Select Committee on Delegated Powers and Deregulation Seventh Report



ANNEX 3

POINTS RAISED BY THE DELEGATED POWERS AND DEREGULATION COMMITTEE IN ITS SUBMISSION TO THE JOINT COMMITTEE

PARAGRAPH 20

1.  There should be an obligation on the FSA to submit an annual report to the Secretary of State, outlining the exercise of its rule-making powers. The Secretary of State should, in turn, lay this report before Parliament. In addition to informing Parliament generally, such a report might be well suited to scrutiny either by a Select Committee, or by a Joint Committee of both Houses established for the purpose.

Paragraph 10 of Schedule 1 to the Bill requires the Authority to submit an annual report to the Treasury. Sub-paragraph (1) allows the Treasury, by direction, to require the Authority to report on specified matters. A further provision not in the draft Bill allows the Treasury to require that the annual report is accompanied by such other reports or information, prepared by such persons, as the Treasury may from time to time direct (sub-paragraph (2)(b)). The Authority issued a press notice on 6 July 1999 setting out the matters it proposed to cover in its annual report. Those matters include:

  • rule making: an account of the exercise of the rule-making powers of the FSA, including a list of legislative acts which took effect during the year.
  • consultation: An account of consultations over the year including information on consultation responses made publicly available and feedback to consultation published.
  • cost-benefit analysis: An account of cost-benefit analysis policy and practice including the contribution of cost-benefit analysis to policy decisions/rule making, and whether revised cost-benefit analyses have been published following consultation.

In addition, the Treasury has modified the procedure applying to the exercise of the rule-making powers. The procedure is described in Annex 1 to the memorandum. This reinforces the procedures set out in clause 85 the draft bill (now clause 146), in particular with the introduction of a requirement for the Authority to publish, in general terms, a statement of the representations made to it and its response to them.

Other changes have been made to the Bill to improve the accountability of the Authority. For example, the Bill now requires the Authority to maintain effective arrangements for consulting practitioners and consumers on the extent to which its general policies and practices are consistent with its general duties under clause 2.

The Treasury Select Committee has indicated its intention to take a close interest in the Authority's performance and to scrutinise its annual report. Treasury ministers have welcomed this proposal.

2.  We understand that it is contemplated that there should be appropriate separation of functions within the FSA between those responsible for bringing any disciplinary proceedings and the body responsible for adjudicating on these proceedings. We believe that this should be made plain on the face of the legislation.

In the light of the comments of the Committee, the Treasury has amended the Bill. Clause 377 of the Bill has been introduced to require a separation of functions within the Authority. Subsection (2) makes it clear that procedures must ensure that persons involved in investigating and assessing a case are different from those who a responsible for deciding whether or not a warning notice, under clause 375 or, where relevant, a decision notice, under clause 376, should be issued. The Authority is required by clause 378 to consult on its proposed policy for meeting the requirements under clause 377.

In addition, the Bill has been modified to make it clear that the Financial Services and Markets Tribunal is a tribunal of first instance. The word "Appeal" has been dropped from the title. And relevant provisions in the Bill make it clear that if upon receipt of an unfavourable decision notice, the person concerned is not satisfied about the Authority's proposed course of action, the matter may be referred to the Tribunal who will be able to determine the matter.

3.  We do not find it clear on the face of the Bill whether it is intended that breaches of rules should be regarded as invoking civil process and sanctions or criminal process and sanctions. This has important consequences for the standard of proof required to establish a breach and potentially as to the extent to which the protections of the Human Rights Act apply. We believe that this uncertainty is unacceptable and that the position should be clarified in the legislation.

The Treasury believe that the Bill is clear on this point. Breach of Authority rules will not be a criminal offence. The process that will be followed where a breach of the rules has occurred and the Authority is proposing to take action is set out in the relevant parts of the Bill. Where the Authority is proposing to take disciplinary action, for example for breach of rules made under Part X, it will need to send the person concerned a warning notice under the notice requirements set out in Part XXV.

The process will be the same where someone engages in market abuse and the Authority is proposing to impose a penalty under Part VIII of the Bill. However, as the Treasury announced in their memorandum to the Joint Committee of 14 May, in cases to impose a penalty for market abuse, the Bill has been amended to provide for the Convention safeguards appropriate to proceedings which would be classed as criminal for Convention purposes. Clause 165 now provides that statements made to investigators using compulsory powers cannot be used in proceedings to impose a penalty for market abuse against the person who gave those statements.

