Implementation of the Financial Services and Markets Act 2000 (FSMA) completed the vesting of supervisory responsibilities in the regulator, the Financial Services Authority (FSA), and rationalised and substantially replaced the banking, financial services and insurance companies legislation (see FSMA destination table ().
This note provides an overview of the legislative structure, the regulatory regime, the activities which are regulated under it, the process by which authorisation can be obtained to carry on such activities and considers in outline the financial promotion and market abuse regimes. For further detail on these regimes see Practice note, Financial promotion: overview () and Market abuse: overview(). This note also outlines the most recent developments in the regulation of corporate finance under FSMA.
The Financial Services Authority
On 1 December 2001 (the date known as N2), the FSA became the single regulator for the financial services industry, responsible for supervising banks, building societies, friendly societies, insurance companies and other financial institutions. (It took on the roles previously exercised by the Supervision and Surveillance Department of the Bank of England, the Investment Management Regulatory Organisation (IMRO), the Personal Investment Authority (PIA), the Securities and Futures Authority (SFA), the Insurance Directorate of the Department of Trade and Industry (subsequently transferred to HM Treasury), the Building Societies Commission, the Friendly Societies Commission, and the Registry of Friendly Societies).
The FSA is also responsible for regulating credit unions (since 1 July 2002), mortgage providers and providers of mortgage advice (since October 2004), and the sale of general insurance by insurance brokers (since January 2005).
The FSA is also a qualifying body under the Unfair Terms in Consumer Contracts Regulations 1999 (as amended) and has power to challenge firms' use of unfair terms in standard form consumer contracts (broadly those relating to investments, pensions, life and general insurance, banking and mortgages).
Constitution, powers, objectives and accountability
Section 1 of, and Schedule 1 to, FSMA set out the requirements for the FSA's constitution and include provisions about its status and the exercise of certain of its functions.
The FSA is a private company limited by guarantee and is required to hold an annual public meeting to consider the contents of its annual report and to permit those present at the meeting to question it on the discharge of its functions. The FSA has a wide range of rule making, investigatory and enforcement powers under FSMA. Its functions are described in general terms, in order to give the FSA flexibility to respond to changing markets.
When making rules, preparing and issuing codes, giving general guidance and determining the general policy and principles by reference to which it performs these and other functions, the FSA is under a duty to act in a way that is compatible with, and appropriate to meet, the statutory objectives listed in FSMA (Section 2, FSMA). These are:
• Maintaining market confidence.
• Promoting public understanding of the financial markets.
• Protecting consumers.
• Reducing financial crime.
These statutory objectives are an important development and are supplemented by several factors or "principles of good regulation" to which the FSA is required to have regard, including the need to facilitate innovation in connection with regulated activities and competition between regulated entities and to minimise the anti-competitive effects of regulatory measures. For further details on what constitutes regulated activities see The regulatory perimeter - Section 19 FSMA and the Regulated Activities Order below.
The FSA is a powerful regulator and, as a result, FSMA contains a number of mechanisms and safeguards to ensure that the FSA is accountable for its actions. These include:
• Practitioner and consumer panels. In 1998 the FSA established a Practitioner Forum (now the Financial Services Practitioner Panel) and a Consumer Panel as part of its policy of ensuring an open and transparent approach to policy making. FSMA requires the FSA to set up these bodies as part of its general duty to consult practitioners and consumers on the extent to which its policies and practices are consistent with the statutory objectives and principles of good regulation. On 18 June 2001 these panels were formally established when sections 8 to 11 of FSMA came into force.
• Complaints scheme. The FSA is required to set up a complaints scheme to deal with the investigation of complaints made against it in connection with the exercise of any of its functions (other than its legislative functions) (paragraphs 7 and 8, Schedule 1, FSMA). For example, the scheme covers complaints made against the FSA alleging mistakes and lack of care, unreasonable delay, unprofessional behaviour, bias and lack of integrity. The arrangements for the investigation of complaints against the FSA (and the transitional scheme for dealing with complaints against regulators in relation to actions taken under previous legislation) came into force on 3 September 2001. These arrangements are set out in the FSA Complaints Against the FSA sourcebook (COAF).
• Reviews and inquiries. The FSA is subject to certain reviews and inquiries; for example, the Treasury has the power to commission reviews of the economy, efficiency and effectiveness with which the FSA has used its resources in discharging its functions (section 12, FSMA). The Treasury can also arrange independent inquiries into certain matters of regulatory concern (such as matters which posed, or could have posed, a "grave risk to the financial system" or which caused, or risked causing, "significant damage to the interests of consumers") (section 14, FSMA).
