for the purposes of assisting, an Overseas Regulatory Authority (ORA). Subsection (4) lists the functions which determine who is an ORA. These are any functions equivalent to those exercised by the Authority under this Bill (including its intended function as competent authority for the listing of shares) and the Secretary of State under the Companies Act 1985. It also includes functions equivalent to the investigation of insider dealing.

150.  The Treasury may add additional functions by regulations made under subsection (4)(e). The functions added must be in the opinion of the Treasury, relate to companies or financial services.

151.  The purpose of this power is to give the Authority certainty as to whether it is appropriate to assist particular overseas authorities exercising functions that are similar, but may not exactly match those of the Authority or Secretary of State under the provisions referred to in subsections (4)(a) to (d). It would be not be appropriate to seek to specify in detail on the face of the Bill the authorities and functions involved, not least because they are likely to change over time and new cases are bound to arise which may require the arrangements to be extended. Examples of the sorts of functions which it might be appropriate to prescribe in regulations under this provision are enforcement of laws against unfair terms in consumer contracts or misleading advertising, and regulation of consumer credit (which is covered by the EEA "passport" for credit institutions and investment firms).

152.  The Treasury believe that the technical nature of the power which can be used for limited purposes makes it appropriate for relevant functions to be prescribed by regulations made subject to the negative resolution procedure.

PART XIV: DISCIPLINARY MEASURES

153.  This Part gives the Authority powers to issue public statements or impose financial penalties in response to contraventions of rules or other requirements by authorised persons. Clause 204 requires the Authority to consult on and publish statements of its policy in relation to the imposition of penalties. This will ensure that authorised persons are clear of the likely consequences of a breach of a requirement imposed by rules.

CLAUSE 203(3): PUBLICATION

154.  Clause 203 applies in cases where having proposed to impose a penalty under clause 199, and following the issue of a warning notice, the Authority decides, in the light of further information or representations made by the authorised person, it would not, after all be appropriate to impose the penalty. By virtue of clause 376, the Authority would not be able to make a public statement during the warning notice period.

155.  Clause 203(3) confers on the Treasury a power to make orders prescribing what information the Authority should publish, with the consent of the authorised person, after it has decided not to impose a financial penalty. The Treasury may also prescribe the manner of publication. These powers are exercisable by orders using the negative resolution procedure.

156.  The purpose in enabling the Authority to publish the information is to ensure that where the proposed penalty had somehow become public the Authority could make clear that it had not, in the event, been imposed. The power for the Treasury to restrict the manner and content of such publications is intended to ensure that the narrow purpose of the provision is met. The Treasury is currently reviewing the need for this power, which it has no current plans to exercise.

PART XV: THE FINANCIAL SERVICES COMPENSATION SCHEME

157.  There are currently five compensation schemes operating in the financial services sector:

  • Building Societies Investor Protection Scheme
  • Deposit Protection Scheme
  • Friendly Societies Protection Scheme
  • Investors Compensation Scheme
  • Policyholders Protection Board

158.  This Part of the Bill provides for those existing schemes to be replaced with a single Financial Services Compensation Scheme, to be set up by the Authority. The Authority will have powers to prescribe in rules the regulated activities to be covered by the scheme. Those powers are discussed in Annex 1. Membership of the scheme will be compulsory for authorised persons carrying on relevant activities, except in the case of EEA firms that are members of equivalent schemes in their home State.

159.  The scheme will be managed by an independent scheme manager and will be funded by authorised persons. The scheme manager will also have certain powers. However, those powers are limited in scope and cover only the ability to levy authorised firms in respect of payments made under the scheme. The other powers conferred on the scheme manager are administrative in nature. The existing compensation schemes are to be dissolved and the relevant legislation establishing them, for example the Policyholders Protection Acts 1975 and 1997, would be repealed. Plans to integrate the existing schemes are underway.

160.  The compensation scheme will be able, as the current schemes do now, to compensate customers who suffer loss in various circumstances as a consequence of the inability of an authorised person to meet its liabilities. The scheme would not, other than in cases of the insolvency of an authorised person, provide compensation for a regulatory breach (for example the mis-selling of investments) where the liability would remain with the authorised firm.

CLAUSE 209: RIGHTS OF THE SCHEME IN RELEVANT PERSON'S INSOLVENCY

161.  This clause confers on the Authority when making rules for the compensation scheme to make provision conferring certain rights on the scheme manager in the event of the insolvency of a relevant person (normally an authorised person). Subsection (6) confers a power to amend insolvency rules to accommodate the operation of the scheme. Responsibility for making such rules, so far as England, Wales and Northern Ireland is concerned, rests with the UK Government, and such rules would be made under powers in existing insolvency legislation. The powers are exercisable by statutory instrument. However the situation in respect of Scotland is different.

162.  Bankruptcy law is a matter which has now been devolved to Scottish Parliament. So if any changes were to be made to Scots bankruptcy law this would be a matter for that Parliament. However, the Parliament would not be able to make rules in respect of the operation of the bankruptcy provisions of this Bill, because these would have been introduced for the purposes of financial services law, which is a reserved matter. Subsection (9)(b) therefore gives the Treasury the power to make any necessary rules, subject to the negative resolution procedure, to facilitate the achievement of the purposes of this clause of the Bill. It further provides that before doing so, the Treasury must consult Ministers of the Scottish Executive, given that these rules, although they themselves will be part of financial services law, and thus reserved, could have an impact on Scots bankruptcy law, which is devolved.

163.  The powers under clause 209 are similar to those under clause 359.

PART XVI: THE OMBUDSMAN SCHEME

164.  There are a number of ombudsman and arbitration schemes currently operating in the financial services sector:

  • Banking Ombudsman
  • Building Societies Ombudsman
  • FSA Complaints Handling Service
  • Insurance Ombudsman Bureau
  • Investment Ombudsman
  • Personal Insurance Arbitration Service
  • PIA Ombudsman
  • SFA Complaints and Arbitration Service

165.  Some of these schemes are provided for in legislation and others are purely voluntary schemes run by the industry concerned. This Part of the Bill provides for the creation of a single, compulsory ombudsman scheme for the speedy and informal resolution of disputes between authorised firms and their customers.

