Select Committee on Delegated Powers and Deregulation Twelfth Report


Annex 2

FINANCIAL SERVICES AND MARKETS BILL

Further Memorandum by HM Treasury

Introduction

  1.  The Financial Services and Markets Bill was brought from the House of Commons on 10 February 2000. The Treasury submitted its memorandum on the delegated legislative powers under the Bill to the Committee on 11 February 2000. On 6 March 2000, the Treasury submitted a further memorandum, in response to the Committee's Seventh Report of 16 February 2000 which made a number of recommendations to the House of Lords concerning the Bill.

  2.  Since being brought from the House of Commons, a number of amendments have been made to the Bill, some of which relate to the delegation of legislative powers under it. On 14 March 2000, the Treasury submitted a memorandum to the Committee explaining modifications proposed by the Government, in amendments that had been tabled at that time, to the powers described in the original memorandum of 11 February 2000. This memorandum explains further changes to the delegated legislative powers resulting from further amendments made during Committee Stage in the House of Lords where those amendments were tabled after 14 March. It also explains further amendments to be considered at Report Stage of the Bill.

  3.  Unless stated otherwise, clause numbering in this memorandum follows that in the Bill as amended in Committee. Amendment numbers refer to the attached list of amendments.

PART II: REGULATED AND PROHIBITED ACTIVITIES

Clause 19: Restrictions on financial promotion

  4.  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 investment activity unless he is an authorised person or the content of the communication has been approved by an authorised person. A more detailed description of the powers under clause 19 can be found in paragraphs 25 to 30 of the Treasury's Memorandum to the Committee dated 11 February 2000.

  5.  Two new subsections have been introduced to clause 19 since it was brought from the House of Commons (subsections (6) and (7)). These were explained in the Treasury's memorandum to the Committee dated 14 March 2000.

  6.  The Government has tabled further amendments to clause 19 (numbers 1-6). Clause 19(8) defines "engaging in investment activity" for the purposes of the financial promotion restriction; clause 19(8)(b) refers to an investment. Under clause 19(13) "investment" is defined to include any asset, right or interest. The new subsection (9A) confers a power on the Treasury to limit clause 19(8)(b) so that it applies only to an investment (or a class of investment) which is specified by order.

PART VI: OFFICIAL LISTING

  7.  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 thereafter. Part VI of the Bill makes provision for this competent authority function and for official listing in the UK.

NEW CLAUSE AFTER CLAUSE 93: OFFICIAL LISTING

  8.  The Government has tabled a new clause for inclusion after clause 93 (number 7). This new clause creates a power for the Treasury to subject the "regulating provisions" which is to say the listing rules and any associated guidance, and the working practices, of the competent authority to a competition scrutiny regime. Subsection (2) makes clear that such a regime will require the person responsible for the competition scrutiny procedure to consider whether any provision or practice, or combination of provisions or practices, has at any time a significant adverse effect on competition. Subsections (6) and (7) then define what is to be regarded as a significant adverse effect on competition.

  9.  The Bill (Chapter III of Part X) already makes provision for competition scrutiny of rules made and guidance issued by the Authority under the main regulatory regime, and the Bill names the Authority as the competent authority under Part VI. The intention is that the regime which applies to rules made and guidance issued by Financial Services Authority in its capacity as the competent authority should reflect that which applies in relation to its functions under the main regulatory regime, which has already been debated during Committee Stage. However, Schedule 8 of the Bill also confers on the Treasury power to transfer the functions of the competent authority under Part VI to a person or persons other than the Authority. Were such a transfer to be made, it may necessitate technical changes being made to competition regime which is applicable under Part VI. The Treasury therefore believes it is appropriate to take power to make provision for the regime which is to apply in the context of Part VI rather than setting the detailed provisions out on the face of the Bill.

PART X: RULES AND GUIDANCE

Clause 135(1): General rule-making power

  10.  In the Bill brought from the House of Commons, clause 129 gave the Authority a power to make general rules and clause 130 gave it a power to make rules applying to the non­regulated activities carried on by authorised firms. Amendments made by the Government in Committee have combined those powers within a single clause (clause 135). It should be noted that, while the amendments have slightly changed the scope of the power delegated on the Authority, the procedures for exercising the power remain unchanged. (For details of the procedure that applies to the exercise of the powers, see the memorandum of 11 February 2000, annex 1, paras 1 to 15.)