• Restrictions on immunity. Although FSMA gives the FSA immunity from civil actions (paragraph 19, Schedule 1, FSMA), its immunity will not apply in relation to acts of bad faith or in respect of damages for breach of section 6(1) of the Human Rights Act 1998() (which provides that it is unlawful for a public authority to act in a way which is incompatible with the European Convention on Human Rights) (for further information on the Human Rights Act 1998, see know-how topic Human rights ().
The FSA's role as UK Listing Authority
On 1 May 2000, the London Stock Exchange's (LSE) function as the competent authority for listing was transferred to the United Kingdom Listing Authority (UKLA), a division of the Financial Services Authority (FSA). The function was transferred under The Official Listing of Securities (Change of Competent Authority) Regulations 2000. The transfer was made because of concerns that the LSE's demutualisation could lead to conflicts of interest in its role as a regulator and a profit seeking organisation.
On 17 November 2003, the UKLA merged with the Markets and Exchanges Division of the FSA to form one division known as the Markets Division. The particular departments of the Markets Division are still referred to as the UKLA when acting as such.
For further details of the FSA's role as UKLA, see Practice note, Relationship between UKLA and the London Stock Exchange ().
The Financial Services and Markets Act 2000 (FSMA)
The regulatory perimeter - Section 19 FSMA and the Regulated Activities Order
A person is prohibited from carrying on a regulated activity in the UK, or purporting to do so, unless authorised or exempt (the general prohibition) (section 19, FSMA). Contravention of the general prohibition is a criminal offence and resulting agreements are unenforceable (section 26, FSMA). Agreements made by authorised persons (in the course of their authorised business) may also be unenforceable if the agreement is entered into as a result of a third party's unauthorised regulated activities (section 27, FSMA). However, sections 26 and 27 do not apply if the regulated activity is accepting deposits.
It should be noted that under FSMA certain regulated activities may be deemed to be carried on in the UK where the activity in question is managed or carried on from an office in the UK (section 418, FSMA).
A number of statutory instruments establish the activities to be regulated under FSMA if carried on by way of business (The Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 (SI 2001/544) (Regulated Activities Order) (as amended) ).
Regulated activities include:
• Deposit-taking.
• Effecting and carrying out contracts of insurance.
• Investment activities, that is:
- dealing in investments as principal or as agent;
- arranging deals in investments;
- managing investments;
- safeguarding and administering investments;
- sending dematerialised instructions;
- establishing, operating or winding up collective investment schemes;
- advising on investments;
- agreeing to carry on any of the above activities (except establishing, operating or winding up collective investment schemes).
• Other activities:
- establishing, operating or winding up a stakeholder pension scheme;
- activities relating to the Lloyd's market;
- providing funeral plan contracts;
- the issuing of e-money;
- regulated mortgage contracts (and those related to long term care) from 31 October 2004;
- general insurance regulation (with the exception of long term care) from 14 January 2005.
Part II of the Regulated Activities Order sets out the exclusions applicable to each kind of activity. The exclusions include the following :
• Sums received in consideration for issues of debt securities fall outside the regulated activity of accepting deposits.
• Dealing in derivatives for risk management purposes falls outside the regulated activities of dealing in investments as agent or principal.
• A person dealing with or through an authorised person will not need to be themselves authorised so long as certain conditions are satisfied.
Part III of the Regulated Activities Order specifies the investments (the specified investments) that are relevant in determining whether a person is carrying on a regulated activity.
For further consideration of the general prohibition in Article 19 of FSMA. see Practice note, Introduction to regulated activities: the general prohibition ().
For detailed consideration of the regulated activities listed above, the specified investments and the full range of applicable exclusions, see Practice note, Regulated activities order: overview ().
The 'by way of business' test - Section 22 FSMA
An activity is only a regulated activity if it is carried on "by way of business" (section 22, FSMA). However, the Regulated Activities Order does not deal with the business test. HM Treasury is given the power to specify the circumstances in which a person will and will not be regarded as carrying on a regulated activity by way of business (section 419, FSMA).