166.  The ombudsman's decision will be binding upon authorised firms but the complainant may choose whether or not to accept an ombudsman's determination and may instead pursue the matter in the courts.

167.  The new statutory scheme will replace the existing schemes. Plans to establish the new scheme are being put in place in advance of the enactment of the Bill. The detailed operation of the compulsory jurisdiction of the scheme will be determined largely by rules made by the Authority, on which it will be required to consult in accordance with the requirements under Part X. These delegated powers are discussed further in Annex 1. The Scheme operator's powers to make rules are considered in Annex 2.

168.  No delegated powers are conferred on the Treasury by this Part.

PART XVII: COLLECTIVE INVESTMENT SCHEMES

169.  This Part comprises six chapters concerning collective investment schemes, including unit trusts, open­ended investment companies and overseas schemes. It includes provisions relating to the authorisation of schemes, their trustees, managers and operators and also to the rules applicable to them. The Part also makes provision for overseas collective investment schemes which may be promoted in the UK:

  • Chapter I provides the relevant definitions for this Part. It also gives the Treasury the power to specify by order that certain arrangements will not constitute a collective investment scheme.
  • Chapter II prohibits authorised persons from promoting participation in a collective investment scheme unless an exemption applies. Whilst the provisions broadly continue the basic prohibition on authorised persons promoting collective investment schemes contained in the FS Act 1986, changes have been made to reflect the new financial promotion regime set out in clause 19.
  • Chapter III contains the provisions relating to authorised unit trust schemes. These broadly follow the provisions of the FS Act 1986, although the Authority is to be given the power to approve changes to an authorised unit trust's investment and borrowing powers. New provisions are also included to deal with rule waivers and modifications, and to grant operators and trustees of authorised unit trust schemes the right to refer matters to the Tribunal in certain circumstances.
  • Chapter IV contains provisions which not only enable the Treasury broadly to continue the current regime concerning open-ended investment companies ("oeics"), but also to make regulations concerning the establishment and regulation of other forms of oeic in the UK.
  • Chapter V broadly carries forward the existing provisions of the Financial Services Act and allows three kinds of overseas scheme to be "recognised" and marketed in the UK. First, schemes constituted in other member states which meet particular requirements, second, schemes authorised in designated territories, and third, schemes constituted in other territories, but which are individually recognised.
  • Chapter VI sets out the powers of investigation which will apply in relation to authorised unit trust and overseas schemes. It is intended that the principal provisions concerning investigations of oeics will be set out in the proposed Treasury regulations under Chapter IV.

CLAUSE 229: COLLECTIVE INVESTMENT SCHEMES

170.  Clause 229(5) confers on the Treasury the power to specify types of arrangements that are not to be treated as collective investment schemes for the purposes of the Bill. This power broadly carries forward the existing arrangements under sections 2 and 75 of the Financial Services Act 1986 (which allows the Treasury to amend the scope of the Act, including in relation to collective investment schemes). The power is currently subject to the negative resolution procedure although the Government intends to introduce amendments to the Bill that would require an affirmative resolution procedure to be used in certain circumstances. It is proposed that those circumstances would be equivalent to those for which an affirmative resolution procedure would be used for an order under clause 20 (classes of activity and categories of investment). The Treasury proposes to retain the order making power since it enables changes to be made to the scope of regulation in response to market developments. The Treasury envisages that the arrangements to be specified in the draft order will be broadly similar to those currently regulated under the Financial Services Act 1986.

CLAUSE 232: SINGLE PROPERTY SCHEMES

171.  Under clause 232, the Treasury may make regulations to exempt single property schemes from the restrictions on the promotion of collective investment schemes under clause 231. If regulations are made, the Authority may in turn make rules imposing duties or liabilities on the operator and (if any) the trustee or depositary of a scheme exempted by the regulations.

172.  This regime is broadly in line with powers contained in section 76(4) to (7) of the Financial Services Act, under which the Treasury may make regulations providing for the exemption of single property schemes, while the Authority is empowered to make supplementary and transitional provisions imposing obligations or liabilities on the operator and trustee (if any) of an exempted scheme.

173.  The Financial Services Act 1986 (Single Property Schemes) (Exemption) Regulations 1989, SI 1989/28 were made under section 76(4). These provide that the restrictions on promotion do not apply to schemes having the characteristics set out in section 76(6) and not yet constituted, where the operator is an authorised person and has given notice to the Authority that the arrangements conform with requirements set out in the Regulations. The Securities and Investments Board (now the Authority) issued The Financial Services (Single Property Schemes)(Supplementary) Regulations 1989, which includes provisions on the preparation of scheme particulars, facilities to be maintained in the United Kingdom and annual report / financial statements requirements. The content of future Treasury regulations under clause 232 is still under consideration, but will largely track the existing Regulations.

174.  The power to make regulations will continue to be subject to the negative resolution procedure. The Treasury believes that secondary legislation is appropriate since it allows changes to be made as necessary in order to accommodate any future changes, thereby maintaining the existing regime under the Financial Services Act 1986.

CLAUSE 240(5): RULES

175.  Clause 240 enables the Authority to make rules as to, amongst other things, the constitution, management and operation of authorised unit trust schemes. However, the power under clause 240(5) would enable the Treasury, by order, to modify the Authority's rule-making powers under this clause where they consider appropriate. These orders are subject to the negative resolution procedure.

176.  The Treasury's power is exercisable where modifications are made to United Kingdom and Northern Ireland statutory provisions governing companies where those provisions relate to the rights and duties of persons who hold the beneficial title to any shares in a company without also holding legal title. However, to exercise the power to assimilate the law relating to authorised unit trust schemes to the modified companies legislation, the Treasury must be of the opinion that it is expedient to modify the Authority's rule-making powers.

