MEMORANDUM FROM HM TREASURY
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
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
- 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
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
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
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
- the Securities and Investment Board
- the Supervision and Surveillance Branch of the
Bank of England
- Insurance Directorate of the Department of Trade
- 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
- 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
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
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
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
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
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
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
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
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
Part XXV - Injunctions and restitution: This
makes arrangements for injunctions and restitution following regulatory
Part XXVI - Notices: This makes provision
about certain procedural matters relating the Authority regulatory
Part XXVII - Offences: This creates certain additional
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
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"
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
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  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
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
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
- 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
- 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
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
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
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
- 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
- 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
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
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
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
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
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
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
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
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"
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";
- 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
- 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
- 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
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
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;
- 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
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
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
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
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
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
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
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
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:
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
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
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
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
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
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
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
- 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
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
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
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
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
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
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
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
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
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
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
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
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
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 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
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
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
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
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
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
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
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
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
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
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
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
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
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.