The test is varied in respect of certain regulated activities in the Financial Services and Markets Act 2000 (Carrying on Regulated Activities by Way of Business) Order 2001 (SI 2001/1177), as amended by the Financial Services and Markets Act 2000 (Carrying on Regulated Activities by Way of Business) (Amendment) Order 2005 (SI 2005/922) (together, the Business Order).
The Business Order also, in effect, requires the trustees of an occupational pension scheme to delegate management of scheme assets to a fund manager (Article 4). In March 2006 the FSA issued new guidance (PERG 10) to enable pension scheme trustees, service providers, employers and affinity groups to identify their regulatory position (see PLC Legal update, FSA issues perimeter guidance on regulated activities in connection with the operation of pension schemes ().
For further details of the Business Order see Practice note, Regulated activities: The business order ().
Financial Promotions - Section 21 of FSMA and the Financial Promotions Order
The expression financial promotion, which is not referred to in FSMA other than in the heading and side note of section 21 of FSMA, is commonly used to describe the communication of an invitation or inducement to engage in investment activity.
FSMA contains a basic prohibition on any person communicating an invitation or inducement to engage in investment activity unless he is an authorised person or the content of the communication is approved by an authorised person or the communication is exempt (section 21, FSMA).
The prohibition of financial promotion is media-neutral and applies to all types of communications, both real time (such as face to face and telephone communications) and non- real time (such as letters, websites and e-mails).
Breach of section 21 of FSMA, in addition to giving rise to civil liabilities, constitutes a criminal offence. The key piece of secondary legislation is The Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (SI 2005/1529) as amended by the Financial Services and Markets Act 2000 (Financial Promotion) Amendment) Order 2005 (SI 2005/3392) (FPO).
The FSA has published guidance (set out in chapter 8 of the Perimeter Guidance Manual (PERG 8) on its interpretation of the financial promotion restriction and the main exemptions from the regime.
(For a detailed analysis of the financial promotion regime under FSMA, see Practice note, Financial Promotion (). For changes to the financial promotion regime in relation to e-commerce see Implementation of the E-Commerce Directive and changes to FSMA).
Authorisation requirements
Under FSMA there is a single authorisation process for all types of firm seeking to carry on one or more regulated activities. An applicant must apply to the FSA for a Part IV permission to carry on a regulated activity (or activities) and any person that is granted such a permission by the FSA is authorised. FSMA also provides for the automatic authorisation (subject to certain conditions and notifications) of:
• Firms "passporting" into the UK under an EU Single Market Directive, such as for example the Investment Services Directive (93/22/EC), the Second Banking Cooprdination Directive (89/646/EEC) or the Third Life and Non-Life Insurance Directives (92/96/EEC and 92/49/EEC).
• Firms exercising EC Treaty rights.
(Section 31(1) and Schedules 3 and 4, FSMA.)
A firm needs to obtain permission for each of the regulated activities it wishes to carry on, although a single permission may encompass a number of regulated activities. In addition to completing the required application forms, an applicant is required to satisfy the "threshold conditions" (that is, the qualifying conditions for authorisation) (Schedule 6, FSMA and COND in the FSA Handbook). For details of the threshold conditions see Practice note, FSA's Threshold Conditions ().
An application for a Part IV permission must be determined by the FSA within six months from the date on which it is received if it is a complete application.
Time limits for determining applications, the FSA's power to vary and cancel a Part IV permission and appeal methods are set out in sections 52 to 55 of FSMA.
For a detailed overview of the process of applying for Part IV permission, see Practice note, Applying to FSA for authorisation: overview ().
The Approved Persons regime
FSMA provides for a single regime of individual approval, under which individuals who carry out specified controlled functions within authorised firms require prior approval from the FSA.
The FSA rules in Chapter 10 of the Supervision manual (SUP 10) divide the controlled functions into the following:
• Governing functions. These comprise the following functions:
- director function;
- non-executive director function;
- chief executive function;
- partner function;
- director of unincorporated association function;
- small friendly society function.
• Required functions. These comprise the following functions:
- apportionment and oversight function;
- EEA investment business oversight function;
- compliance oversight function;
- money laundering reporting function;
- actuarial function;
- with-profits actuary function;
- Lloyd's actuary function.
• The systems and controls function.
• The significant management function.
• The customer function.
For further details on controlled functions, see Practice note, Controlled Functions ().