177.  The background to this Treasury power is an Authority proposal that it should have the power to grant a broader range of rights to the beneficial owners of units held by nominees. This might include extensions of rights of beneficial owners in corporate governance matters such as voting rights and the provision of information, which the Government is currently considering as part of its fundamental review of company law. This would keep the rights of beneficial owners of units in authorised unit trust schemes broadly consistent with the rights of beneficial owners in companies incorporated under the Companies Act 1985.

178.  Further changes to Company law may be made subsequently, in which case it is likely that in the future orders made under this clause will require amendment. The Treasury believes that secondary legislation is necessary to ensure that such changes can be accommodated as necessary.

CLAUSE 256: OPEN-ENDED INVESTMENT COMPANIES

179.  Clause 256 empowers the Treasury to make provision for facilitating the carrying on of collective investment by way of open-ended investment companies and regulating such companies. In particular, these regulations may make provision for, amongst other things, the incorporation and registration of open-ended investment companies, the purpose for which they may exist, the investments which they may issue as well as more general constitutional issues. Regulations may impose criminal liability, or confer functions on the Authority (including the power to make rules). These regulations must be passed by a draft affirmative resolution procedure.

180.  The Treasury is intending to use its power to replace the Open-Ended Investment Companies (Investment Companies with Variable Capital) Regulations 1996 (SI. 1996/2827) with new regulations. Draft regulations were published by the Treasury in January, 2000 for consultation (the consultation period is to close on 30 April, 2000). These largely follow the 1996 regulations, although under the new regulations, the investment powers of an open-ended investment company will no longer be confined to reflect only the provisions of the UCITS Directive (Council Directive 85/611/EEC). The current regulations were made under the vires conferred on the Treasury by the European Communities Act 1972 and so the regulations are limited in their scope to the matters required by the directives. The Treasury hopes that the regulations under this power will improve the overall arrangements for open-ended investment companies.

181.  The Treasury regulations may confer a rule-making power on the Authority. This is expressly limited to powers in relation to authorised open-ended investment companies which correspond to powers the Authority has in relation to authorised unit trust schemes under Chapter III of Part XVII. Under the existing regulations, a similar approach was taken and the Financial Services (Open-ended Investment Companies) Regulations 1997 (Release 168) were made under regulation 6 of those Regulations. The substance of these regulations is likely in the future to be carried forward and replaced with Authority rules which take account of the changes which will take place as a result of the bill and the Treasury regulations to be made under it. The Authority rules will of course be subject to the general rule-making provisions contained elsewhere in the Bill.

CLAUSE 258: SCHEMES CONSTITUTED IN OTHER EEA STATES

182.  Clause 258 provides for certain recognised overseas schemes (in this case, collective investment schemes constituted in another EEA State satisfying the conditions set out in this clause). The restriction on promotion of collective investment schemes in clause 231 does not apply in relation to recognised schemes.

183.  The Treasury's prescription power under this clause relates to two matters: firstly, under clause 258(1)(a), the Treasury may prescribe what requirements ought to be met in order for a collective investment scheme to be recognised under this clause. Secondly, by virtue of subsection (3)(c), the Treasury may prescribe the information and documents that should accompany an application for authorisation under clause 235(3).

184.  The Treasury's subsection (1)(a) power mirrors its powers under section 86(1) of the Financial Services Act 1986, under which "a collective investment scheme constituted in a member State other than the United Kingdom is a recognised scheme if it satisfies such requirements as are prescribed". The Financial Services (Schemes Constituted in Other Member States) Regulations 1989, SI 1989/1585 provide that the scheme must be one which, in accordance with the UCITS Directive, is an undertaking for collective investment in transferable securities subject to that Directive. The Treasury has not yet reached a view as to whether there should be any change in substance compared with the regulations currently in force.

185.  The Treasury's subsection (3)(c) power imposing requirements on incoming UCITS firms replicates section 86(3)(c) of the Financial Services Act. The proposed exercise of this power is under consideration although the Treasury does not at this stage have any proposals for modifying the requirements in any substantive way.

186.  The regulations under clause 258 are exercisable by statutory instrument subject to the negative resolution procedure. It is possible that future directives relating to collective investment schemes may be made (several proposals for a directive are being discussed in a Council Working Group, some at more advanced stages than others). If this happens, it may be necessary in future to change the provisions which identify the schemes to which this clause relates. The Treasury believes that identifying those schemes in secondary legislation under the bill is the most straightforward way of accommodating these likely changes. By providing express powers under the Bill to modify arrangements at the time any new European legislation is adopted, it avoids the difficulty of seeking to implement directives under the European Communities Act 1972 powers, which sometimes result in having unwanted discrepancies between procedures depending on the coverage of the directives.

CLAUSE 262: SCHEMES AUTHORISED IN DESIGNATED COUNTRIES OR TERRITORIES

187.  Clause 262 provides for recognition of certain other schemes (in this case, individual collective investment schemes authorised in designated countries or territories). These are collective investment schemes which are not UCITS schemes recognised under clause 258, but are managed in, and authorised under the law of, a country or territory outside the UK. There are certain requirements that must be met as to the law of, and standards of supervision in, a particular country before it can be designated. The Treasury may specify the class of scheme into which a scheme must fall if it is qualify under clause 262.

188.  This power parallels the regime under section 87(1) of the Financial Services Act 1986, where the Treasury may designate countries or territories for the purpose of recognising schemes under this section. At present, certain types of scheme constituted in the Isle of Man, Guernsey, Jersey and Bermuda are designated under a series of related statutory instruments made under powers in the Financial Services Act 1986. It is possible that in the future legislation made under this clause may require amendment (although, at present, there are no plans to expand the scope of designated territories). However, if changes are made, secondary (as opposed to primary) legislation has the right degree of flexibility to accommodate these changes. The order is subject to the negative resolution procedure.

CLAUSE 277: POWER TO INVESTIGATE

189.  Clause 277 provides that the Authority or the Secretary of State may appoint a person to investigate and report on, amongst other things, the affairs of an authorised unit trust. The Treasury may prescribe other schemes which may be investigated as part of an investigation into the affairs of an authorised unit trust scheme, a recognised scheme or any other collective investment scheme (including the affairs of the operator, manager, depositary and trustee of such schemes).

