The Future for Financial Regulation: The Financial Services and Markets Bill
| Author | Iain MacNeil |
| DOI | http://doi.org/10.1111/1468-2230.00233 |
| Published date | 01 September 1999 |
| Date | 01 September 1999 |
LEGISLATION
The Future for Financial Regulation: The Financial
Services and Markets Bill
Iain MacNeil*
A draft Financial Services and Markets Bill (FSMB) proposing a significant re-
organisation of regulatory responsibility in the financial sector in the United
Kingdom was published by the government in July 1998. Following consultation1
undertaken by the Treasury and pre-legislative scrutiny undertaken by a joint
committee2of the House of Commons and the House of Lords, the Bill was
introduced into the House of Commons on 17 June 1999.3It provides for the
transfer of almost all regulatory functions in the financial sector to the Financial
Services Authority (FSA) and it also proposes some changes in the powers
available to the regulator. The Bill is unlikely to become law until early in the year
20004but substantial progress has already been made in preparing the regulatory
response to its introduction: the FSA has issued 20 detailed consultation papers and
the Treasury is consulting on several draft Orders to be made under powers
provided by FSMB. When the Bill is passed it is likely that the new regulatory
structure will already be in place in terms of regulatory personnel, rulebooks and
enforcement procedures. This note examines the major changes introduced by
FSMB with the objective of assessing whether they can remedy the shortcomings
which have became apparent within the regime established by the Financial
Services Act 1986 (FSA 1986).
From self-regulation to statutory regulation
The demise of self-regulation
Underlying the reform of financial regulation is dissatisfaction on the part of the
government with the working of self-regulation and an intention to move to a
system administered by a single statutory regulator. This proposal received
widespread support in the consultation on the draft Bill.5However, the demise of
ßThe Modern Law Review Limited 1999 (MLR 62:5, September). Published by Blackwell Publishers,
108 Cowley Road, Oxford OX4 1JF and 350 Main Street, Malden, MA 02148, USA. 725
*Department of Law, University of Aberdeen.
1 See HM Treasury documents, ‘Financial Services and Markets Bill: A Consultation Document’ (July
1998) and ‘Financial Services and Markets Bill: Government Response to the Reports of the Joint
Committee on Financial Services and Markets’ (June 1999, < http://www.hm-treasury.gov.uk/docs/
1999/jcresp.html >).
2 See the First Report on the Bill (HC 328-I, < http://www.parliament.the-station...9/jtselect/jtfinser/
328/32801.htm >) and the Second Report (HC 328-II,
jtfinser/465/46501.htm >).
3 References to Parts and clauses of the Bill in this Article are to the Bill as introduced rather than to the
earlier consultation draft.
4 According to the Treasury News Release of 24 November 1998.
5 See HM Treasury, ‘FSMB Progress Report’ (March 1999) para 2.1.
self-regulation is unlikely in itself to be a major factor in the operation of the new
system of regulation. There are two reasons for such a view: first, the extent to
which the FSA 1986 incorporated the principle of self-regulation was very limited;
and second, there are some elements of the self-regulatory approach which have
been retained by FSMB.
Prior to the introduction of FSA 1986, there was aclearly established tradition of
self-regulation in financial markets in the United Kingdom.6This was evident in
several ways. The Stock Exchange set its own rules governing the listing of
securities, the obligations of members and the operation of the market. From the
perspective of securities dealing, Stock Exchange regulation was of much greater
practical significance than the provisions of the Prevention of Fraud (Investments)
Act 1958 and the Conduct of Business Rules made under it. This was because the
requirement to be licensed under the Act did not apply to members of the Stock
Exchange or the managers and trustees of unit trusts, and many other dealers in
securities were able to benefit from exempt status.7The regulation of take-overs,
developed as a result of the emergence of hostile take-overs of public companies
from the 1950s onwards, was through the self-regulatory mechanism of the Take-
over Panel which represents the interests of those professionally involved in take-
overs and administers the Take-over Code. The Lloyd’s Insurance market had a
long history of self-regulation and the Lloyd’s Act 1982, while strengthening the
position of external members and reducing the influence of working members on
the Council of Lloyd’s, preserved the principle of self-regulation.8There was no
formal role for self-regulation in the banking sector, but elements of the self-
regulatory approach were present in the differing treatment of recognised banks
and licensed deposit takers under the Banking Act 1979, the premise being that
licensed deposit takers (sometimes referred to as secondary banks) required a
firmer regulatory hand than the recognised banks.9
The self-regulatory ethos was therefore deeply ingrained in the financial sector
and the White Paper10 which foreshadowed the Financial Services Act 1986 gave
the appearance of extending that tradition. It described its proposals as ‘self-
regulation within a statutory framework’ and the Act itself went some way towards
giving effect to this principle. It provided that the boards of the regulatory bodies
should contain a substantial practitioner element,11 enabling rulebooks to be
developed with appropriate technical input; responsibility for monitoring
compliance with the rules was effectively devolved to individual firms;12 and
6 The Wilson Committee (Committee to Review the Functioning of Financial Institutions) generally
supported the status quo in its 1980 Report (Cmnd 7937): ‘It will be apparent from what we have said
so far in this chapter that we do not believe that the case for any significant shift in the balance
between the statutory and non-statutory aspects of the regulation of the securities markets in this
country has yet been demonstrated’.
7 See R. Pennington, The Law of the Investment Markets chapter 2.
8 R.B. Ferguson comments on the pre-1982 Act system of regulation at Lloyd’s ‘Self-regulation at
Lloyd’s could never have worked (in the sense of safeguarding the reputation of the market) had it
had to rest primarily on the Lloyd’s Acts . . . And yet, it seems, self-regulation at Lloyd’s did work
well – until recently. The real basis of the system was non-statutory: a combination of unwritten laws
and contractual arrangements’ ‘Self-regulation at Lloyd’s: The Lloyd’s Act 1982’ (1983) 46 MLR 56,
58.