The detail of the approved persons regime is set out in the High Level Standards block of the FSA Handbook . The relevant sourcebbook is the Statements of Principle and a Code of Practice for Approved Persons (APER). The Code of Practice provides guidance to firms and individuals by describing conduct which, in the FSA's opinion, does not comply with the Statements of Principle and, in certain cases, factors which are to be taken into account in determining whether or not an approved person's conduct complies with a Statement of Principle. For further background on the approved persons regime see Practice note, The FSA Approved Persons regime: an overview () and Practice note, The FSA's Statements of Principle and the Code of Practice for Approved Persons ().
The Listing Rules, Disclosure Rules and Prospectus Rules
The FSA, when acting as the competent authority for listing, is referred to as the UKLA with responsibility for maintaining the official list, the admission of securities to listing, the discontinuance and suspension of listings and the approval of listing particulars, prospectuses and sponsors. Part VI of FSMA deals with the duties of the competent authority. Section 73(2) of FSMA sets out the competent authority's general functions of making rules, giving general guidance and determining the general policies and principles by reference to which it performs those functions. In discharging these functions the UKLA is required to have regard to the principles of good regulation.
The FSA has published three sets of rules for the purposes of Part VI of FSMA (known as the Part 6 rules):
• Listing Rules: which include six overarching Listing Principles, requirements for listing, rules and guidance on listed companies' continuing obligations and the sponsors' regime. The Listing Principles, which are enforceable like other rules, apply to all issuers of equity securities with a primary listing in respect of its obligations arising from the Listing Rules or Disclosure Rules (but not to obligations under the Prospectus Rules). Guidance on the FSA's approach to enforcing breaches of Listing Principles is set out in the Enforcement Manual within the FSA Handbook.
The Listing Principles provide that:
- a listed company must take reasonable steps to enable its directors to understand their responsibilities and obligations as directors;
- a listed company must take reasonable steps to establish and maintain adequate procedures, systems and controls to enable it to comply with its obligations;
- a listed company must act with integrity towards holders and potential holders of its listed equity securities;
- a listed company must communicate information to holders and potential holders of its listed equity securities in such a way as to avoid the creation or continuance of a false market in such listed equity securities;
- a listed company must ensure that it treats all holders of the same class of its listed equity securities that are in the same position equally in respect of the rights attaching to such listed equity securities;
- a listed company must deal with the FSA in an open and co-operative manner.
• Disclosure Rules: containing rules and guidance on listed companies' obligations to disclose and control inside information and notify transactions by persons discharging managerial responsibilities.
• Prospectus Rules: which broadly contain rules and guidance on the requirement for a prospectus and exemptions; the contents requirements for a prospectus; the approval process; and the obligation to produce an annual information update.
These three sets of rules comprise three sourcebooks within the FSA Handbook of rules and guidance, forming a block known as the "Listing, Prospectus and Disclosure Rules". For more detailed information see Practice note, Recent and proposed changes to the Listing Rules, Disclosure Rules and Prospectus Rules () and Article, Listing and prospectus rules: a guide to the new regime (), PLC Magazine, 2005.
One of the most significant developments introduced by FSMA was the creation of the civil regime of market abuse (section 118, FSMA). The regime is designed to protect the UK's financial markets against market manipulators and insider dealers.
The criminal offences of insider dealing and misleading statements and market manipulation remain. The market abuse regime supplements, rather than replaces, the criminal regime.
The lower standard of proof required in civil cases makes proceeding under the market abuse regime an attractive option to the FSA and it is expected to have a noticeable impact on the number of cases which can be sanctioned. For details of sanctions imposed for market abuse see Practice note, Market abuse: FSA investigations ().
As required by FSMA (section 119), the FSA has published a code to supplement the statutory provisions which deal with market abuse and to provide guidance as to whether or not behaviour is abusive. This is the Code of Market Conduct (Code) which forms chapter 1 of the FSA Market Conduct sourcebook (MAR 1)).
In order to implement the Market Abuse Directive (MAD) in the UK, significant amendments were made to the UK market abuse regime - both under the Financial Services and Markets Act 2000 (FSMA) (in accordance with The Financial Services and Markets Act 2000 (Market Abuse) Regulations 2005 (SI 2005/381)) (the Market Abuse Regulations) and the Code. Most changes to the market abuse regime came into force on 1 July 2005, however, the provisions dealing with the safe harbour for price stabilisation and buyback programmes and new sections 73A, 96A, 96B and 96C of FSMA came into force on 17 March 2005.
Elements of market abuse
In order for behaviour to constitute market abuse, the behaviour must:
• Occur in relation to a qualifying investments admitted (or in respect of which a request has been made for admission) to trading on a prescribed market.