190.  Regulations under clause 277 are subject to the negative resolution procedure.

191.  The Bill's investigations regime in relation to collective investment schemes broadly follows section 94 of the Financial Services Act 1986. However, under section 94(2), an inspector may only, if he thinks it necessary for the purposes of that investigation, investigate, amongst other things, the affairs of any collective investment schemes which has the same manager, trustee, operator or depositary as the scheme which forms the primary focus of the investigation. Under the Bill, this power may be expanded to include schemes established by regulations made under clause 256 (for example authorised open-ended investment companies).

192.  This broader investigative scope will need to be updated by the Treasury to keep it in line with developments in the field and so it is considered appropriate for the Treasury to take a power to make regulations to facilitate such changes.

PART XVIII: RECOGNISED INVESTMENT EXCHANGES AND CLEARING HOUSES

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

194.  Chapter 1 of this Part:

  • gives the Treasury the power to set the requirements that such bodies have to meet in order to be recognised;
  • sets out the application procedures and supervisory arrangements for recognised bodies, including conferring powers to revoke recognition and to direct recognised bodies to take steps to meet the recognition requirements;
  • allows the Treasury, jointly with the Secretary of State, to extend special protection from insolvency law to organisations clearing certain non­investment contracts.

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

CLAUSE 279(1), (2) AND (4): QUALIFICATION FOR RECOGNITION

196.  Clause 283 allows the Authority to make a recognition order declaring an applicant to be a recognised investment exchange or a recognised clearing house if it is satisfied that the applicant satisfies the recognition requirements applicable in its case. In order to remain recognised the body must continue to meet these requirements.

197.  Clause 279(1) allows the Treasury to make regulations setting out the recognition requirements (under the negative resolution procedure). If the regulations contain provisions relating to default rules, then the Treasury has to have the approval of the Secretary of State before making regulations. (The Secretary of State is responsible for insolvency law generally.) The power in clause 279(4) to prescribe contracts is included to enable the Treasury to track any change in the definition of market contract in the event of changes to the Companies Act 1989.

198.  The recognition requirements are currently set out in the Financial Services Act 1986 (schedule 4 and, in the case of clearing houses, section 39) and schedule 21 of the Companies Act 1989. Only the latter provisions can currently be amended by secondary legislation. The Government believes that it is appropriate to provide for a regulation-making power in respect of all of the recognition requirements in order to ensure that the requirements can keep pace with developments in the way exchange and clearing services are provided and with changes in insolvency law. It is possible that, with further development of electronic trading, new types of organisations or ways of doing business will emerge that are not adequately covered by the recognition requirements then in force. In February 1999, The Treasury published draft regulations setting out its proposals for exercising these powers.

CLAUSE 294(1) AND (2): SUPERVISION OF CERTAIN CONTRACTS

199.  Clause 294 allows the Treasury, acting jointly with the Secretary of State (who is responsible for insolvency law), to make regulations which extend the provisions of Part VII of the Companies Act 1989, with any appropriate modifications, to certain contracts in the same way as it applies to contracts connected with a recognised body. 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. Clause 294 carries forward, with some modifications, the provisions of section 171 of the Companies Act 1989, which also gives the Treasury a power to make regulations in this area jointly with the Secretary of State. At present, regulations are in force which relate to certain money market contracts (Financial Markets and Insolvency (Money Market) Regulations 1995).

200.  The Treasury believe that keeping this order making power is appropriate given the desirability, in certain circumstances, of extending the protections of Part VII of the Companies Act 1989 to the settlement of non-investment contracts, and the difficulty of knowing in advance what kind of contracts bodies might wish to clear.

PART XIX: LLOYD'S

201.  This Part of the Bill includes 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 1871­1982, in relation to the Lloyd's community.

202.  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.

203.  The Bill gives the Authority considerable discretion as to how it discharges its obligations for the regulation of Lloyd's. 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.

204.  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 to be authorised to carry on any other regulated activity, for example advising on investments.

205.  No delegated legislative powers are conferred on the Treasury under this Part.

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

206.  Part XX introduces arrangements into the Bill whereby professionals (solicitors, actuaries and accountants), who are (a) not carrying on mainstream regulated activities, and are (b) members of designated professional bodies, will be exempt from the requirement to obtain authorisation from the Authority. The scope of the exemption will be determined by orders made by the Treasury under clauses 317 and 318. Additional tests are set out in clause 318 which must be met in order for the professional to qualify for the exemption.

207.  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 keeping itself informed about the effectiveness of the complaints and redress arrangements of designated professional bodies.

208.  In addition, the Authority will be able to prohibit members of the professions who benefit from the exemption from carrying on regulated activities, where they are not fit and proper. The Authority can also direct that the exemption can be cut back on a more general class basis (eg. so that certain categories of professional, carrying on certain types of activities, will no longer benefit from the exemption).

209.  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 317: DESIGNATION OF PROFESSIONAL BODIES

CLAUSE 318: EXEMPTION FROM THE GENERAL PROHIBITION

210.  Clause 317 provides that the Treasury may by order specify which professional bodies are to be designated professional bodies for the purposes of the arrangements under Part XX. Clause 318 empowers the Treasury to make orders specifying investments or activities in relation to which the exemption from the general prohibition should not apply. It is currently envisaged that the existing recognised professional bodies under the Financial Services Act 1986 will be designated.

211.  The first order (as well as an order removing a designated body) under clause 317 must be laid in draft and approved by affirmative resolution of each House before it is made. The first order under clause 318(6) must also be laid in draft and approved by affirmative resolution, as must any order adding new investments or activities to the activities prescribed under clause 318. These procedures are consistent with the general approach in the Bill to subordinate legislation extending or restricting the scope of regulation (see commentary on clause 20(1) above). Since the bodies which are relevant for the purposes of these provisions may change and since experience may demonstrate that particular investments or activities ought to be added to or subtracted from those which are relevant for the purpose of determining the scope of the regime, it was thought appropriate to provide for these matters to be dealt with in subordinate legislation. This will enable the Treasury to respond promptly, particularly if it were found that it would be inappropriate to maintain these special arrangements for the persons who are able to carry on business with the benefit of the exemption created under this Part.