9 Ellinger and Lomnicka comment ‘The Bank of England tended to supervise them [the recognised
banks] less strictly than the licensed deposit takers, relying to a certain extent on goodwill and co-
operation:’ Modern Banking Law (Oxford: Clarendon, 1994).
10 Financial Services in the United Kingdom. A new framework for investor protection Cmnd 9432
(1985).
11 FSA 1986, s 10 and Sched 2 para 5(1).
12 FSA 1986, s 10 and Sched 2 para 4.
The Modern Law Review [Vol. 62
726 ßThe Modern Law Review Limited 1999
enforcement action and sanctions were determined by the regulators with no right
of appeal to the courts.13 An emphasis on the self-regulatory nature of FSA 1986
may have been necessary to secure its acceptance in the financial community, but
it soon became clear that the concept of self-regulation which it adopted was much
narrower than that which had prevailed in the pre-FSA 1986 era. Gower
commented in 1988 that ‘during the debates on the Bill, exaggerated emphasis was
placed on the extent of self-regulation in the scheme – so much so that some people
are still arguing that it will be insufficiently ‘‘statutory’’. But this toois based on a
misunderstanding. In reality the self-regulatory element will be relatively slight’.14
The accuracy of this view of the working of FSA 1986 was to be borne out by
subsequent developments. Practitioner representatives on the Boards of the Self-
Regulating Organisations (SROs) felt unable to participate actively in the work of
the SROs15 and the Securities and Investment Board (SIB) emerged as the main
force driving the development of rule-making and enforcement.16 The effective
absence of self-regulation within the regulatory system, contrary to any public
perception that the financial sector was regulating itself in a self-interested fashion,
was stressed in evidence given to the Treasury and Civil Service Committee17 by
the SROs: The Securities and Futures Authority (SFA) commented that ‘In reality,
the ‘‘self-regulators’’ have become statutory regulators in all but name, drawing
their power from the fact that it is illegal to operate without becoming subject to
their authority’.
The issue of whether regulation of investment business should be primarily
statute-based or self-regulatory had therefore been largely resolved even before
FSMB was envisaged. The explicit abandonment of self-regulation by FSMB does
not therefore represent a new development. Nor would it be correct to say that self-
regulation will be completely abandoned under FSMB. Although not formally
present, some of the components of self-regulation are still visible.18 One is that
there will remain some practitioner involvement through the Practitioner Forum.19
Another is the principle that compliance is the responsibility of the authorised firm
and directors and employees of those firms. Under FSA 1986 responsibility for
compliance is devolved to authorised firms20 and the SROs require individual
registration of senior employees who are subject to SRO disciplinary procedures.
FSMB takes this process a step further through the creation of a regime for
approved persons who will be subject to a code of conduct drafted by the FSA.
Linkage of FSMB with self-regulation is also evident in the retention of the
concept of a recognised investment exchange which will allow The Stock
13 However, judicial review was available based on the general principle established in RvPanel on
Takeovers and Mergers, ex p Datafin PLC [1987] QB 115. For examples of judicial review of
Scotland vIMRO 1989 SLT 432.
14 L.C.B. Gower, ‘Big Bang and City Regulation’ (1988) 51 MLR 1.
15 See Elliot and Henshaw, ‘Self-regulation; present and future’ in E.J. Swan (ed), Derivative
Instruments Law (London: Cavendish, 1995).
16 This trend was confirmed by the Large Report (Financial Services Regulation, Making the Two Tier
System Work, May 1993) which characterised SIB as a supervisor of regulators with ultimate
responsibility for safeguarding the public interest in investor protection.
17 Treasury and Civil Service Committee Sixth Report 1994–1995, The Regulation of Financial Services
in the United Kingdom.
18 See Page, ‘Self-Regulation: The Constitutional Dimension’ (1986) 49 MLR 141 on the form and
substance of self-regulation in the financial sector.
19 See FSA Consultation Paper 2, Practitioner Involvement and the Treasury Progress Report on FSMB
(March 1999).
20 See SIB/FSA Principle 9.
September 1999] Financial Services and Markets Bill
ßThe Modern Law Review Limited 1999 727
Exchange to continue largely to regulate its own affairs21 and the retention of a
limited regulatory function for the Society of Lloyd’s.22 Expectations as to how the
FSMB system of regulation will operate are therefore largely unrelated to the issue
of self-regulation. The limited initial contribution of self-regulation and the gradual
move over time towards a style of regulation which bears the directive and
independent characteristics of statutory regulation mean that the abandonment of
self-regulation cannot be seen as a major factor in the working of the new system.
A single statutory regulator
The FSA 1986 system of regulation involves both direct regulation undertaken by
the FSA (in respect of directly authorised persons) and regulation by self-
regulatory organisations and regulated professional bodies of their members. The
different regulators are all required to comply with requirements imposed by FSA
1986 and failure to do so can result either in resumption by the Department of
Trade and Industry (DTI) of powers transferred to the FSA or the revocation by the
FSA of recognition of an SRO or Recognised Professional Body (RPB). This
structure has given rise to two problems. The first is the complexity of the current
system under which financial institutions can be subject to the jurisdiction of a
number of different regulators and different approaches to regulation. Banking and
insurance regulation is institutional in its nature, focusing on the entire business of
the regulated institution, whereas regulation by SROs is functional in its nature,
focusing only on specific investment activities.23 The second problem, which
follows from the first, is that there can be problems in dealing with financial
services organisations where there is inadequate co-operation or co-ordination
between regulators. The collapse of Barings is probably the best publicised failure
in this respect.24 The expectation is that a single regulator will help resolve both
problems, but the extent to which that is the case cannot be judged at this stage.