  11.  Combining the clauses, and thereby integrating the power to apply rules to non-regulated activities within the main rule­making power, focuses non-regulated activities rules on their proper target: consumers. Moreover, by having two powers, there was a risk that certain situations in which investors interests were threatened would fall outside the scope of the rule­making power. In addition, old clause 130 differed from old clause 129 in that it did not contain a specific provision to what is now clause 135(4). That provision is included in clause 135 because a consumer's interests may be damaged by systemic problems which affect authorised persons other than the authorised person whose services he is using (for example, if there run on banks due to a loss of confidence). By dealing with the rule­making power in relation to non­regulated activities in the same clause as the general rule­making power that important protection will apply to rules generally.

  12.  Clause 135(1)(a) empowers the Authority to make such rules applying to authorised persons with respect to the carrying on by them of regulated activities as appear to it to be necessary or expedient for the purpose of protecting the interests of consumers (broadly users of an authorised person's regulated activity services).

  13.  Clause 135(1)(b) now deals with the Authority's power to make rules applying to the non­regulated activities of authorised persons. But, as clause 135(1) specifies, it can only do so to the extent to which it is necessary or expedient for the purposes of protecting consumers of regulated activities in relation to the carrying of those regulated activities.

Clause 142: financial promotion rules

  14.  Clause 142 confers a power on the Authority to make rules applying to authorised persons in relation to the regulation of financial promotions under Part II and Part XVII of the Bill. Under amendments to be brought at Lords Report (numbers 8-10), this rule­making power will only apply to communications which, if made by a person other than an authorised person, without the approval of an authorised person, would contravene section 19(1), and communications which may be made by an authorised person without contravening section 234(1).

  15.  Under subsection (3) the Treasury may by order impose limitations on the Authority power to make rules under this section. This power has been made available primarily in order to enable the Treasury to limit, if necessary, the Authority's rule­making 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.

New Clause after clause 143 and amendments to clause 392: Chinese walls

  16.  A new clause is to be inserted after clause 143 giving the Authority the power to make rules requiring firms to withhold information from their clients or to prevent or restrict the flow of information within their business (number 11). These are commonly referred to as "Chinese walls" rules. Chinese wall are barriers in the form of procedures, systems, management and physical separation which firms may employ in order to ensure that information obtained by one part of a firm is not communicated in inappropriate circumstances to another part of the firm (for example, where it would advantage one client at the expense of another).

  17.  The purpose of these rules is to protect investors from potentially harmful conflicts of interest and to protect firms by allowing them to deal with multiple clients without breaching regulatory or fiduciary obligations they may otherwise have to disclose information. This power is in line with that currently contained in section 48(2)(h) of the Financial Services Act 1986 (the "FS Act"). Subsection (1) provides that the rules may require an authorised person to withhold information from a person for or with whom he does business in the course of carrying on any regulated activity. Under subsection (2), control of information rules may require the withholding of information which the authorised person would otherwise have been legally obliged to disclose to his client. They may also require an authorised person to restrict or prevent the passing of information between different parts of an authorised person's business. It is proposed that directions under clause 144 ("Modifications or waivers") may be made in relation to control of business rules.

  18.  The introduction of this rule­making power mirrors the regime set out in the FS Act.

  19.  The amendments to Clause 392 (page 210, lines 27 and 35) (numbers 18 and 19) provide that statements or behaviour which are in conformity with such rules will constitute a defence to the criminal offence of making misleading statements in clause 392 ("Misleading statements and practices". A similar defence is currently set out in section 48(6) of the FS Act. These amendments also ensure that authorised persons will have a defence when acting in conformity with price stabilising rules made under clause 141 where offences have been committed under Clause 392(1)(a) in addition to the defence currently provided for in respect of Clause 392(3).

PART XII: CONTROL OVER AUTHORISED PERSONS

  20.  Part XII 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 he has passed a threshold without prior notification. The purpose of these provisions is to ensure that persons are not able to have control of an authorised person when the Authority does not consider them fit and proper to do so.

Clause 188: Power to change definitions of control

  21.  The Government has tabled an amendment to clause 188 (number 12) to introduce a new paragraph. This new power will allow the Treasury to exempt certain persons from an unnecessary obligation to notify the FSA of the acquiring or divesting of control. This discretion will only be exercised in cases where the single market directives do not apply, or in situations such as one where the definition of associate in clause 411(4) has the effect that two or more people would have to notify the same acquisition of shares or voting rights.