PART XXI: MUTUAL SOCIETIES

212.  This Part gives the Treasury powers by order to transfer the functions of the Building Societies Commission, the Friendly Societies Commission and the Registry 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, which are broadly analogous to Transfers of Functions Orders under the Ministers of the Crown Act 1975.

CLAUSES 324 TO 329: MUTUAL SOCIETIES

213.  The relevant powers are in clauses:

  • 324(1) (Friendly Societies Commission),
  • 325(1) to (3) (for the Registrar of Friendly Societies, the Central Office of the Registry of Friendly Societies, or the assistant registrar for Scotland).
  • 326(1) (Building Societies Commission); and
  • 328(1) (functions under the Industrial and Provident Societies Acts and the Credit Unions Act 1979)

214.  It is intended to exercise the powers to transfer to the Authority those functions which relate to the registration and regulation of societies under the existing legislation. 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.

215.  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.

216.  These transfer provisions also include power (clauses 324(2), 325(4) and 326(2)) for the Treasury to dissolve the existing bodies (and under clause 327 the Building Societies Investor Protection Board which will be replaced by the Financial Services and Markets Compensation Scheme under Part XV of the Bill), 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.

217.  The Treasury has decided to give effect to these transfers by order because of the need to be able to deal flexibly in each case with the supplemental matters which can be dealt with in the order under the power contained in clause 329. The detailed changes that are required are more easily accommodated in an order than in primary legislation, and indeed transfers of functions are regularly achieved by order.

218.  Orders under this Part will be subject to the negative resolution procedure. This is appropriate for provisions of this kind, particularly when the transferees are expressly limited on the face of the Bill and the policy will already have been open to adequate scrutiny.

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

220.  There are no legislative powers delegated to the Authority under this Part.

PART XXII: AUDITORS AND ACTUARIES

221.  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.

222.  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 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.

223.  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 332: INFORMATION GIVEN BY AUDITOR OR ACTUARY TO THE AUTHORITY

224.  Clause 332 provides that where an auditor or actuary of an authorised person passes on information to the Authority which he has gained in the course of his appointment then, so long as he is acting in good faith, he does not thereby contravene any duty of confidentiality to which he is subject. Subsection (5) goes on to give the Treasury a power to set out, in regulations subject to negative resolution, circumstances in which an auditor or actuary must communicate matters to the Authority.

225.  The circumstances in which auditors and actuaries pass on information about a particular authorised person will, to some extent, be a matter for them to decide for themselves on the basis of their own judgement, in the light of any guidance issued by their various professional bodies. Subsection (5) is intended to prescribe the minimum level of information which it is felt the Authority must receive in order to carry out its functions properly. Since the Treasury's judgement of what this level might be may vary over time, in the light of experience, it is appropriate for this to be fixed by regulation.

226.  So far as the use of this power is concerned, it is proposed to deal with auditors and actuaries in different ways. The Treasury is required by EC Directives to ensure that auditors report to the Authority any matter that calls into question the fitness or properness of an authorised person to remain authorised, or which suggests that disciplinary action or intervention may be appropriate, in order to protect investors from a significant risk of loss. It is therefore intended to use this power to re-enact various regulations relating to auditors under existing legislation necessary to comply with this requirement. An example of an existing use of an equivalent power are the Auditors (Financial Services Act 1986) Rules 1994 (SI 1994/526) made under section 109 of the Financial Services Act 1994. No similar statutory requirement exists in respect of actuaries, although has made rules the Institute of Actuaries about disclosure in particular circumstances. The Treasury intends to consult with the professional actuarial bodies before taking a decision whether regulations under clause 332(5) should be made for actuaries.

CLAUSE 333: INFORMATION GIVEN BY AUDITOR OR ACTUARY TO THE AUTHORITY: PERSONS WITH CLOSE LINKS

227.  Clause 333 contains very similar provisions to clause 332, except that it concerns situations in which auditors and actuaries may, or must, pass on information to the Authority which they have come by as a result of their appointment by a person having "close links" with an authorised person, rather than by an authorised person himself. However, this requirement extends not to all auditors and actuaries of persons having close links with an authorised person, but only to those who have been appointed by, or who have acted for, both an authorised person and a person with close links with this authorised person. (A person has close links with an authorised person when it is a parent undertaking or subsidiary undertaking of that authorised person, or when both are members of the same group of undertakings.)

228.  As with clause 332, clause 333 contains in subsection (5) a power enabling the Treasury to set out, in regulations subject to negative resolution, circumstances in which an auditor or actuary must communicate matters to the Authority. The purpose of this power is similar to that in the previous clause, and as with the previous clause, we are subject to a Directive requirements to make regulations imposing reporting requirements on auditors. Again, as with the previous clause, there is no equivalent Directive requirement in respect of actuaries, and the Treasury is considering whether such rules should be made.

PART XXIII: PUBLIC RECORD AND DISCLOSURE OF INFORMATION

229.  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.

230.  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 339: EXCEPTIONS FROM CLAUSE 338

231.  Clause 338 defines confidential information, in respect of the Bill, and provides that such information must not be disclosed by the Authority, the Secretary of State, the competent authority for listing securities, or by their employees or contractors. Clause 339 then qualifies this prohibition by providing that disclosure may take place if it is to a prescribed recipient, or for a prescribed purpose. The clause confers on the Treasury the power to make regulations, subject to the negative resolution procedure, setting out who such persons and what such purposes may be.

232.  The extent to which regulators in the various different sectors of the financial services industry, such as banking, insurance etc, may disclose confidential information is the subject of detailed constraints under EC law. At present, this is implemented in the UK by provisions in the primary legislation covering each of these areas, such as the Banking Act 1987. These provide for specific "gateways" through which particular information can be disclosed to particular persons, or for particular purposes. Rather than reproduce these gateways on the face of the present Bill, the intention is that we should use the order making power contained in subsection (1) to create, in regulations, a single set of gateways covering all sectors of the financial services industry, which will, however, be broadly similar in their effects to various sets of sectoral gateways which exist now.

