2000 Chapter 8

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These notes refer to the Financial Services and Markets Act 2000 which received Royal Assent on 14 June 2000 (c.8)

Financial Services And Markets

ACT 2000

EXPLANATORY NOTES

INTRODUCTION

1.     These explanatory notes relate to the Financial Services and Markets Act 2000 ("the Act") which received Royal Assent on 14 June 2000. They have been prepared by HM Treasury in order to assist the reader in understanding the Act. They do not form part of the Act and have not been endorsed by Parliament.

2.     The notes need to be read in conjunction with the Act. They are not, and are not meant to be, a comprehensive description of the Act. So where a section or part of a section does not seem to require any explanation or comment, none is given.

SUMMARY

3.     The Act provides the framework within which a single regulator for the financial services industry, the Financial Services Authority ("the Authority"), will operate. It equips the Authority with a full range of statutory powers and creates the Financial Services and Markets Tribunal ("the Tribunal"). The Act also establishes the framework for single ombudsman and compensation schemes to provide further protection for consumers.

4.     The Act makes provision, amongst other things, with respect to:

• the constitution and accountability of the Authority;

• the definition of the scope of regulated activities;

• the control of financial promotion;

• powers of the Authority to authorise, regulate, investigate and discipline authorised persons;

• the recognition of investment exchanges and clearing houses;

• arrangements for the approval of controllers and the performance of regulated activities;

• the oversight of financial services provided by members of the professions;

• regulation and marketing of collective investment schemes;

• certain criminal offences;

• powers to impose penalties for market abuse; and

• the transfer to the Authority of registration functions in respect of building societies, friendly societies, industrial and provident societies and certain other mutual societies.

5.     An overview of the Act is set out below. A detailed description of each Part and the sections is contained in the commentary. Terms used are defined in the text where they first appear. There is a glossary of certain terms defined in the Act and certain other terms which are used throughout these notes.

BACKGROUND

Financial Services Overview

6.     The UK financial services industry accounts for approximately 7 per cent of GDP, employing over 1 million people in the City of London and across the country.

7.     Businesses to be authorised and regulated under the Act include:

• Banks

• Building societies

• Insurance companies

• Friendly societies

• Credit unions

• Lloyd's

• Investment and pensions advisers

• Stockbrokers

• Professional firms offering certain types of investment services

• Fund managers

• Derivatives traders

Regulatory Framework

8.     The regulation of financial services has, historically, been the responsibility of a range of different bodies:

• the Authority (formerly the Securities and Investment Board);

• the Self-Regulating Organisations ("SROs"): most recently the Personal Investment Authority, the Investment Management Regulatory Organisation and the Securities and Futures Authority;

• the former Supervision and Surveillance Branch of the Bank of England;

• the Building Societies Commission;

• the Insurance Directorate of the Treasury;

• the Friendly Societies Commission; and

• the Registry of Friendly Societies.

9.     Following the Government's announcement of its proposals to introduce legislation to reform the regulation of financial services in May 1997, steps were taken to transfer responsibility for regulation to the Authority. Certain functions under the Banking Act 1987 ("Banking Act") were transferred by the Bank of England Act 1998. In other cases, the Authority entered into contracts with the relevant bodies to perform regulatory functions on their behalf. For example, the Treasury contracted with the Authority for the performance of certain functions under the Insurance Companies Act 1982 ("ICA 1982"). Many relevant staff transferred to the Authority and relocated to its headquarters building. This process of integration will be completed when the Act is brought into force.

10.     The Act will broadly continue the regime for recognised investment exchanges and clearing houses under the Financial Services Act 1986 ("FS Act 1986"), although the Authority's powers under the Act will be widened as compared with those under the predecessor legislation. The Authority will have powers to regulate the Lloyd's insurance market, and have powers of direction over the Council of Lloyd's, although the latter will retain its responsibilities under Lloyd's Acts for the superintendence and governance of the Society of Lloyd's. The recognised professional bodies regime under the FS Act 1986 will not continue. Professional firms (such as solicitors, accountants and actuaries) carrying on mainstream regulated activities will be authorised and regulated directly by the Authority. However, some categories of professional firm will benefit from an exclusion from the scope of regulation under the Act, subject to arms-length oversight by and certain powers of the Authority. The Act does not affect the professional bodies' wider powers to regulate the professional activities of members of their respective professions.