• Fall within one or more of the following seven types of behaviour set out in FSMA (Sections 118(2) to 118(8)) :
- insider dealing
- improper disclosure of inside information
- misuse of information
- manipulating transactions
- manipulating devices
- disseminating information likely to give a false or misleading impression
- misleading behaviour or market distortion
The Code of Market Conduct (Code) describes types of behaviour which may or may not constitute abuse under each category but it is not intended to be an exhaustive list. Where the Code describes behaviour which, in the FSA's opinion, does not amount to market abuse, then that behaviour can be regarded conclusively as not amounting to market abuse. Otherwise the Code only has evidential effect and may be relied on only in so far as it indicates whether or not behaviour should be taken as amounting to market abuse. It is open to the FSA to bring an action against anyone who breaches the wider definition of behaviour which may constitute market abuse in FSMA, even if the Code does not specify that behaviour to be market abuse.
In addition, FSMA creates a second offence of requiring or encouraging another person to engage in behaviour which would be market abuse if the encourager had carried out the behaviour. The Code provides some examples of behaviour that may amount to requiring or encouraging.
Scope of the market abuse provisions
The market abuse provisions are not restricted to the regulated community. They apply to anyone (including corporations and individuals) who abuses a "prescribed" market. Behaviour which occurs outside the UK can also constitute market abuse if it relates to qualifying investments which are traded (or in respect of which an application has been made for admission to trading) on one of the prescribed markets.
The regime generally does not require knowledge, intent or recklessness on the part of the alleged abusers in order for a market abuse offence to be committed. Instead, the effect of abusive behaviour on the markets and other market participants is considered.
For a detailed analysis of the market abuse regime see Practice note, Market abuse: overview ().
Change of control of authorised firms
FSMA standardises the change of control regimes applicable to UK investment firms, banks and insurance companies. A person who is proposing to take a step which will result in that person acquiring "control" over an authorised firm must give advance notice to the FSA and may not proceed with the proposed action until the FSA has confirmed that it does not object. In addition, that person must notify the FSA after it has acquired the "control" (as defined by section 422 of FSMA). A similar requirement applies where a person proposes certain changes to the level, or to the nature, of its existing control of an authorised firm. There is also a general duty to give prior notification to the FSA of any proposal to cease to have control over a regulated firm or to reduce an existing control from specified thresholds. Breach of any of these requirements is a criminal offence.
For further details see Practice note, Changes of control under the FSMA ().
Insurance and banking business transfers
The special nature of the business of financial institutions means that it may be difficult to transfer such businesses solely by contractual means. Prior to the introduction of FSMA, significant banking transfers tended to be carried out under a private Act of Parliament. Part VII of FSMA introduced a new mandatory regime under which transfers of banking or insurance businesses must be sanctioned by the court.
The Financial Services and Markets Act 2000 (Control of Business Transfers) (Requirements on Applicants) Regulations 2001 (SI 2001/3625) came into force on 1 December 2001. They set out the procedures to be followed when a banking or insurance business is being transferred.
Most of Part VII of FSMA was in force at N2 (1 December 2001) for banking and insurance business transfers. However, section 104 (control of business transfers) of FSMA is not yet in force for banking business transfers (although it is in force for insurance business transfers). Therefore, other limited procedures that allow banking business transfers can continue to be used, and the new regime is optional for banking business transfers.
For further details of the procedure for insurance and banking business transfers see Practice note, Insurance and banking business transfers: the FSMA regime ().
Collective Investment Schemes
Part XVII sets out provisions relating to approval of collective investment schemes (CIS). FSMA recognises three types of approved CIS:
• Authorised unit trusts. FSMA sets out provisions in relation to the authorisation of unit trusts (sections 242 to 261, FSMA), including the FSA's powers to grant rule waivers and modifications in relation to unit trusts and to approve changes to their investment and borrowing powers (sections 250 and 251, FSMA).
• Authorised open-ended investment companies (OEICS). OEICS are defined in section 236 of FSMA but the detail of their regulation is dealt with in secondary legislation (The Open-Ended Investment Companies Regulations 2001 (SI 2001/1228), as amended by the Open Ended Investment Companies (Amendment) Regulations 2005 (SI 2005/923)). In the Perimeter Guidance Manual (which does not form part of the Handbook), the FSA provides guidance on the meaning of OEIC (PERG 9).