It seems clear, however, that the accountability of the FSA to Parliament, the
regulated community and consumers will be improved under FSMB. A number of
provisions additional to those included in the original draft bill have now been
added.25 First, the Treasury is to have the power to commission independent
reports, at periodic intervals, into the efficiency and economy of the FSA’s
operations.26 Second, a majority of the FSA Board members will have to be non-
executives.27 Third, the FSA will be required to maintain consumer and
practitioner panels and to consult the panels on the extent to which its general
policies and practices are consistent with its general duties under clause 2.28
Fourth, the FSA will be required to hold an annual public meeting to discuss its
21 This is subject to obligations imposed on it as the competent authority for listing in the United
Kingdom and obligations arising from the Investment Services Directive (Dir 93/22, OJ L141/27) and
the Capital Adequacy Directive (Dir 93/6, OJ L141/1) relating to the operation of the market.
22 The Society of Lloyd’s will be an authorised person under FSMB, whereas s 42 FSA 1986 currently
grants exemption. Under FSMB, the FSA’s general rule-making powers will apply to Lloyd’s but the
FSA has made clear that it will allow Lloyd’s a regulatory function under FSMB subject to the
direction of the FSA. The Society of Lloyd’s will also retain its regulatory functions under the Lloyd’s
Act 1982. See FSA Consultation Document 16 The future regulation of Lloyd’s.
23 The jurisdiction of each SRO is determined by its scope rule.
24 See the Board of Banking Supervision Inquiry into the Collapse of Barings (HCP 673 1994/95)
section 14 ‘Lessons arising from the collapse’.
25 See HM Treasury n 5 above para 3.7.
26 FSMB Clause 10.
27 FSMB Sched 1 para 3.
28 FSMB Clauses 7, 8 and 9.
The Modern Law Review [Vol. 62
728 ßThe Modern Law Review Limited 1999
annual report,29 and fifth, the FSA will be required to consult upon its
arrangements for independent investigation of complaints made against it and to
appoint an independent investigator on a continuing basis.30 As well as being able
to report publicly on their investigations, investigators will also have the power to
publish the FSA’s responses to their recommendations. The need for greater
accountability is also evident in the FSMB proposals relating to rule-making and
enforcement procedures which are discussed below.
Regulated activities
The move to a single financial regulator under FSMB has necessitated a new
definition of regulated activities as section 3 of FSA 1986 limits its scope to the
carrying on of investment business.31 Clause 17 of FSMB contains a general
prohibition against carrying on a regulated activity without being authorised or
exempt from authorisation in relation to that activity. Following the approach of
FSA 1986, clause 21 of FSMB proposes that it should be a criminal offence to
engage in regulated activity without an authorisation or relevant exemption.
A general description of the scope of regulated activities is set out in Schedule 2
to FSMB but the precise scope of regulated activities will be set out in Orders32
made by the Treasury under clause 20. There are relatively few changes in the
scope of regulated activities by comparison with the current definitions of
regulated activities under the relevant statutes.33 The draft Regulated Activities
Order retains the ‘business test’ contained in FSA 1986, thereby excluding from
the scope of regulation activities which are carried on in a private capacity.34 The
territorial scope of regulation under clause 17 of FSMB follows the existing
approach under FSA 1986 which is limited to the carrying on of investment
business in the UK.35 The passport rights of European Economic Area (EEA) firms
under the single market directives are preserved and allow EEA authorised firms to
engage in regulated activities in the UK on the basis of their home-state
authorisation.36 Mortgages have not been included within the definition of
investments in the draft Regulated Activities Order but the Treasury has indicated
that the question of whether mortgage advice should be a regulated activity is
being kept under review, as is the position of long term care insurance.37 The
29 FSMB Sched 1 para 11.
30 FSMB Sched 1 para 7.
31 Investments and investment business are defined in FSA 1986 Sched 1.
32 Drafts of the Financial Services and Markets Act (Regulated Activities) Order, the Financial Services
and Markets Act (Exemption) Order and the Financial Services and Markets Act (Collective
Investment Schemes) Order were published by the Treasury in February 1999.
33 The most important definitions of regulated activities to be assumed by the FSA are contained in FSA
34 The Treasury consultation document on regulated activities explains that the ‘business activity’ test is
included in the Order rather than the Bill itself as it does not apply to all regulated activities.
35 Clause 8 of the draft Bill appeared to extend the territorial scope of regulation to persons who have
their head offices in the UK but are not engaging in investment business in the UK. Article 38 of the
draft Regulated Activities Order retains the existing exemption for overseas (ie non-authorised)
persons engaging in business in the UK on an ad hoc basis (ie in a manner which does not amount to
carrying on a business).
36 FSMB Clause 28 and Schedule 3.
37 Advice on endowment policies sold in conjunction with mortgages is a regulated activity and has
recently attracted the attention of the FSA as a result of allegations that endowment mortgages have
been recommended in inappropriate circumstances. Rights arising from loans secured on land are
September 1999] Financial Services and Markets Bill
ßThe Modern Law Review Limited 1999 729
position where contracts are entered into with unauthorised persons or as a result of
advice given by unauthorised persons remains unchanged, with the purchaser
having the right to avoid the contract and recover money paid over as well as
compensation for any loss sustained.38 As in the case of FSA 1986, no specific
reference is made to business transacted on the internet and therefore the
determination of whether internet-based business is a regulated activity will be
made on the basis of whether the activity is being carried on in the UK.39
The main changes in the scope of regulated activities relate to the investment
business of professional firms currently regulated by RPBs, and the Lloyd’s
insurance market. RPBs will lose their status as regulators once FSMB becomes
law and their members will therefore be faced with a choice between being
authorised and subject to FSA regulation or ceasing to engage in discrete
investment business.40 The draft Regulated Activities Order identifies activities
which are ancillary to a professional firm’s main business (eg tax advice on
investments, preparation of documentation to give legal effect to a transaction) and
for which authorisation will not be required. The Society of Lloyd’s (which
organises the facilities supporting the market and trading in syndicate capacity) and
underwriting (or managing) agents (who manage the syndicates which write
insurance business at Lloyd’s) are exempted persons under FSA 1986. However,
under FSMB no exemptions are made in relation to Lloyd’s. The Society will be an
authorised person,41 subject to prudential supervision by the FSA, but retaining its
regulatory functions under the Lloyd’s Act 1982.42 Managing agents will require
authorisation under FSMB as they engage in the regulated activities of arranging
contracts of insurance and advising on non-Lloyd’s investments (for the purposes
of investing premiums paid to syndicates). The extension of the scope of regulated
activities to cover advising and making arrangements relating to participation in
Lloyd’s syndicates means that Lloyd’s members agents will also require
authorisation under FSMB. Underwriting members of Lloyd’s (who provide the
capital which enable syndicates to operate) will not require authorisation although
clause 286 of FSMB contains a reserve power allowing FSA to introduce such a
requirement. A less significant change in the scope of regulated activities is that the
‘permitted persons’ regime43 under FSA 1986 will not be continued under FSMB.