233.  It would have been possible to achieve this outcome, as at present, by listing all the necessary gateways in primary legislation. The reason for the change is that we could face difficulties if at some time in the future, changes to the underlying EC Directives necessitated a change to the domestic implementing legislation. Whilst the Directives regime covers the majority of areas regulated by the Authority, it does not cover them all. Rather than create separate arrangements for Directive and non-Directive information, we propose to have a single scheme covering both areas. This means, however, that if we were to make alterations as a result of changes in the Directives, we might also wish to make changes in the non-Directive area, to avoid the two parts of scheme from coming out of alignment. The power we have taken in this clause is intended to provide for this possibility, by allowing us to make changes to both types of gateway in the same manner. We could not rely on section 2(2) of the European Communities Act 1972 to do this.

234.  It is also the case that in other legislation in the past, such gateways have often been spelt out in the primary legislation but because of the number of bodies and functions that are specified, the provisions are subject to constant amendment and it is difficult to establish which gateways are in force at any particular time, and for what purposes. Such changes may be as a result of primary legislation or following the exercise of powers to make secondary legislation, including transfers of functions orders. A single set of regulations should make it easier to maintain a current list.

CLAUSE 342: REMOVAL OF OTHER RESTRICTIONS ON DISCLOSURE

235.  The Directive regime described above only applies to the Authority in its capacity as regulator, and not to the various other bodies carrying out functions under the Bill, such as the Ombudsman, or the Compensation Scheme. This does not mean, however, that these bodies will be entirely free to disclose information they have received in confidence, since they will be subject, like all public bodies, to the general equitable duty of confidentiality imposed by domestic law.

236.  We believe this is right, and we have no plans to provide for a general exemption from this duty in the Bill. Nevertheless it is possible that a situation may arise in the future in which this duty appeared to create a barrier which prevented, for example, the Ombudsman from disclosing confidential information, either in order to directly further its own functions, or to the Authority to assist it in the performance of its regulatory duties. The power in subsection (1) is intended to enable the Treasury to make regulations, under the negative resolution procedure, enabling persons with functions under the Bill either to disclose confidential information to assist them in performing their own functions, or to disclose confidential information to the Authority to assist it in performing its functions.

237.  It is difficult to anticipate the exact circumstances in which the Treasury might wish to make use of this power, or when or if these may arise. It is because these circumstances may only become clear as the new institutions created by the Bill are set up, and begin operations, that we have felt it necessary to take a power of this sort. However, we will only make use of this power if it appears that the duty of confidentiality that a particular person is under is inhibiting the effective functioning of the Bill regime.

PART XXIV: INSOLVENCY

238.  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 not just to protect 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.

239.  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, as described above.

240.  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).

241.  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. Clauses 347 and 353 make changes to the insolvency regime for insurance companies.

CLAUSE 347: INSURANCE COMPANIES

242.  Since 1985, insolvency law has provided for the court to place a company or partnership in financial difficulties into administration, that is to say to allow it to continue in business, under the supervision of an administrator, as an alternative to winding it up. When the administration procedure was initially devised it was not clear whether this would be appropriate for use by insurance companies, given the special nature of insurance business. As a result, Section 8 of the Insolvency Act 1986 contains an absolute prohibition on putting insurance companies into administration.

243.  Experience has since shown that it may be useful to have available the option of putting insurance companies into administration, and we wish to provide for this, but before doing so we want to undertake a public consultation exercise as to the exact form such a procedure would take. Subsection (1) of this clause therefore provides that the Treasury may make an order, under the negative resolution procedure, enabling insurance companies to go into administration, but subject to such modifications to the administration procedure as may be specified. Subsection (2) further provides that in making this order, the Treasury must obtain the consent of the Secretary of State for Trade and Industry, as the Minister responsible for insolvency law. Once the public consultation exercise referred to above has been undertaken, we would propose to make use of this power to amend the law to allow insurance companies, in certain circumstances, to be placed in administration.

CLAUSE 359: PETITIONS

244.  Clause 359 allows the Authority to present a petition for the bankruptcy of an insolvent sole trader who is an authorised person, or who has been carrying out financial services business without authorisation. It then goes on to provide what evidence will serve to establish that this person is in fact bankrupt, that is to say that he cannot pay his debts. In this respect, the tests that the Authority has to follow to demonstrate that such a person is bankrupt differ somewhat from those applied by general insolvency law to prove bankruptcy in other situations, but there is a similarity in that the each regime does not rest entirely on statute, but relies partly on secondary legislation. Thus the Bill provides for the service on the alleged bankrupt of a statutory demand to pay, or prove that he can pay, a debt, but any provision as to, for example, the proper form of such a demand would need to be made not in primary legislation, but in the rules.

245.  It is therefore likely that it will be necessary to make or amend insolvency rules to facilitate the proper functioning of this clause. Responsibility for making such rules, so far as England, Wales and Northern Ireland is concerned, rests with the UK Government, and such rules would be made under powers in existing insolvency legislation. However the situation in respect of Scotland is different.

246.  Bankruptcy law is a matter which has now been devolved to Scottish Parliament. So if any changes were to be made to Scots bankruptcy law this would be a matter for that Parliament. However, the Parliament would not be able to make rules in respect of the operation of the bankruptcy provisions of this Bill, because these would have been introduced for the purposes of financial services law, which is a reserved matter. Subsection (9)(b) therefore gives the Treasury the power to make any necessary rules, subject to the negative resolution procedure, to facilitate the achievement of the purposes of this clause of the Bill. It further provides that before doing so, the Treasury must consult Ministers of the Scottish Executive, given that these rules, although they themselves will be part of financial services law, and thus reserved, could have an impact on Scots bankruptcy law, which is devolved.