  22.  In the case of a provisional agreement to sell shares, it may be found to be unnecessary to require both the buyer and the seller to notify the agreement. In this situation, the seller might be exempted from the obligation to notify. In addition, we are considering whether the extension of the controllers requirements to non­directive friendly societies is proportionate in the context of very small societies which are set up by professional firms for the purpose of building up individual funds for partners. In general, members (ie policy holders) will each have one vote. There are nearly 100 friendly societies with less than 10 members and the controllers provisions would apply to those on the assumption of one member one vote. There may also be other situations in addition to those already identified in which it is possible and appropriate to use the exemption power.

  23.  The power will be exercisable by order subject to the negative resolution procedure.

PART XVII: COLLECTIVE INVESTMENT SCHEMES

Clause 232(5): Open­ended investment companies

  24.  Clause 232 defines an open­ended investment company. The definition applies two tests: the investment condition and the property condition. The former condition is that the property of the company is held for the purpose of investment with the aim of spreading investment risk and giving its members the benefit of any return on that investment. The latter is framed by reference to the expectations of a reasonable investor in relation to the realisation of his investment.

  25.  Clause 232(4) states that, for the purpose of the investment condition, certain actual or potential redemptions and repurchases of shares and securities are to be ignored. The relevant redemptions or repurchases are those made under Companies Act 1985 (and corresponding provisions in the legislation of Northern Ireland and other EEA member States and, by virtue of clause 232(4)(d), provisions in non­EEA states that are designated as "corresponding provisions").

  26.  The designation of non­EEA provisions as "corresponding provisions" is to be by an order made by the Treasury. An order under this power would result in such provisions being discounted in the test for the investment condition, thereby excluding certain overseas companies from the definition of an open­ended investment company. An order under Clause 232(4)(d) could only limit the scope of the definition, and thus the application of other Parts of the Bill, and will therefore be subject to the negative resolution procedure.

  27.  Clause 232(5) gives the Treasury power, by order, to amend the definition of an open­ended investment company. 'Open­ended investment company' is defined in section 76 of the Financial Services Act 1986 and difficulties with the current definition have emerged over the years. It will also be clear from the above that it is not easily defined. If the definition is found in some way to be deficient, for example because it fails to recognise adequately developments in the marketplace, it is important that a more appropriate definition should be substituted. The Government introduced amendments at Committee stage that confer on the Treasury a power to amend the definition. As an amended definition could have the effect of extending the scope of the definition and thereby the application of provisions under the Bill (in particular the power under clause 258) and relevant FSA rules, it will be subject to the affirmative resolution procedure.

PART XIX: LLOYD'S

Clause 318: Rules applicable to former underwriting members

  28.  Regulations were introduced in December 1996 (Insurance (Lloyd's) Regulations 1996 (SI 1996/3011)) which treat former members of Lloyd's, for so long as they have liabilities outstanding on insurance contracts underwritten by them as members, as UK companies for the purposes of Part II of the Insurance Companies Act 1982 so they may be subject to regulation under that Act. The introduction of this measure was necessary to ensure that policyholders are protected. In practice, substantive requirements would only be imposed in this way if former members' reinsurance cover were to fail, leaving them with primary responsibility for meeting their liabilities.

  29.  The Bill as originally introduced into Parliament had the effect that former members were authorised. This would have made former members subject to the full regulatory requirements under the Bill. However this was thought too onerous. The Government amended the relevant provisions in Committee Stage in the House of Commons by removing the requirement for authorisation and instead conferring a power of direction on the Authority which would enable it to impose necessary requirements on former names (clause 317).

  30.  The new clause 318 enables the Authority to make rules of general application with which former members, or groups of such members, would have to comply. The exercise of this power will be subject to the usual procedural requirements for rule making, including consultation and cost benefit analysis. This contrasts with the arrangements under clause 317 which enable the Authority, by direction, to impose specific requirements on names individually. In such cases, the former member concerned would have the opportunity to make representations about the requirements and ultimately have the right to refer the matter to the tribunal.

  31.  These powers are necessary to ensure that arrangements could be put in place to protect the policyholders of former members of Lloyd's. It is thought that for the time being the Authority would maintain the existing requirements for changes of address to be notified.

PART XXIII: PUBLIC RECORD AND DISCLOSURE OF INFORMATION

  32.  This part of the Bill makes provision for the protection of confidential information held by the Authority, or by other persons having functions under the Bill, whilst providing for the disclosure or use of such information where it would be appropriate to do so (for example, in order to assist in the prosecution of a criminal offence).