This regime allows for a person to be exempted from the requirement of
authorisation in respect of dealing in securities if it is inappropriate for that person
to be regulated under FSA 1986. It was primarily intended for companies engaged
in dealing on their own account but was little used as a result of other exemptions
from the definition of carrying on investment business.
The procedure for granting authorisation under FSMB will be that the applicant
will apply for permission to engage in specific activities (clause 36). The
investments (FSMB Sched 2, Part 2) and therefore it appears that advising on or arranging
securitisation of mortgages will be a regulated activity. This seems anomalous in the absence of
regulation of mortgage advice to consumers.
38 FSMB Clauses 24–27.
39 See FSA Guidance 2/98, Treatment of material on overseas Internet World Wide Web sites accessible
in the UK but not intended for investors in the UK. See also see D.Tunkel, ‘Financial Services on the
Internet: Can the Present Regulatory System Cope?’ (1996) 11(4) BJIB&FL 193.
40 The Treasury consultation document on regulated activities states that there are 14–15,000
professional firms authorised by RPBs of which the FSA estimates 13,000 do not engage in discrete
investment business.
41 FSMB Clause 285.
42 The 1982 Act allows the Society to regulate the transaction of business at Lloyd’s and provides
investigative and disciplinary powers.
43 FSA 1986, Sched 1 para 23.
The Modern Law Review [Vol. 62
730 ßThe Modern Law Review Limited 1999
permission to carry on regulated activity may be limited by reference to locality,
description or value of the transaction, a particular period of time, or by reference
to consumers of a particular description. While authorisation under FSA 1986 does
involve scrutiny of the proposed business of the applicant, there is no statutory
provision made for the issue of a limited authorisation in the form proposed by
FSMB.44 FSA will have a duty to ensure that the applicant meets the qualifying
conditions for authorisation set out in Schedule 6 to FSMB and has recently
produced draft guidance on the way in which these criteria will be interpreted.45
The granting of permission to engage in specific activities will be an authorisation
to engage in regulated activities and therefore engaging in business outside the
permitted activities will not be an offence but may give rise to disciplinary
action.46
Rule-making
The experience under FSA 1986
The history of rule-making under FSA 1986 is dominated by attempts to construct
manageable rules for the conduct of investment business, combining flexibility
with certainty. The original rulebooks of the (then five) SROs were at first seen as
unduly legalistic and lacking coherence.47 The restructuring of SRO rulebooks
through the ‘new settlement’ introduced by the Companies Act 1989 attempted to
resolve this problem by introducing new provisions into FSA 1986 which would
simplify the individual rulebooks of SROs and provide some consistency between
them. Several new provisions in FSA 1986 gave effect to the ‘new settlement’.
First, under section 47A, SIB was given power to make Principles which applied to
all authorised persons. Breach of a principle is a ground for disciplinary action
against an authorised firm but does not provide grounds for a civil action in
damages. Second, under section 63A, SIB was given power to designate rules as
applicable to SROs, the result being that SROs were required to incorporate the
designated rules in their rulebooks. Third, the test applied to SRO rulebooks for the
purposes of recognition of an SRO as a regulator was changed from requiring the
SRO rulebooks to be equivalent to that of SIB48 to requiring the SRO rulebooks to
provide adequate protection for investors49. Fourth, the right to sue for damages for
breach of a conduct of business rule was limited to private investors by section
62A. The result of the ‘new settlement’ was that the rulebooks of SIB and the
SROs were divided into three distinct tiers: 10 general principles; 40 core rules
which were a mandatory part of the SRO rulebooks;50 and third-tier rules made by
the SROs which were derived from the principles and core rules and were
applicable in the context of the specific activities regulated by the individual SROs.
44 However, the SROs can and do limit members’ business to permitted activities under FSA 1986.
45 FSA Consultation Paper 20, The Qualifying Conditions for Authorisation.
46 The position is the same under FSA 1986 in relation to permitted business authorised by an SRO.
47 See Ashe, ‘Conduct of Investment Business’ (1987) 8 Co Law 154 and Pritchard, ‘Investment
Protection Sacrificed: The New Settlement and s 62’ (1992) 13 Co Law 171, 210.
48 SIB/FSA’s rulebook applies to directly-authorised firms (ie those authorised by SIB/FSA under s 25
FSA 1986 rather than through membership of an SRO, the more usual method of gaining
authorisation).
49 FSA 1986, Sched 3, para 3(1).
50 The core rules were made mandatory through the process of ‘designation’ under s 63A FSA 1986.
September 1999] Financial Services and Markets Bill
ßThe Modern Law Review Limited 1999 731
The three-tier structure was relatively short-lived. The advent of a new Chairman
of SIB in 1992 saw the emphasis move away from rules and the structure of rules
to compliance with the spirit of the rules and an emphasis on management
responsibility for compliance.51 This reflected a change in SIB’s perception of its
own role; it moved away from being itself a detailed regulator to being a regulator
of regulators and a standard-setter. The core rules were largely de-designated in
1994, signalling a devolution of power to the SROs and a withdrawal on SIB’s part
from active rule-making. Thus, rule-making under FSA 1986 can be divided into
three distinct phases: the first, characterised by the presence of many detailed
rulebooks and the dominance of SIB over the SROs; the second, following the
‘new settlement’ in which greater autonomy was passed to the SROs but SIB
remained an active rule-maker; and the third, in which SIB retreated from ‘front-
line’ regulation and placed greater emphasis on standards and the monitoring of
performance of the SROs. The legal framework underlying the second phase
remains in place but is unlikely to be used pending the introduction of FSMB.