• Recognised overseas schemes. FSMA carries forward the previous regime in relation to these schemes which are established outside the UK and are permitted to be marketed direct to UK retail investors (sections 270 and 280, FSMA and The Financial Services and Markets Act 2000 (Collective Investment Schemes Constituted in Other EEA States) Regulations 2001 (SI 2001/2383)).
Using its powers under FSMA (under section 235(5)), the Treasury has specified that certain schemes that would otherwise be a CIS should not be treated as such (The Financial Services and Markets Act 2000 (Collective Investment Schemes) Order 2001 (SI 2001/1062) as amended byThe Financial Services and Markets Act 2000 (Miscellaneous Provisions) Order 2001 (SI 2001/3650)).
Arrangements which do not amount to CIS for the purposes of FSMA include:
• Individual investment management arrangements.
• Enterprise initiative schemes; pure deposit based schemes.
• Schemes not operated by way of business.
• Certain debt issues.
• Common accounts.
• Certain funds relating to leasehold property.
• Certain employee share schemes.
• Schemes entered into for commercial purposes related to an existing business.
• Group schemes.
• Fanchise arrangements.
• Trading schemes.
• Timeshare schemes.
• Certain other schemes relating to the use or enjoyment of property.
• Schemes involving the issue of certificates representing investments.
• Clearing services.
• Contracts of insurance.
• Funeral plan contracts.
• Individual pension accounts.
• occupational pension schemes.
• Personal pension schemes (though not feeder funds).
• Certain bodies corporate.
Unless a CIS has been authorised or approved it cannot be marketed to retail investors or to the public at large (section 238, FSMA). The FSA makes provision for unapproved schemes to be marketed by authorised persons to certain categories of investor in its CIS sourcebook (or the COLL sourcebook, where applicable - see further below for details of the COLL sourcebook).
The marketing of CIS is similar to the financial promotion regime. An authorised person is precluded from inviting or inducing someone to participate in a CIS unless that CIS is an authorised unit trust scheme, a scheme constituted by an OEIC authorised pursuant to regulations made under section 262 of FSMA or an overseas scheme recognised pursuant to section 264, section 270 or section 272 of FSMA (Section 238, FSMA). HM Treasury is entitled to disapply this prohibition, which it has done by statutory instrument to confer similar exemptions to those available under the financial promotion regime (section 238(6), FSMA and The Financial Services and Markets Act 2000 (Promotion of Collective Investment Schemes) (Exemptions) Order 2001 (SI 2001/1060) as amended).
FSA's reform of CIS Sourcebook
The FSA published policy and made handbook text on 23 March 2004 for the reform of the Collective Investment Schemes sourcebook (CIS) (see PLC Legal update, Collective Investment Schemes: FSA Policy Statement 04/7 ().
The new Collective Investment Schemes sourcebook (COLL) became effective on 1 April 2004 for use by then existing authorised funds wishing to convert to the new regime and for the establishment of new schemes. COLL became mandatory for all authorised funds from 13 February 2007.
Under the new regime, retail investors have access to a wider range of investment opportunities and product features, together with better information about the progress of their investments, while schemes available only to professional investors benefit from a reduction in regulation.
Investigations and enforcement
FSMA introduced a consolidated regime for investigations into matters of regulatory concern and for disciplinary and other enforcement action. These powers affect not only authorised persons (firms) and their employees, but may also affect a wider range of people, including listed companies and their directors, and any person who commits market abuse. In particular, FSMA provides for:
• Investigation powers enabling the FSA or its investigators to obtain information from those who hold information that is relevant to an enquiry, in many cases even if the person holding the information is not himself the subject of the enquiry.
• Enforcement powers ranging from criminal prosecution, market abuse fines, disciplinary action against firms and approved persons and a variety of other regulatory action.
• An enforcement process, under which most FSA decisions to take enforcement action are made by the Regulatory Decisions Committee (RDC) after hearing representations from the firm or individual concerned.
• A regime for listed companies, allowing the FSA, in its capacity as the UKLA, to take enforcement action against listed companies, their directors and sponsors, and to refer particular aspects to other regulators, such as one of the UK exchanges or an overseas regulator.
• A civil offence of market abuse, which applies to everyone, regardless of whether or not they are regulated under FSMA.
• The Financial Services and Markets Tribunal (the tribunal), an independent body run by the Department for Constitutional Affairs (formerly known as the Lord Chancellor's department) which provides an important safeguard for those subject to enforcement action).