Clause 344: exemptions from restrictions on disclosure

  33.  Clause 343 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 344 qualifies this prohibition by providing that disclosure may take place if it is to a prescribed recipient, or for a prescribed purpose, and by giving the Treasury the power to make regulations, subject to the negative resolution procedure, setting out who such persons and what such purposes may be.

  34.  In its Seventh Report of 16 February 2000, the Committee drew attention to the width of the power in clause 344 (then clause 339), and recommended that the Bill be amended "to restrict this power in a way which clearly limits it to information needed for regulatory and other public functions". The Treasury's 2nd memorandum to the Committee confirmed that it accepted this recommendation. The Government has tabled amendments to clause 344 to give effect to this (numbers 13-17).

  35.  The first three of these amendments make clear that the Treasury may make regulations authorising the disclosure of information only for the purpose of prescribed public functions. (Since "regulatory functions" are, in this context, a category of public functions, it was not necessary to mention this separately in the amendments.) The fourth and fifth amendments, taken together, are intended to put beyond question that disclosure in certain circumstances does constitute a public function. These circumstances are when it takes place in order to comply with an obligation under domestic or European Community law, when disclosure is to an overseas financial services regulator or Government body, or for the purposes of prescribed disciplinary proceedings. (This might include, in particular, proceedings by a professional body in respect of alleged professional misconduct by one of its members.)

PART XXVIII: MISCELLANEOUS

New Clause before clause 398: Reviews of past business

  36.  The Government has tabled a new clause for inclusion at the beginning of Part XXVIII (number 20). There is also a consequential amendment to clause 418 (number 26). Under the new clause, the Treasury will by order be able to allow the Authority to require firms to review their past business and where appropriate make restitution. This requirement has been introduced to provide a mechanism capable of addressing concerns that have arisen in the light of cases of mis-selling - most notably of personal pensions.

  37.  Reviews of past business rely on a combination of rule making and restitution powers. In respect of the current pensions review the Authority has operated partly through rules applying to a large class of firms, requiring them to carry out reviews of past business, and partly through requirements to pay compensation according to set formulae, which have more in common with the kind of statutory intervention or restitution powers which are more usually exercised on case by case basis. It is for this reason that the Government proposes to confer on the Treasury a power exercisable by order subject to an affirmative resolution procedure to implement past reviews. The trigger for such a review will be (i) evidence of a widespread or regular failure on the part of authorised persons to comply with rules relating to a particular kind of activity; or (ii) evidence that, as a result, private persons have or will suffer loss for which authorised persons are liable to make compensation payments.

Clause 402: Gibraltar

  38.  This clause was introduced at Committee Stage in the House of Lords. It has been introduced to enable account to be taken of several matters arising from Gibraltar's status within the EEA. These matters are to be dealt with in orders, made by the Treasury, as Gibraltar's status and ability to exercise rights within the EEA is subject to change. The powers will therefore enable the Treasury to determine when firms in Gibraltar should be able to passport into the UK.

  39.  Subsection (1)(a) gives the Treasury the power to extend Schedule 3 so that Gibraltar firms which are covered by one of the single market directives to which effect has been given in Gibraltar would be able to qualify for status as an authorised person and establish a branch or provide services within the UK. This is necessary because neither the Treaty nor the directives confer any rights on Gibraltar firms in relation to the UK.

  40.  At present, if they comply with the relevant notification procedure, Gibraltar insurance companies are allowed to passport their services into the UK. Similarly Gibraltar credit institutions are allowed to passport into the UK for the provision of banking services. But this does not yet extend to investment services. Investment firms have not yet been granted the right to passport into the UK.

  41.  The Gibraltar insurance companies and credit institutions which already benefit from this passport will continue to do so. Further passport rights will be granted as and when the Treasury are satisfied with the relevant regulatory standards in Gibraltar. As now, the passport will be optional and not an exclusive route to authorisation. Gibraltar firms will still have the option of seeking Part IV permissions.

  42.  Subsection (1)(a) will also enable the Treasury to make the provision necessary to ensure that firms from other EEA States which exercise passport rights in relation to Gibraltar before they exercise them in relation to the United Kingdom proper are not required unnecessarily to duplicate notification requirements. The phrase "or otherwise connected with Gibraltar" ensures that the power is broad enough to cover such firms. Without this, we might be in breach of our obligations under the directives.