The transition to the FSA handbook of rules and guidance
The introduction of FSMB will mark a new phase in rule-making. By the time the
Bill becomes law, it is likely that the process of rule-making will be largely
complete, with the new Act enabling the new handbook of rules and guidance
developed by the FSA to come into effect. The transition to the new handbook will
reflect the rule-making powers given to FSA under FSMB and the obligations
imposed on the FSA in the rule-making process. A general rule-making power in
clause 110 allows FSA to make such rules applying to authorised persons as appear
necessary or expedient for the purpose of protecting the interests of persons who
use regulated services or who derive rights from the use of such services by other
persons. This is wider than the parallel power contained in section 48 of FSA 1986
in that it is not restricted to conduct of business rules and it allows for the making
of rules applicable to any authorised person.52 There are other specific rule-making
powers contained in FSMB but clause 110 makes clear that the general rule-
making power is not limited by any other specific powers. The FSA will also have
the power to make rules in relation to non-regulated activity carried on by
authorised persons to ensure that such activity does not have an adverse effect on
users of services provided as part of a regulated activity.53 The Treasury has been
given a general power to make rules (in the form of statutory instruments)
necessary to give effect to the purposes of the Act.54 Other significant changes
proposed by FSMB are a requirement for new rules and changes to existing rules to
51 Andrew Large, the new SIB Chairman, commented in the Large Report (n 16 above) 62 that ‘Rules
are a vital ingredient of regulation. But they should be seen as only one available mechanism to
achieve the investor protection objectives. Other available mechanisms include principles, guidance,
codes of conduct, training requirements or competence qualifications’.
52 Under s 48 FSA 1986, the FSA cannot make rules applicable to persons authorised by RPBs and prior
to the ‘new settlement’ could not make rules applicable to SRO members. This reflects the structure
of regulation under FSA 1986 whereby the SROs and RPBs are responsible for making rules for their
own members.
53 FSMB Clause 111. This power could be used to regulate mortgage advisers who are authorised
persons, even if mortgage advice were to remain an unregulated activity, but would result in differing
forms of regulation for mortgage advisers.
54 FSMB Clause 361. Given that FSMB contains regulatory objectives and requires the FSA to justify
rules by reference to those objectives, it seems odd that clause 361 should refer to an undefined set of
‘purposes’ in relation to rules made by the Treasury.
The Modern Law Review [Vol. 62
732 ßThe Modern Law Review Limited 1999
be justified by reference to the regulatory objectives55 and for the FSA to publish a
cost benefit analysis in relation to proposed rules.56
Different regulatory approaches within the framework of FSMB are also
significant for the rule-making process. The rulebooks created under FSA 1986
distinguish between different participants in investment transactions with the
greatest protection being given to private customers, less to non-private customers,
and very little to market counterparties.57 The FSA has indicated that it wishes a
lighter regulatory regime for inter-professional business to form part of the new
structure.58 It follows that, in the main, the new Handbook of Rules and Guidance
will be relevant mainly at the level of what are currently termed private and non-
private customers as business between market participants will be dealt with by the
lighter regulatory regime for inter-professional business.
The FSA has indicated that it will approach rule-making in the following
manner.59 First, it will create a Handbook of Rules and Guidance which has ‘a
coherent architecture in which the relationship between principles, rules, codes of
conduct and guidance is apparent to the regulated community’.60 As clause 110
(the general rule-making power) makes no reference to rule type, the choice is left
to FSA. Second, the FSA will state principles (but not other rules) applicable to
approved persons61 employed by regulated firms. This is a new power introduced
by clause 61 of FSMB which reflects concern that there was insufficient attention
paid to the responsibilities of senior management under FSA 1986. The Principles
will set out in general terms the standards expected of approved persons and will be
supported by a code of practice which will have evidential status in determining
whether approved persons are in breach of the principles. Third, the FSA will make
evidential provisions which do not impose obligations but which will help to
demonstrate observance or breach of binding requirements. Such provisions will be
made under the general rule-making power in clause 110 but their content will be
controlled by clause 119.62 An example of such a provision is the Code of Market
Conduct which is currently being developed by the FSA. Fourth, the FSA will
endorse codes or standards issued by others for use by regulated firms. Clause 74
of FSMB provides FSA with authority to endorse such codes only if it is satisfied
that the provision of the Code could have been made by FSA under the general
55 Not contained in the original draft bill but now contained in FSMB clause 125(2)(c).
56 FSMB Clause 125(2)(a). Clause 125(5) requires a final rule change to state alterations made to the
original proposal and a revised version of the cost-benefit analysis to be issued. There will clearly be a
proliferation of cost-benefit analyses under the new system.
57 For definitions of these terms, see the Financial Services Core Glossary (SIB/FSA Rulebok volume
1). Private customers are either individuals who are not engaged in investment business or small
business investors. Market counterparties are normally parties dealing as principals with each other in
the same type of investment business – referred to as ‘inter-professional business’ in the FSA
Discussion Paper Differentiated regulatory approaches: future regulation of inter-professional
business (October 1998).
58 ibid.
59 See ‘Financial Services Authority, Meeting our Responsibilities’, August 1998.
60 ibid 14.
61 Approved persons are individuals employed by an authorised person who perform a controlled
function. Controlled functions will be specified by FSA subject to clause 56(3) FSMB which requires
a person carrying out a controlled function to have a significant influence on the conduct of the
authorised person’s affairs and to be involved in dealing directly with customers.
62 The wording of clause 119 is not without difficulty. While the FSA seems to regard clause 119 as
allowing for the creation of ‘evidential provisions’, it is not entirely clear that this clause is primarily
concerned with evidence of a contravention. An alternative reading of clause 119 would suggest that
it relates to the substance of rules and provides for the making of a new type of rule which will
provide greater detail and certainty to more general rules.