For further details of the FSA's investigation and enforcement process, see Practice note, Overview of the FSA enforcement regime ().
The Financial Services and Markets Tribunal
The Financial Services and Markets Tribunal (the tribunal) is intended to provide an important safeguard for those subject to enforcement action. For discussion of the tribunal as a safeguard against FSA decisions, see Article, Legal & General: challenging the FSA (), PLC Magazine, 2005. For further background on the Tribunal see Practice note, FSA enforcement regime: overview: Referrals to the Tribunal ().
The Financial Ombudsman Service
FSMA provides for a single Financial Ombudsman Service (FOS), which operates independently of the FSA and replaces all of the pre-FSMA sector-specific ombudsman and arbitration schemes. Although the role of the FOS is to adjudicate individual complaints, rather than set industry standards, it has great capacity to influence industry behaviour. The FOS also issues guidance on how it handles particular types of complaint, and examples of cases it has handled, which are intended to influence firms in their own complaints handling procedures. FSA rules require firms to handle complaints properly and to co-operate with the FOS. It is compulsory for all authorised firms to be members of the FOS.
Under the Consumer Credit Act 2006 the jurisdiction of the FOS is to be extended to cover businesses holding a consumer credit licence issued by the Office of Fair Trading. On 16 June 2006 the FOS launched a consultation on the rules it proposes to use in dealing with consumer complaints. That consultation was open until 11 October 2006 (for further details see PLC Legal update, Consumer Credit Act 2006: consultation on new complaint rules for consumer credit disputes arising from April 2007 (). The new rules came into force on 6 April 2007 (see Legal update, FOS consumer credit jurisdiction effective from 6 April 2007 ()
For further information about the FOS, see the FOS website , and Practice note, The Financial Ombudsman Service ().
The Financial Services Compensation Scheme
Part XV of FSMA empowered the FSA to establish the Financial Services Compensation Scheme (FSCS). The aim of the FSCS, which replaced all the pre-FSMA sector compensation schemes, is to compensate customers who suffer financial loss as a consequence of the inability of a regulated firm to meet its liabilities arising from claims made in connection with regulated activities (even if the claim arises in relation to an activity for which that regulated firm did not have permission). It is compulsory for all authorised firms to be members of the FSCS.
The FSA recently published a discussion paper on possible changes to the funding arrangements for the FSCS. Comments were invited by 21 June 2006 (see PLC Legal update, FSA publishes a discussion paper on review of FSCS funding arrangements (). For further information about the FSCS, see the FSCS website.
FSMA introduced provisions that aim to harmonise the rules governing the regulators' powers on the insolvency of financial institutions and regulated bodies. Under Part XXIV of FSMA the FSA can:
• Initiate most types of insolvency proceedings against regulated persons and bodies.
• Commence winding up petitions against bodies that are (or have been) carrying on a regulated activity without permission.
• Participate in insolvency proceedings and creditors' meetings involving regulated bodies.
Insolvency office holders are also required to provide information to the FSA.
Exchanges and clearing houses
The FSA is responsible for the recognition of UK investment exchanges and clearing houses and FSMA also gives the FSA responsibility for the recognition of overseas exchanges and clearing houses (which were previously recognised by HM Treasury) (section 292, FSMA).
All investment exchanges and clearing houses must meet certain requirements in order to obtain recognition and maintain their recognised status. For UK bodies, these are contained in the Financial Services and Markets Act 2000 (Recognition Requirements for Investment Exchanges and Clearing Houses) Regulations 2001 (SI 2001/995). For overseas RIEs and RCHs they are set out in section 292(3) of FSMA and are the only recognition requirements applicable to overseas recognised bodies.
The FSA specialist Sourcebook on RICs and RCHs (REC) sets out the rules and guidance which applies to UK and overseas recognised investment exchanges and clearing houses and provides information on how the FSA interprets the recognition requirements and other obligations imposed on recognised bodies in, or under, FSMA.
The FSA Handbook of Rules and Guidance
Structure of the Handbook
The Handbook aims to harmonise, consolidate and rationalise principles, rules and guidance to provide a single point of reference for users. The FSA has made the Handbook as accessible as possible by publishing versions in electronic (internet and CD Rom) and paper form
The regulations under FSMA and related FSA rules are constantly developing, especially with the influence of European legislation.