11.     The Act is intended to coordinate and modernise financial regulatory arrangements which are currently established under a number of different enactments:

• the Credit Unions Act 1979

• the Insurance Companies Act 1982

• the Financial Services Act 1986

• the Building Societies Act 1986

• the Banking Act 1987

• the Friendly Societies Act 1992

12.     Those enactments are generally supplemented by secondary legislation or rules. It is intended that the powers conferred by section 426 will be used so that the relevant parts of that legislation, and rules and regulations made under it, will be substantially repealed when the Act comes into force. Certain other enactments will also be repealed, or substantially repealed, including the Policyholders Protection Acts 1975-97, the Industrial Assurance Acts 1923-48 and the Insurance Brokers (Registration) Act 1977.

13.     The Act also provides for the transfer of the remaining functions, including for example functions relating to the registration of mutual societies, of the Building Societies Commission, the Friendly Societies Commission and the Registry of Friendly Societies.

Consultation and scrutiny

14.     In July 1998, the Treasury published a paper entitled Financial Services and Markets Bill: A Consultation Document which explained its policy in detail and included a draft of the Bill. That consultation exercise attracted comments from over 220 firms and bodies interested in the regulation of financial services, including those representing consumers. The Treasury also published a number of relevant consultation papers, including drafts of secondary legislation to be made under the Act. Copies of relevant documents, including consultation papers and press notices, were made available at the Treasury's website (www.hm-treasury.gov.uk).

15.     The draft Bill was subject to pre-legislative scrutiny prior to its introduction into the House of Commons. The Treasury Committee published its third report of Session 1998-1999 on Financial Services Regulation in February 1999 (Financial Services Regulation, Volumes I and II; House of Commons 73 I - II). The Government's response was published in March 1999 (Financial Services Regulation: The Government's Response to the Third Report from the Committee of Session 1998-99; House of Commons 347).

16.     A Joint Committee of both Houses of Parliament was also established to consider aspects of the draft Bill. That committee was also able to consider the Treasury's Progress Report published in March 1999. The Joint 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 response to the reports of the Joint Committee on Financial Services and Markets was published in June 1999.

17.     The Bill was introduced into the House of Commons on 17 June 1999 and given its second reading on 28 June 1999. The Bill was the first public Bill to be carried over from session of Parliament to the another, under a new procedure recommended by the Select Committee on Modernisation of the House of Commons. The Bill was scrutinised in Standing Committee A between 6 July 1999 and 9 December 1999 (35 sessions). Report Stage took place on 27 January 2000 and on 1 and 9 February 2000. The Bill also received its third reading in the House of Commons on 9 February 2000.

18.     The Bill was introduced into the House of Lords on 10 February 2000. It received its second reading on 21 February 2000. There were five Committee days, between 16 and 30 March 2000, followed by three days on Report, on 13 and 18 April 2000 and on 9 May 2000. The Bill received its third reading on 18 May 2000.

19.     While the Bill was before the House of Lords, the Treasury also submitted a number of memoranda on the powers to make delegated legislation under the Bill to the Delegated Powers and Deregulation Committee. The Committee reported its view in a number of published reports. The relevant reports were the Seventh Report (16 February 2000), Eighth Report (8 March 2000), Tenth Report (15 March 2000) Twelfth Report (12 April 2000) and Sixteenth Report (17 May 2000). The Treasury's memorandum in each case was annexed to the report.

20.     The Bill returned to the Commons for consideration of Lords Amendments on 5 June 2000. It was subsequently returned to the Lords for consideration of Commons amendments on 12 June 2000. This completed the Bill's Parliamentary passage. Royal Assent was given on 14 June 2000.

21.     The Authority consults widely on the way it proposes to use its powers and carry out functions under the Act in accordance with the requirements under the Act. Full details of the Authority's consultation papers are available on its website (www.fsa.gov.uk) from where copies of current documents can be downloaded.

INTERPRETATION

22.     There are many defined words and expressions in the Act.

23.     Most of the definitions are for the purpose only of the section or Schedule in which they are used. So, for example, the three words defined in subsections (13), (14) and (15) of section 21 are defined only for the purposes of that section.