September 1999] Financial Services and Markets Bill
ßThe Modern Law Review Limited 1999 733
rule-making power contained in clause 110. Breach of the Code can only result in
the use of FSA’s disciplinary or intervention powers where this is requested by the
body responsible for the endorsed code. A similar power is contained in FSA
1986,63 but it is less restrictive in two senses: first, there is no requirement that FSA
could itself have made the Code; and second, there is no automatic limitation of
disciplinary action or intervention to circumstances in which they are requested by
the body responsible for the code. Finally, the FSA will issue guidance on matters
such as the operation of the Act and rules made under it. This power is contained in
clause 127 of FSMB which is similar in its terms to section 206 of FSA 1986,
under which the FSA has issued a substantial number of guidance notices.64
In preparing for the changeover from multiple SRO/RPB rulebooks to the new
FSA Handbook, the FSA has indicated that it will give priority to (a) the drafting of
material made necessary by the new legislative framework (eg authorisation
procedures and enforcement powers) and (b) the rationalisation of existing rules
where there is significant scope for such activity (the FSA gives as an example the
creation of a single set of standards for wholesale market business from the
separate regimes maintained in the past by the Bank of England and the Securities
and Futures Authority). Significantly, material not falling into these two categories
(much of the current SRO rulebooks) will be included in the FSA Handbook with
only the adaptations necessary to fit within the overall regulatory framework of
FSMB. It therefore appears that much of the substance of the rules which were
created under FSA 1986 will be transferred across to the new FSMB regime.
The FSA has made clear that its regulatory requirements should be ‘appropriate,
simple, clear and coherent’65 but it recently stated that ‘UK experience of both
prudential and conduct of business regulation suggests that the kind of framework
which lends itself best to a strategy of active supervision and firm enforcement is
one which combines high-level principles, rules and guidance’.66 A building-block
approach will be adopted in which discrete elements will be separated primarily to
make the rulebook manageable and to separate substantive regulatory standards
from regulatory processes. The proposed structure is:67
Block 1 – High-level standards: The Principles for businesses; The Principles and
code of conduct for approved individuals; Fitness and propriety (including senior
management responsibilities, high-level systems and controls).
Block 2 – Business Standards: Prudential sourcebook; Conduct of Business
sourcebook; Market conduct sourcebook; Training and competence sourcebook.
Block 3 – Regulatory processes: Authorisation manual; Supervision manual;
Intervention and discipline manual.
Block 4 – Redress: Complaints code; Compensation code; Pensions Review
materials.
Block 5 – Specialist sourcebooks (for particular investment businesses).
Block 6 – Special guides (for investment advisers, professional firms).
Block 7 – Reference: Definitions; Index.
63 Section 47A(2). The Takeover Code has been approved under this section.
64 See part 4 of SIB’s Rulebook.
65 ibid 14.
66 See FSA Consultation Document 8, 11.
67 See FSA Consultation Document 8 as amended by the Feedback Statement form FSA of 8 October
1998 < http:www.sib.co.uk/docs/fs-1.htm >.
The Modern Law Review [Vol. 62
734 ßThe Modern Law Review Limited 1999
This structure undoubtedly makes the architecture of regulation more manageable
and coherent in that it represents the complete system of financial regulation
managed by a single regulator. However, as much of the substance of existing rules
will simply be carried over into the new structure, it remains to be seen whether
elegant design in itself can make a significant contribution to improving the quality
of regulation.
Cost-benefit analysis
Regulators operating under FSA 1986 have a statutory obligation to take account
of the costs of compliance in framing their rules.68 Clause 125(2)(a) of FSMB takes
this a step further by requiring a cost-benefit analysis to be published in relation to
proposals to make rules. The final version of a rule change will be required to state
alterations made to the original proposal and must be accompanied by a revised
version of the cost-benefit analysis.69 Three cost-benefit analyses have already
appeared: the first relating to the draft Bill; the second relating to the draft
Regulated Activities Order; and the third relating to the draft Recognition
Requirements for Investment Exchanges and Clearing Houses. The benefits
identified for consumers are: the ability of the new regulator to target supervisory
resources where they are most needed; rationalisation of the different complaints,
ombudsman and compensation schemes into three single schemes; greater scope
for international co-operation with other regulators and increased consumer
confidence in the financial sector.
The main benefits identified for authorised firms are savings in the cost of
compliance. No global figures are given by the FSA but a general impression can
be drawn from some of the figures which are quoted. Using the FSA’s assumption
that incremental70 compliance costs are four times the direct cost of regulation
charged to firms by regulators, the total incremental cost of FSA 1986 regulation to
non-RPB authorised firms is in the order of £600m.71 Considered in isolation this
figure appears large but not when compared with the cost of failure in financial
regulation: for example, compensation for the investors falling within the second
phase of the review of pensions misselling is estimated to cost between £3,350m
and £5,800m.72 The FSA’s estimate of a five per cent one-off transitional cost for
regulated firms in moving to the new regulatory system therefore gives rise to a
cost of £30m. Offsetting this are savings in the recurring cost of compliance. This
is likely to be greatest in relation to RPBs who decide not to become authorised on
a precautionary basis, as many have done under FSA 1986 simply to avoid any risk
of engaging in unauthorised investment business. FSA estimates that there are
13,000 such firms, who could each save around £2,000 per annum, giving a total of
£26m. Savings in other areas, such as those resulting from dealing with a single
regulator are likely to be on a much smaller scale. The overall effect of FSMB is
therefore to reduce compliance costs although non-RPB authorised firms, who
68 FSA 1986, Sched 7 para 2 (the FSA), Sched 2 para 3A (SROs), Sched 3 para 3A (RPBs).
69 FSMB Clause 125(5).
70 The FSA uses the concept of incremental compliance costs to mean costs of complying with
regulations that would not be incurred by a well run business in the absence of regulation. Its
estimates are based on data presented by Franks, Schaeffer and Staunton in ‘The direct and
compliance costs of financial regulation’ (1998) 21 Journal of Banking and Finance 1547.