Clauses 126 to 128 also provide the Lord Chancellor with powers to establish a scheme for providing free or subsidised legal assistance to individuals on whom the Authority is proposing to impose a financial penalty under Part VIII.

4.  The provisions on market abuse are clearly of great importance to those regulated by the legislation. Under clause 57 [now clause 110] of the Bill, the FSA propose a code for the purpose of determining whether or not behaviour amounts to market abuse. We consider that it should be made plain that compliance with the code is a "safe harbour" for commercial transactions.

The Treasury agreed with this recommendation and has made appropriate changes to clause 112. Clause 112(1) provides a safe harbour for behaviour which is described in the code as not amounting to market abuse. In other circumstances, the code will continue to carry evidential weight as provided for in clause 112(2).

5.  We also consider that in view of the width of the rule-making powers and their potential effect, and the assumed lack of Parliamentary control, it is highly important that those seeking the certainty which is not necessarily granted either by the legislation or the FSA rules should be entitled to seek advance rulings, whether in the form of "no action" letters or otherwise, which enable them to know in advance of taking any particular action that it does not contravene the rules. We accordingly recommend that the Bill should be amended to that effect.

The Treasury agrees and for this reason the Bill gives the Authority waiver and guidance powers.

Under clause 139 of the Bill, the Authority may, on the application or the consent of an authorised person, direct that all or any of the rules specified in clause 139 are not to apply to the authorised person, or are to apply to him with such modifications as may be specified in the direction. The Authority will not then be able to take action for breach of a particular rule if someone has acted in accordance with a waiver. The Authority may revoke a direction or vary it on the application or with the consent of the authorised person to whom to relates.

Under clause 148 of the Bill, the Authority has broad powers to give guidance consisting of such information and advice as it considers appropriate with respect to any rules made under the Bill, as well as any matters relating to the Authority's functions. Guidance can also be given for the purpose of meeting the Authority's regulatory objectives, and with respect to any other matters about which it appears to the Authority to be desirable to give information or advice (including Treasury statutory instruments and the operation of the Bill's provisions).

While guidance will continue to be non-binding (as are SEC "no action letters" in the US), as long as a person has acted within current written guidance issued to him in the circumstances contemplated by the guidance, the Authority will not be expected to take regulatory action against him. This was reflected in the Authority's September 1999 policy statement The FSA's approach to giving guidance and waivers to firm. Similarly, where matters are referred to the Tribunal, the Tribunal will take any relevant guidance into account in forming its decision on the matter referred to it.

With regard to judicial proceedings, clause 22 of the Bill provides that it is a defence for the accused to show in relation to an alleged false claim to be authorised or exempt that he took all reasonable precautions and exercised all due diligence. Likewise, under clause 23 in relation to an alleged breach of the financial promotion prohibition, it is a defence for the accused to show that he took all reasonable precautions and exercised all due diligence to avoid committing the offence. Both defences may well focus on reliance on Authority guidance.

As with waivers or modifications, the Authority may alter or revoke any of its general guidance as long as it complies with the procedural requirements set out in the Bill.

PARAGRAPH 22 AND 23

The Committee has considerable unease about clause 55(2) [now clause 71(2)]. Whereas it is normally the right of the individual to have the courts decide whether he has a remedy, under this subsection the FSA is given this power, which it will exercise without the consent of the Treasury or Parliamentary control. Parliament will wish to consider carefully whether it considers the delegation of this power appropriate. ... The Committee's comments on clause 55 [now 71] also apply to clause 80(5) [now 141(5)].

Changes were made to the Bill before its introduction to so that the power to define "private person" is conferred on the Treasury, and exercisable by statutory instrument. The exercise of this power is discussed in the memorandum. This change is reflected in clauses 71(2) and 141(5).

PARAGRAPH 30

Clause 18 (controlled activities) [now clause 19] confers a power on the Treasury to determine the scope of the prohibition in clause 17. This can be different from the scope of regulated activities made under clause 11 [now clause 20]. ... Although this power is narrower than that under clause 11 the Committee considers that it too should be made subject to the affirmative resolution procedure.

It should be noted that clause 404 has now been amended so that an affirmative resolution procedure applies to the following: the first orders made under clause 19(4), subsequent orders varying orders made under clause 19(4) so as to make clause 19(1) (the financial promotion prohibition) apply in circumstances in which it did not apply, the first orders to be made under clauses 19(5) and 19(7), and orders adding one or more activities to those that are controlled activities for the purposes of clause 19. With respect to clause 19(5) orders, whether the affirmative resolution procedure is to be extended to subsequent orders is under consideration.

11 February 2000


 
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