24.     Where there is no indication that a definition is intended to apply to a group of provisions, a Part of the Act or the Act as a whole, it applies only for the purposes of the section or Schedule in which it appears.

25.     Many of these single-provision definitions are just drafting devices to avoid clumsy repetition which would make an already long Act even longer. For example, in section 38 the word "specified" is used on its own on five occasions. The definition in subsection (4) is there to save repeating the words "in an exemption order" each time it is used.

26.     Some of the words and expressions that are defined just for the purposes of the particular provision in which the definition occurs are used (and defined separately) in other provisions — where they may have a different meaning. For example "consumers" is defined separately for the purposes of sections 5(3), 10(7), 14(5) and 138(7) (the definition in section 10(7) differing from the others).

27.     The Act consists of a large number of separate Parts. Where a particular Part deals with a self-contained subject there may be a separate interpretation section within the Part (for example section 193, which deals with the interpretation of Part XIII).

28.     For the Act as a whole, Part XXIX contains a group of nine sections which deal with expressions used in a number of provisions and other matters which bear on the interpretation of provisions of the Act.

29.     The purpose of this glossary is to provide the reader with a guide to words or expressions which are defined generally and so liable to be met in provisions which do not themselves contain the definition.

Expression	Where defined (references are to sections, unless otherwise specified)
appointed representative	39(2)
approved person	64(13)
auditors and actuaries rules	417
Authority	1(1)
authorised person	31(2)
authorisation offence	23(2)
body corporate	417(1)
chief executive	417(1)
collective investment scheme	235
Commission	417(1)
compensation scheme	213(2)
compulsory jurisdiction	226(8)
control of information rules	147(1)
controller	422
director	417(1)
documents	417(1)
EEA authorisation	425(1) and Sch 3, para 6
EEA firm	425(1) and Sch 3, para 5
EEA right	425(1) and Sch 3, para 7
EEA State	425(1) and Sch 3, para 8
exempt person	417(1)
financial promotion rules	417(1)
first banking co-ordination directive	425(1) and Sch 3, para 2(1)
first life insurance directive	425(1) and Sch 3, para 3(2)
first non-life insurance directive	425(1) and Sch 3. Para 3(5)
friendly society	417(1)
general guidance	158(3)
general prohibition	19(2)
general rules	138(2)
group	421
home state authorisation	425(2) and Sch 4, para 1
home state regulator	425(1) and Sch 3, para 9
host state regulator	425(1) and Sch 3, para 11
incorporated friendly society	417(1)
industrial and provident society	417(1)
insurance business rules	141(5)
insurance directives	425(1) and Sch 3, para 3(1)
investment services directive	425(1) and Sch 3, para 4
legal assistance scheme	134(4)
listed securities	14(7)
manager	423
market abuse	118(1)
Minister of the Crown	417(1)
money laundering rules	417(1)
notice of control	178(5)
ombudsman scheme	225(3)
open-ended investment company	236
own initiative power	45(5)
parent undertaking	420
Part IV permission	40(4)
partnership	417(1)
policy	424(2)
prescribed	417(1)
price stabilising rules	417(1)
private company	417(1)
prohibition order	56(2)
recognised clearing house	285
recognised investment exchange	285
recognised scheme	237(3)
registered friendly society	417(1)
regulated activity	22
regulating provisions	159(1)
regulatory objectives	2
regulatory provisions	302(1)
rule	417(1)
rule-making instrument	153
scheme manager	212(1)
scheme operator	225(2)
scheme particulars rules	248(1)
second banking co-ordination directive	425(1) and Sch 3, para 2(2)
second life insurance directive	425(1) and Sch 3, para 3(6)
second non-life insurance directive	425(1) and Sch 3, para 3(3)
seventh company law directive	417(1)
single market directives	425(1) and Sch 3, para 1
subsidiary undertaking	420
supervisory notice	395(13)
third life insurance directive	425(1) and Sch 3, para 3(7)
third non-life insurance directive	425(1) and Sch 3, para 3(4)
threshold conditions	41
Treaty	417(1)
Treaty firm	425(2) and Sch 4, para 1
Tribunal	132(1)
trust scheme rules	247(1)
UK authorised person	178(4)
UK firm	425(1) and Sch 3, para 10
unit trust scheme	237
voluntary jurisdiction	227(12)