CLAUSE 365: TREATMENT OF ASSETS ON WINDING UP

247.  This part of the Bill contains provisions relating to the winding up of insurance companies. Whilst the winding up of companies doing only general insurance business, such as motor insurance, does not require any particular special provision, long term insurance (or life assurance) is a different matter. Policyholders of long term insurers face different problems from most consumers if the company fails. They enter into agreements, for example for pensions, which are designed to last many years, and the benefits which they expect to receive build up over time. Also, the terms of the contract, and the premium, are set at the outset. If, for example, during the course of the contract they were to develop an illness they might not be able to obtain alternative cover. For these reasons it is desirable, where possible, to try to maintain a long term insurance company in financial difficulties as a going concern, or to find an alternative insurer to take over its policies, rather than allowing it to be wound up.

248.  The Bill makes provision for this matter in clause 363, which requires the liquidator of a company doing long term business to carry on this business with a view to transferring this to another company, unless the court orders otherwise. What the present clause is intended to do is to deal with the situation in which a company doing long term business has to be wound up. In doing this, it will be desirable to reflect the different position of policyholders as compared to other creditors eg unpaid utility suppliers, in the arrangements made for winding up.

249.  The Bill already provides, at clause 134, a power to make regulations to separate the assets of companies doing long term business into different parts, whilst the company is a going concern. The present clause extends this into situations where such companies have become insolvent. Subsection (1) therefore provides the Treasury with a power, subject to the negative resolution procedure, to make regulations allowing the separation of the assets of the business into two parts, reflecting its long term business and other liabilities, and for the holding of separate meetings of the long term policyholders and other creditors of the business, to consider how these should be dealt with.

PART XXV: INJUNCTIONS AND RESTITUTION

250.  This Part is concerned with the Authority's (and in certain cases the Secretary of State's) power to seek injunctions and restitution orders from the High Court, or in Scotland the Court of Session, against both authorised and unauthorised persons where it appears that certain requirements have been, or might be, contravened. Clause 371 also gives the Authority the power to require restitution to be paid without having to apply to the courts for a restitution order but this direct power can only be used against authorised persons.

251.  The powers contained in this Part are based on similar powers under the existing legislation. They may be exercised by the Authority in relation to breaches of any offence under the Bill, or which the Authority has power to prosecute under clause 384, or any breach of any other requirement imposed by or under the Bill, such as a rule made under Part IX. The Secretary of State may exercise the powers in relation to any breach which constitutes an offence which the Bill gives him the power to prosecute under clause 383.

252.  There are no delegated legislative powers under this Part.

PART XXVI: NOTICES

253.  Various provisions of the Bill relate to the Authority taking decisions for example as to whether to grant, or to withdraw, authorisations and approvals, or whether to take other regulatory action, such as the imposing financial penalties or making public statements. The provisions in this Part require the Authority to serve a warning notice when it proposes to take action and then a decision notice once it has decided whether or not to take the action proposed. This Part is concerned with the Authority's procedures prior to, and the process of, serving these notices as well as the information which they are to include. In particular, the Part requires the Authority to act in accordance with a published set of procedures unless it considers there are good reasons not to.

254.  There are no powers delegated to the Treasury under this Part.

PART XXVII: OFFENCES

255.  This Part contains provisions which make it an offence to make misleading statements or engage in a misleading practice in order to induce someone to enter into an investment contract. It also creates an offence of misleading the Authority. The first of these offences is carried over from sections 47 and 133 of the FS Act 1986 and section 35 of the Banking Act. It also provides that where a corporate body (or partnership) has committed an offence then, in certain circumstances, its officers may also be guilty of that offence. In addition, this Part contains general provisions on the institution of proceedings for offences under this Bill. It gives the Authority new powers to prosecute insider dealing under the Criminal Justice Act 1993, to prosecute under the Money Laundering Regulations 1993, and to prosecute the offences of misleading statements and practices.

CLAUSE 379: MISLEADING STATEMENTS AND PRACTICES

256.  Clause 379 provides for two criminal offences concerning misleading statements and practices. The first, set out in subsections (1) and (2) arises where a person deliberately or recklessly makes a misleading statement, promise or forecast, or dishonestly conceals facts, with the intention of inducing someone to enter into, or refrain from entering into, a relevant agreement, or to exercise, or refrain from exercising, any rights conferred by a relevant investment. The second offence, set out in subsection (3), is the creation of a misleading impression about a relevant investment with the intention of inducing a person to trade in, or refrain from trading in, this investment, or to exercise, or refrain from exercising, any rights conferred by the investment.

257.  Subsections (8) and (9) give the Treasury powers to specify by order, subject to the negative resolution procedure, what kinds of things should fall within the categories of "relevant agreement" or "relevant investment" respectively. The reason is that the Bill itself will not directly specify the kinds of activity which the Authority will regulate, but will enable the Treasury to do this in an order made under clause 20. We will wish to ensure that the areas of investment and the types of agreement covered by the offences of misleading statements and misleading practices are aligned with the area of regulated activity itself, and so it is necessary to provide that the coverage of the offences may be changed to follow any changes in the coverage of regulated activity.

CLAUSE 382: BODIES CORPORATE AND PARTNERSHIPS

258.  Clause 382 provides for the officers and directors of a company, or the members of a partnership, to be guilty of an offence under the Bill committed by the company or partnership, if this offence was committed with their consent or connivance, or if it was attributable to negligence on their part.

259.  Subsection (7) gives the Treasury a power, subject to the negative resolution procedure, to extend the provisions of this offence, with any modifications as the Treasury may deem appropriate, to a company, partnership or other body formed or recognised under the law of a territory outside the United Kingdom. This power is necessary because bodies formed under foreign law may wish to do financial services business in the UK. It is possible that these bodies may include some kinds of unincorporated or incorporated bodies for which there exists no equivalent in the UK, and which would therefore not fall within the scope of the present clause. This power would allow the Treasury to extend the coverage of the clause to any such bodies, should such a situation arise.

CLAUSE 384(1)(B): POWER OF THE AUTHORITY TO INSTITUTE PROCEEDINGS FOR CERTAIN OTHER OFFENCES

260.  Clause 384 allows the Authority to prosecute offences which are not contained in this Bill. These are the offence of insider dealing (Part V of the Criminal Justice Act 1993) and offences relating to money laundering under regulations prescribed by the Treasury.

