The Financial Services and Markets Act cross‐border issues
| Published date | 01 March 2000 |
| Pages | 237-255 |
| Date | 01 March 2000 |
| DOI | https://doi.org/10.1108/eb025047 |
| Author | Charles Abrams |
| Subject Matter | Accounting & finance |
Journal of Financial Regulation and Compliance Volume 8 Number 3
The Financial Services and Markets Act
cross-border issues
Charles Abrams
SJ Berwin & Co, 222 Gray's Inn Road, London WC1X 8HB; tel: +
44
(0)207533 2222;
fax: +44 (0)207533 2000
Charles Abrams is a partner and head of
the Financial Services Group, SJ Berwin &
Co. He is also co-author of 'Guide to finan-
cial services regulation' (1997, CCH, 3rd
Edition) and a legal adviser to the
Conser-
vative Party's Treasury Team on the
Financial Services and Markets
Bill,
in
particular in relation to financial promo-
tion, market abuse and cross-border
issues.
INTRODUCTION
After first being issued in draft in July 1998
and then taking a year to go through Par-
liament, the Financial Services and Markets
Act 2000 (FISMA) finally became law on
14th June, 2000. The Treasury, the govern-
ment department responsible for the UK
financial services industry, has, however,
just announced that the FISMA will not
come fully into force until summer 2001,
although some sections may perhaps come
into force earlier.
The FISMA will replace the Financial
Services Act 1986 (FS Act) and will re-
enact it with some significant differences.
First, it will extend its authorisation (or
licence) requirement to cover both deposit
taking and general insurance (and not just
investment life assurance as now), although
the exemptions provided under it are, in
general terms, likely to be the same as
under the FS Act. In addition, the UK
Financial Services Authority (FSA) will
replace all the self-regulatory organisations
(SROs) and become the only securities,
banking or insurance regulator.
Importantly, the FISMA substantially
changes the restrictions on marketing
which are presently contained in the FS
Act, and extends them to cover deposits
and general insurance policies (which are
both also referred to as investments). The
restrictions on the marketing of invest-
ments and investment services by banks,
securities firms, ordinary trading compa-
nies,
individuals or other persons (firms)
which are not FISMA-authorised (non-
authorised firms) are referred to in the
FISMA as the 'financial promotion' restric-
tions.
The FISMA, also for the first time,
spells out the way in which the single Eur-
opean passports granted by the EU's single
market directives, or, indeed, the Treaty of
Rome
itself,
can be used.
The FISMA also imposes restrictions on
the acquisition or increase of 'control' over
UK FISMA-authorised firms. As now,
'control' includes ten per cent sharehold-
ings,
or control over ten per cent of the
voting power, in either the firm itself or a
parent undertaking of the firm. In contrast
to the FS Act position, however, the
restrictions apply in relation to all FISMA-
authorised firms incorporated in the UK,
not just UK firms entitled to a single
European passport under the EU single
market directives. The proposed controller
Journal of Financial Regulation
and Compliance, Vol. 8, No. 3,
2000,
pp. 237-255
© Henry Stewart Publications,
1358-1988
Page 237
The Financial Services and Markets Act cross-border issues
must first notify the FSA and the FSA has
three months to decide whether or not to
grant approval; the FSA must also be noti-
fied if a controller wishes to reduce his
holding below specified levels. To contra-
vene these requirements is a criminal
offence and the FSA can impose 'freezing
orders' on shares acquired or held in con-
travention of the 'approval' requirements.
Finally, the FISMA will create a new
offence, market abuse, which is subject to
an unlimited fine; the offence can be com-
mitted even without any intention to abuse
the market, even by non-authorised firms
and, in the case of markets in or accessed
electronically from the UK, even by con-
duct outside the UK.
THE AUTHORISATION REQUIREMENT
The FISMA provides that no firm may
carry on a regulated activity in the UK
unless it is authorised under the FISMA,
and has permission from the FSA to do so,
or is exempted from this 'general prohibi-
tion'. To do so without authorisation is a
criminal offence, leading to imprisonment
or an unlimited fine or both; in addition,
as under the FS Act, contracts entered into
by a firm in the course of carrying on a
regulated activity in contravention of the
general prohibition arc normally unen-
forceable against the client or counterparty,
who will have to be compensated for any
resulting loss. The activities which arc to
be classified as regulated activities are not
set out in the FISMA (although the FISMA
contains examples of what might be cov-
ered) but are to be specified by the Treas-
ury, which have already issued a draft of a
long statutory instrument setting out the
classes of activity and categories of invest-
ment they presently intend to cover (the
'Regulated Activities Order'). Unless an
exemption applies, these will in general
terms be the same as now and include
market making or dealing in securities
(other than derivatives), soliciting members
of the public to buy or sell securities (other
than derivatives) in transactions to be
entered into as principal by the person soli-
citing them, buying or selling derivatives
as principal, buying or selling securities as
agent, arranging deals in securities or
making arrangements enabling or facilitat-
ing deals, discretionary investment man-
agement or investment advice in relation
to securities and managing investment
funds;
they, of course, will also include (for
the first time) accepting deposits and gen-
eral insurance. The draft Order provides
that a person is not to be regarded as carry-
ing on an activity covered by the Order
unless he/she carries on the business of
engaging in that activity. This means that,
as under the FS Act at present, a firm will
not require authorisation under the FISMA
for isolated activities. Although there was
originally no actual requirement in the
FISMA itself that the activity had to be
carried on 'by way of business', this has
now been incorporated in the FISMA
under pressure from, among others, the
Conservative Party's Treasury Team.
The government has decided that, in the
interests of flexibility, it should be left to
the Treasury to decide what investment
activities need authorisation. Accordingly,
very few exemptions appear in the FISMA
itself.
The Treasury's draft Regulated
Activities Order, however, currently pro-
vides many special exemptions for overseas
firms (technically, 'overseas persons'). As in
the FS Act, 'overseas persons' are defined
as banks, securities firms and other firms
which do not carry on regulated activities
in relation to securities from a UK branch
(technically, a permanent place of business
which they maintain in the UK) even if
they carry on a banking or 'non-invest-
ment' insurance business from it; 'securities'
means securities, derivatives, interests in
investment funds or qualifying 'investment'
life,
pension or other long-term insurance
policies, which, in general terms, arc
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