High Level Standards (Principles for Businesses and SYSC)
Block 1 of the FSA's Handbook of Rules and Guidance contains six sourcebooks which are known as the FSA's High Level Standards. These are the overarching requirements that apply to authorised firms and to approved persons. They set the standards by which firms and approved persons are expected to conduct themselves and also the core regulatory obligations that apply to them.
The six sourcebooks are as follows:
• Principles for Businesses (PRIN).
• Senior Management Arrangements, Systems and Controls (SYSC).
• Threshold Conditions (COND).
• Statements of Principle and Code of Practice for Approved Persons (APER).
• The Fit and Proper test for Approved Persons (FIT).
• General Provisions (GEN).
The High Level Standards largely reflect and build upon concepts which existed under the pre-FSMA regulatory regimes. They also reflect developing international standards as formulated by organisations such as the Basel Committee on Banking Supervision, the International Association of Insurance Supervisors (IAIS) and the International Organisation of Securities Commissions (IOSCO).
The Principles for Businesses are high level principles which sit above the more detailed rules and guidance contained in the FSA Handbook. There are 11 of them in total and they form the foundation of regulated firms' responsibilities to their clients. For further detail, see Practice note, The FSA's Principles for Businesses ().
The rules and guidance on senior management arrangements, systems and controls contained in the SYSC Sourcebook reflect the FSA's concern to ensure that firms' directors and senior management:
• Take appropriate responsibility for managing their firms' affairs; and
• Establish and maintain such systems and controls as are appropriate to their businesses.
For further detail, see Practice note, Senior Management Arrangements, Systems and Controls: overview ().
Conduct of Business Rules
The primary purpose of the Conduct of Business sourcebook (COB) is to set and reinforce business standards for various aspects of firms' relationships with their investment business customers. There are, therefore, rules to cover information flows between the firm and the customer, advising the customer or acting for the customer at discretion, and executing instructions. All of these rules aim to protect the customers and to ensure that consumers are treated fairly, and are able to make effective and well-informed choices.
The content of COB relates mainly to the business of investment firms but, it also contains rules and guidance of relevance to deposit takers, general insurers and certain participants in the Lloyd's market.
For details of COB see Practice note, Conduct of business: overview ().
Supervision
The Regulatory Processes Block of the FSA Handbook consists of the following sourcebooks:
• The Supervision Manual (SUP). This sets out the FSA's approach to ongoing supervision of authorised firms and approved persons. The FSA's approach to supervision is risk-based, meaning that the FSA categorises firms according to the risks those firms present to the FSA's fulfilment of its statutory objectives. Whether a firm satisfies threshold conditions is initially considered at the authorisation stage and on an ongoing basis by means of various supervisory tools the FSA has developed to enable it to . These tools include: desk based reviews of firms' practices; thematic work including "mystery shopping" exercises; on-site inspections or meetings with particular firms and/or reviewing statements or notifications issues by a particular firm; and liaison with other regulators to see how they are dealing with particular financial services sectors.
• The Enforcement Manual (ENF) and the Decision Making Manual (DEC). For details of the FSA's enforcement powers and processes see Practice note, FSA enforcement regime: overview ().
Prudential Regulation
Firms are required to maintain capital resources that are commensurate to the risks they face. The FSA's statutory obligations of maintaining market confidence and protection of consumers mean that it must ensure that firms act prudently with regard to the risks they face, and that they hold adequate capital as a buffer so that they can absorb losses and avoid those losses impacting their creditors. For further details see Practice note, Prudential regulation: an overview ().
Training and Competence
The FSA is responsible for ensuring that the authorised community is well trained and competent for the roles that they will be fulfilling. The Training and Competence sourcebook (TC) sets out the FSA's rules and guidance. For further details see Practice note, Training and competence requirements for authorised firms: an overview ().
Client Assets
Principle 10 of the FSA's Principles for Business requires that firms arrange adequate protection for client assets when it is responsible for them. The Client Assets sourcebook (CASS) builds on this. The main elements of the client assets rules are the custody rules and the client money rules. For further details see Practice note, Client assets: an overview ().
Action against money laundering is key to the FSA's statutory objective of protecting the financial system against financial crime. The Money Laundering sourcebook (ML) was valid only until 30 August 2006 after which it was deleted and replaced with high level rules in SYSC 3.2. For further details see Practice note, Money laundering: overview ().
Practical Law Dictionary. Glossary of UK, US and international legal terms. www.practicallaw.com. 2010.