71 This is based on a 4 multiple of FSA’s projected expenditure for the combined (FSA/PIA/SFA/
IMRO) regulator for 1998/99, assuming that the regulator’s income will broadly equal expenditure.
72 FSA Consultation Paper 7 (March 1998), Pension transfers and opt out review phase 2, 28.
September 1999] Financial Services and Markets Bill
ßThe Modern Law Review Limited 1999 735
account for the vast majority of investment business, are unlikely to realise
significant savings.
Compliance responsibility
Under FSA 1986, the obligation imposed on authorised persons to comply with
rules made by the regulators arises both under statute and contract. The statutory
obligation applies to rules created under the Act, the major examples being conduct
of business rules applicable to directly-authorised persons and the client-money,
cold-calling and cancellation rules which apply to all authorised persons.73 A
contractual obligation of compliance arises in the case of members of SROs and
RPBs as the rules made by those organisations are not made under statutory
authority.74 One obvious result of the move to a single statutory regulator is that the
nature of the compliance obligation will become statutory in relation to all the rules
made by the regulator. Of more direct concern to the manner in which FSMB
addresses the failings of FSA 1986 is the manner in which responsibility attaches
to individuals and particularly senior management within an authorised firm. The
manner in which FSA 1986 approached this issue attracted considerable attention
following the collapse of Barings.75 All the regulators under FSA 1986 are entitled
to consider the quality of management of an authorised firm when an application
for authorisation to conduct investment business is made but the extent to which
rules bind individuals within authorised firms varies as between the FSA and the
SROs. In the case of the FSA (and its predecessor SIB), neither the ten Principles
nor the conduct of business rules made under section 48 of FSA 1986 apply
directly to individuals employed by authorised persons regulated by the FSA (ie
directly-authorised persons). This means, for example, that the FSA cannot impose
sanctions on such individuals for contraventions.76 In the case of the Securities and
Futures Authority (SFA), individuals who require to be personally registered are
contractually required to comply both with the SFA rules and the ten Principles.77
A similar situation applies in the case of individuals who are required by IMRO to
be personally registered except that an individual can only be responsible for a
breach of the Principles if the breach puts his firm in breach of the Principles.78 The
PIA has recently introduced a system of individual registration which imposes
personal liability on individuals for breaches of PIA rules relevant to registered
individuals or for causing a Member firm to be in breach of the Principles or PIA
rules.79
Under clause 61 of FSMB, the FSA will state principles (but not other rules)
applicable to approved persons80 employed by regulated firms. The Principles will
73 Although they do not necessarily apply in the same manner to all authorised persons.
74 Such rules must, however, satisfy the requirement of FSA 1986 Sched 2 (SROs) and Sched 3 (RPBs)
that they provide an adequate level of protection to investors.
75 SIB issued Consultative Paper 109 The Responsibilities of Senior Management in 1997 largely in
response to the collapse of Barings.
76 An additional problem arises from SIB/the FSA having no power to fine under FSA 1986.
77 SFA rule 2–24.
78 IMRO rule 5.1(4).
79 PIA rule 1.8.13.
80 Approved persons are individuals employed by an authorised person who perform a controlled
function. Controlled functions will be specified by FSA subject to FSMB clause 56(5) and (6) which
requires a person carrying out a controlled function to have a significant influence on the conduct of
the authorised person’s affairs and to be involved in dealing directly with customers.
The Modern Law Review [Vol. 62
736 ßThe Modern Law Review Limited 1999
set out in general terms the standards expected of approved persons and will be
supported by a code of practice which will have evidential status in determining
whether approved persons are in breach of the principles. An individual in breach
of the principles applicable to approved persons can be fined by the FSA as can an
individual who is knowingly concerned in a breach of the Act (or rules made under
it) by his firm. The effect of FSMB is to rationalise the approach towards
individual responsibility into a single regime for employees of all authorised firms.
However, the differing nature of the rules81 which apply to regulated business
subject primarily to prudential supervision (banks, building societies, insurers)
means that it will be unlikely that issues of individual responsibility will arise as
frequently as in connection with investment business as defined for the purposes of
FSA 1986.
Market abuse
While not concerned directly with the criminal law relating to insider dealing, the
FSA 1986 and rules made under it are relevant to dealing in securities. The Act
itself provides that it is an offence to engage in market manipulation82 and core rule
28 prohibits a firm from engaging in a transaction either on its own behalf or on
behalf of a client where the transaction is an offence under the insider dealing
provisions of Part V of the Criminal Justice Act 1993 (CJA 1993). Gathering
sufficient evidence to justify a prosecution for either the market manipulation or
insider dealing offences has proved difficult and attention has therefore focused on
the possibility of imposing civil sanctions on conduct which can be considered to
fall within the broad category of ‘market abuse’ set out in clause 95 of FSMB.
While this may appear sensible as a means of avoiding the difficulties associated
with the burden of proof in criminal prosecutions,83 it introduces the problem of
separating criminal behaviour from conduct punishable only by civil sanctions
imposed by a regulator.84
Insider dealing serves as a useful example. Section 52 of the CJA 1993 defines
the dealing offence85 as ‘an individual who has information as an insider is guilty
of insider dealing if, in the circumstances mentioned in subsection (3), he deals in
securities that are price-affected securities in relation to the information’. The Draft
Code of Market Conduct86 contains the following provision entitled ‘Unfair use of
relevant information’: ‘6.2 A person who has privileged possession of relevant
information that is disclosable information should not deal in any investment to
which the information is relevant, save as permitted under 9 or 10 below’. It is
clear that the scope of each of these two provisions differs even though the
circumstances in which they are intended to apply are similar. They are formulated
81 Primarily capital adequacy rules rather than conduct of business rules.
82 FSA 1986, s 47(2), the same provision appearing in FSMB clause 341(3).
83 C. Diver, ‘A Theory of Regulatory Enforcement’ (1980) 28 Public Policy 257, 292 comments in
relation to the enforcement experience of regulatory agencies in the United States ‘Making a violation
previously punishable only by criminal prosecution also subject to civil fine will provide a much more
dramatic change than the reverse’.