261.  The Treasury's intention is to use this power to prescribe the Money Laundering Regulations 1993. The reason for dealing with this through secondary legislation is that any reference to those Regulations in the Bill could become out of date if further regulations are made in the future.

PART XXVIII: MISCELLANEOUS

262.  Clauses 346 to 349 concern reciprocity powers. Under certain EC directives a decision can be taken by the European Council or European Commission to require regulators in individual member states to take reciprocal action to deprive subsidiaries of firms from a country outside the European Economic Area (EEA) of access to their markets. This is referred to in the Bill as a "third country decision". Such a decision may be taken where it appears to the European Commission that EEA firms wishing to establish themselves or provide financial services in third countries are not being treated on the same basis and offered the same competitive opportunities as domestic firms.

263.  The potential for reciprocity action has diminished following World Trade Organisation ("WTO") negotiations on financial services which resulted in the EU, along with many other WTO member countries, making a commitment to offer Most Favoured Nation treatment to other WTO members on a permanent basis. This commitment came into force on 1 March 1999 and means that EC reciprocity powers can now only be used against countries outside the WTO.

264.  There are no delegated legislative powers under this Part.

PART XXIX: INTERPRETATION

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

CLAUSE 394: CARRYING ON REGULATED ACTIVITIES BY WAY OF BUSINESS

266.  Clause 394 confers on the Treasury the power to define in regulations the circumstances in which activities are to be classed as carried on by way of business. This power in linked to the power under clause 20(1) to define regulated activities for the purposes of the Bill. The order making power under this clause is therefore considered in the context of clause 20.

PART XXX: SUPPLEMENTAL

267.  This Part contains various supplemental provisions, including provisions as to Parliamentary control over statutory instruments and provisions enabling the Treasury to make transitional provisions and consequential amendments.

CLAUSE 402(1): CONSEQUENTIAL AND SUPPLEMENTARY PROVISION

268.  Clause 402(1) confers on the Treasury powers to make orders making incidental, consequential, transitional or supplemental provision which the Treasury consider necessary or expedient for the purposes of the Act or giving effect to it.

269.  This is not an uncommon bill provision. It is similar, for example, to section 75 of the Competition Act 1998.

270.  The provision is necessary to ensure that detailed provisions of the Bill can be brought into effect smoothly, without the need for further primary legislation and to deal with any transitional provisions and consequential amendments that are not covered directly in the bill. The circumstances in which the power can be used and the purposes for which it may be used are, in fact, quite focussed. It can only be used for the general or any particular purposes of the bill, in consequence of its provisions or for giving full effect to it. In broad terms, the power is needed to deal with tidying up that is not dealt with directly by the Bill itself.

271.  Although it is the Treasury's intention to make all practicable efforts to deal in the bill with the maximum number of matters that can be dealt with under this power, it is inevitable with an exercise of this size and complexity that certain things will fall through the net. For example, the Government intends to introduce amendments to the Bill that will make consequential amendments to other legislation. For example, tax and companies legislation contain provisions that rely on definitions in the Banking Act 1986 and the Insurance Companies Act 1982. Those provisions will need to be updated when those other enactments are repealed. However, some consequential changes may not be easy to identify and the Treasury needs to have the powers to bring about relevant any changes in the event there are some that have been overlooked.

272.  It is also possible to imagine circumstances in which it is necessary to make provision which cannot strictly be characterised as transitional or consequential but which is to ensure proper articulation between provisions in the bill, once it is enacted, and other measures on the statute book. The Treasury are not currently aware of the need to make such provision but with the range of matters covered by the bill the need to make such provision seems a possibility that could not be called remote. By way of example, the Bill and the Companies Acts make provision requiring auditors to disclose certain matters in particular circumstances. The purpose of the requirements will be similar - but as they are not directly equivalent provisions it is not inconceivable that some inconsistency or conflict may be identified at a later stage. An order under this clause would, therefore, be able to resolve such difficulties.

273.  The order is subject to the negative resolution procedure. This is appropriate because the powers would only be used for limited purposes to give effect to the policy that Parliament has endorsed when passing the legislation.

CLAUSE 403(3): REGULATIONS AND ORDERS

274.  This is a standard Bill provision. The power in clause 403(3) extends other powers in the Bill to make orders and regulations, as described in this memorandum, so that:

  • they may include provisions that are incidental, supplemental, consequential or transitional; and
  • make different provision for different cases.

275.  The provision in paragraph (a) will be necessary when the powers under the Bill are first used, to ensure a smooth transition from existing arrangements. But it may also be necessary at a later stage. For example, clauses 71(2) and 141(5) confer a power on the Treasury to define in regulations the definition of a "private person" who would have a right of action in the event of a regulatory breach by an authorised firm. After an order had been made under those powers, the Treasury may take the view that the definition needs to be changed. A transitional provision would be needed to ensure that the effect of the order was clear so far as it related to persons who had been either included, or excluded, by the revised definition.

276.  The provision in paragraph (b) is necessary since the same requirements, definitions or restrictions imposed by virtue of regulations or orders made under the Bill may not be appropriate for all circumstances. Taking the example of clauses 71(2) and 141(5) again, it is possible that a particular type of private person who should enjoy a right of action against an insurance company in particular circumstances ought not have a similar right in relation to a firm offering share dealing services, whether in the same or other circumstances.

277.  There is clearly no alternative but to exercise the powers conferred by this clause in the regulations or orders for which they are being used, and subject to the procedure applying to the primary legislative power.

CLAUSE 406(2): COMMENCEMENT

278.  The power in clause 402(2) enables the Treasury to make commencement orders. This is a standard Bill provision. It is particularly important that the Treasury should have the flexibility to determine the day each provision comes into force given the complexity of the Bill and the arrangements that will need to be made, by the Treasury, the Authority and the Lord Chancellor, in preparation for commencement. No firm date has yet been proposed for commencement although the Government can confirm its intention to bring the Bill into force at the earliest practical opportunity. In accordance with usual practice, no procedure is required for a commencement order under clause 406(2). Where necessary, the Treasury could include in an order under this part, provision of the kind provided for under clause 403(3) above.


 
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