  43.  Subsection (1)(d) makes equivalent provision for Gibraltar-based collective investment schemes. The Treasury also has the power under subsection (1)(c) to extend the application of Schedule 4 so that a financial services firm with its head office in Gibraltar or being otherwise connected with Gibraltar would acquire Treaty rights if it is authorised by the Gibraltar competent authority and the relevant conditions in Schedule 4 are met.

  44.  Subsection (1)(e) will enable the Treasury to modify the provisions of clause 260 so that the Authority can refuse to admit a collective investment scheme from another member State if the way in which it proposes to market its units is incompatible with requirements imposed in Gibraltar in the general good. This is necessary to accommodate the possibility that a collective investment scheme from another member State may acquire an automatic right to sell units in Gibraltar once it is recognised by virtue of clause 260.

  45.  Subsection (1)(b) gives the Treasury the power, by order, to extend the application of Schedule 3 to the Bill so as to make provision as to the exercise by UK firms of rights which are afforded to them under the law of Gibraltar which corresponds to an EEA right.

  46.  This clause will confer no new rights on Gibraltar firms until the relevant powers are exercised, but existing rights will continue. The powers will be exercisable subject to negative resolution procedures.

Clause 405: Gaming contracts

  47.  Clause 405 concerns gaming contracts, which are generally not enforceable in law. Some investment activities involve entering into or performing contracts which might otherwise be regarded as contracts for gaming or wagering. It is important that this does not happen, as financial markets require certainty that contracts will be enforceable. This clause makes explicit provision for such contracts to be enforceable in law regardless of the provisions in gaming legislation or of the common law in Scotland. This reflects the provisions of section 63 of the Financial Services Act 1986.

  48.  The Government has tabled amendments to clause 405 (numbers 21-23) which confer on the Treasury a power to specify, by order, which contract-based activities will be covered by the statutory exemption, replacing the reference to regulated activities in subsection (2)(b). This will enable the scope of the provision to reflect that of section 63 of the Financial Services Act 1986. Certainty is required in relation to all contracts effected on the financial markets and not merely those effected by authorised persons. The term "regulated activities" is used to define those activities for which authorisation is required under the Bill; so, for example, a contract entered into by a person in the course of engaging in an activity falling within an exclusion contained in the regulated activities order under clause 20 of the Bill would not have the benefit of the provisions of clause 405.

  49.  All this is in line with the Government's commitment made during Commons Committee stage to look again at clause 405 to ensure that it reproduces the same protection for the enforceability of these sorts of contracts that is provided for under the existing legislation.

New Clause after clause 406: Service of notices

  50.  This new clause (number 24) has been introduced to specify the way in which notices given to or by the Authority (or other relevant persons) are to be taken to have been given. On the face of it, this may appear a minor point, but precision would be important if, for example:

  • a person had a specified number of days in which to do something from the date on which the notice was deemed to have been given, or

  • there was a question as to whether the notice was served on an appropriate person.

  51.  Section 204 of the Financial Services Act 1986 makes specific provision about service of notices. The Government considered making similar provision in the Bill. However the section 204 provision would not adequately deal with the range of matters that would need to be covered, given the much wider scope of the Bill. The way in which such matters are to be dealt with would depend on matters such as:

  • the type of notice in question (for example, a confirmation of grant of permission, a notice of a proposal to take disciplinary action, or a notice of the variation of permission with immediate effect),

  • the person on whom it was to be served (for example provision will be needed to ensure that a notice served on a company is delivered to an appropriate individual, not just a receptionist; in the case of a partnership, on a partner),

  • the address at which it may be delivered (for example some authorised person may have more than one office, and the registered office may not be a place from which it carries on business).

  52.  A further concern is that the provisions of section 204 of the 1986 Act envisage service of notice in hard copy. Since that provision came into force, the use of the fax machine has become commonplace, and acceptable, for many types of formal communication but is not provided for under the 1986 Act. Clearly, the development of electronic mail and other Internet based communications systems mean that the extended use electronic communications is inevitable. The Government would not wish to prevent the financial services industry from benefiting from the use of those technologies in its dealings with the regulator. For example, to keep regulatory burdens low, the Authority is currently exploring an Internet based system to enable firms to apply for approvals under section 58 of the Bill for their prospective employees.

  53.  Section 8 of the Electronic Communications Bill currently confers a power on Departments that would enable them by order to make provision amending primary legislation dealing with matters such as service of notices in paper form. The Treasury believe that while that power is likely to achieve similar purposes to those described above, relying on that power would lead to confusion as the overall package of arrangements would be set out in various legislative instruments.

  54.  In view of the nature of what is to be described, and the desire to ensure that the arrangements are convenient to those likely to have an interest in matters relating to service, the Government proposes a power that would enable it to make appropriate provision by order subject to the negative resolution procedure.

PART XXX: SUPPLEMENTAL

New Clause after clause 416: Consequential and supplemental provision

  55.  Clause 416 of the Bill confers a power on the Treasury by order to make such incidental, consequential, transitional or supplemental provision as they consider necessary or expedient for a number of purposes, including for the purpose of giving effect to the Bill. The power was explained more fully in the Treasury's memorandum of 10 February 2000.

  56.  The Treasury have concluded that it would be advantageous to use the power to make many of the transitional arrangements required to bring the Bill into force with the minimum possible disruption to the regulated community. This will make it possible for a period of consultation before the provisions are set in stone. The kinds of arrangements that are needed include provisions that will ensure that a person who is currently authorised under an existing enactment would have permission, on the day the key provisions of the Bill come into force, to do those things permitted by the authorisation from the predecessor regulator under the former legislation. It will also be necessary to ensure that where people are currently performing functions that will be controlled functions for the purposes of clause 58 of the Bill, will be treated as having been approved for the purposes of clause 58. Similarly, where enforcement or disciplinary action is in train on the commencement day, it is necessary to ensure, if consumers are to be protected, that such action is able to proceed without interruption. These are matters which are currently provided for under clause 416(1).

  57.  The Government considers it would also be desirable, where there is no reason to change from existing rules and regulations, that such rules and regulations should be capable of being carried forward without requiring the Authority to follow the usual procedural requirements, for example as to consultation, that apply to its rule making powers (under clause 151). Where new rules are to be made, or when rules that are carried forward are to be made, clause 151 would apply. The Government is also concerned that existing rules will have been made in accordance with the vires of the powers under the existing legislation. The purposes for which rule-making powers are exercisable under the Bill are different and it is important that there should be no doubt about existing rules that are carried forward on an interim basis. It is understood that the Authority will for the most part replace existing rules. However, the current intention is that the prudential requirements for insurance and banking institutions will be carried forward for an interim period to minimise the disruption to firms when the new regime comes into effect.

  58.  The New Clause after clause 416 (number 25) is intended to clarify the purposes for which an order under clause 416 may make provision in relation to transitional matters. The power is exercisable subject to the negative resolution procedure.

SCHEDULE 20: TRANSITIONALS AND SAVINGS

Paragraphs 1 and 2: Self­Regulating Organisations

  59.  Paragraphs 1 and 2 of Schedule 20 have been introduced to ensure an orderly transition before the Bill is brought into force. It will be necessary for the Authority to be able to take certain steps in preparation for taking over regulatory functions currently performed by those bodies. The intention is that, at the invitation of the Self­Regulating Organisations (SROs) under the 1986 Act, the Authority should be able to appoint members of staff to serve on the boards of the SROs. This would materially affect the current arrangements, since the SROs are totally independent of the Authority, which supervises their activities.

  60.  By setting in stone the SROs that are recognised under the 1986 Act when the provision is commenced, it removes the potential doubt as to whether the SROs could continue to be recognised when they cease to be truly independent of their regulator. If there were such doubts as to whether these arrangements were legitimate, this could in turn cast doubt on the validity of the authorisation of firms that are authorised by virtue of their membership of an SRO. Firms could find themselves inadvertently committing a criminal offence by carrying on investment business without authorisation. It will also be of benefit to any members of the SRO boards since it would allow those who wish to do so, to leave their positions in advance of commencement of the substantive provisions of the Bill.

  61.  Equivalent provision is also made for Self-Regulating Organisations for friendly societies which are recognised under the provisions of Schedule 11 to the Financial Services Act 1986. There is only one such organisation - the Personal Investment Authority (PIA). The PIA is also a recognised Self-Regulating Organisation under Part I of the 1986 Act.

  62.  Paragraphs 1(5) and 2(4) of Schedule 20 confer on the Treasury a power, exercisable by Order subject to the negative resolution procedure, to designate a date on which the arrangements described above would come into effect in relation to each SRO. This power is necessary since the Treasury will need to be satisfied that an SRO has taken appropriate steps, for example to modify its constitution, before these modified arrangements can be applied to in a particular case.

10 April 2000


 
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