84 On the categorisation of conduct amounting to market abuse as either criminal or civil and the
consequences under the Human Rights Act 1998 see the opinion of Lord Lester of Herne Hill QC and
Javan Herberg, Annex C to the First Report of the Joint Parliamentary Committee on the FSMB.
85 This is one of the three insider dealing offences set out in CJA 1993 s 52.
86 FSMB clause 96 requires the FSA to prepare and publish a code for the purpose of determining
whether or not behaviour amounts to abuse. See FSA Consultation Document 10 and the feedback
statement (March 1999).
September 1999] Financial Services and Markets Bill
ßThe Modern Law Review Limited 1999 737
in different terms and each includes its own definitions: section 57 of the CJA
defines the circumstances in which a person has information as an insider and the
Draft Code defines relevant information and disclosable information.87
The result is that the questions which a person intending to deal in securities on
the basis of new information88 must ask himself before dealing differ under the
CJA 1993 provisions and the draft Code of Market Conduct. Under the former, a
simplified version of the sequence of questions is as follows: (a) Is the new
information inside information within the meaning of section 56 of the CJA 1993?
To qualify it must, inter alia, be likely, if it were made public, to have a significant
effect on the price of any securities (not necessarily the one in which dealing is
envisaged). Only if the answer is yes need the next question be considered. (b)
Does the individual intending to deal hold the new information as an insider within
the meaning of section 57 of the CJA 1993? This requires knowledge that the
information is inside information (as defined in section 56) and that it comes from
an inside source.89 If the answer is yes, the individual should not deal unless he
falls within one of the (many) defences provided by the Act. Under the draft Code
of Market Conduct the sequence of questions is as follows: (a) Is the new
information relevant information that is disclosable information? This question
differs from question (a) above in that inside information under the CJA 1993 is
not limited to information which is disclosable information under the draft Code.
Only if the answer is yes need the next question be considered. (b) Does the
individual have privileged possession90 of the new information? The test here
differs from the determination under the CJA 1993 of whether information is from
an inside source as section 57(2) of the CJA 1993 refers to a closed category of
inside sources (albeit wide) whereas the concept of privileged possession applies to
any situation where other market users cannot legitimately obtain the information.
In relation to this question the draft Code is therefore wider than the CJA 1993.
The introduction of regulatory provisions such as the draft Code of Market
Conduct confuses the boundaries of the criminal law in an area which is already
complex. It is not entirely clear why a policy decision to introduce civil sanctions
should also involve the introduction of new regulatory rules operating in parallel
with the criminal provisions but not identical to them. The rationale put forward by
the government is that it is necessary to allow the FSA to deal with market-abusive
behaviour on the part of non-authorised firms which is not caught by the existing
criminal offences. However, the approach of FSMB stands in contrast to the
development of civil sanctions in the United States, which has a much longer
experience of enforcing a prohibition against insider dealing. The introduction of
87 Relevant information is information which persons using a market would reasonably regard as
significant in determining whether to deal in an investment traded on that market (para 2.8 of the
Draft Code). Disclosable information is any information required to be disseminated on a regulated
market or which concerns matters which if concluded would be required to be disseminated or which
is to be the subject of official announcements by government, central monetary or fiscal authorities or
regulatory authorities (para 2.12 Draft Code paraphrased).
88 The working assumption is that it is only new information (not known to the market) which is of
interest to an insider. Information already known to the market should be reflected in the price of a
security.
89 CJA 1993, s 57(2) provides: ‘(2) For the purposes of subsection (1), a person has information from an
inside source if and only if– (a) he has it through– (i) being a director, employee or shareholder of an
issuer of securities; or (ii) having access to the information by virtue of his employment, office or
profession; or (b) the direct or indirect source of his information is a person within paragraph (a)’.
90 Para 7.1 of the Draft Code provides that ‘A person’s possession of information is privileged
possession for so long as he knows or ought to know that other market users cannot legitimately
obtain that information’.
The Modern Law Review [Vol. 62
738 ßThe Modern Law Review Limited 1999
civil penalties of up to three times the trading gain or losses avoided in the United
States by the Insider Trading Sanctions Act 1984, as an alternative to the
disgorgement orders already provided for by the Securities Exchange Act 1934,91
was not accompanied by any attempt to redefine the meaning of insider trading or
to separate a regulatory concept of insider trading from the well-established legal
concept. Section 10(b) of the Securities Exchange Act 1934 and its associated Rule
10b-5 continued to form the substantive basis on which the prohibition against
insider dealing was based.92 This remained the case also when the Securities
Exchange Act 1934 was amended by the Insider Trading and Securities Fraud
Enforcement Act 1988 to provide a statutory right of action for contemporaneous
traders.93
Enforcement
The experience under FSA 1986
The volume and complexity of the rules created under FSA 1986 stands in contrast
to the nature of the FSA’s main enforcement activity, which has been into
contraventions of the most basic rule – that authorisation is required to conduct
investment business. The numbers of such investigations (referred to by the FSA as
‘policing the perimeter’) have generally increased each year since the 1986 Act
became effective.94 Investigations into authorised businesses are generally carried
out without resorting to the use of the formal powers provided by FSA 1986.
However, a substantial number of convictions for fraud and theft have resulted
from evidence passed by the FSA to the prosecuting authorities.95 Enforcement
activity relating to SRO members is largely the responsibility of the individual
SROs and will remain so until FSMB become effective, at which time it will pass
to the FSA. In the meantime, SROs’ enforcement powers remain distinct from
those of the FSA and are contractual in nature as they are contained in the
individual SRO rulebooks rather than the 1986 Act.96 The separation of
enforcement powers between the FSA and SROs is, however, of limited
significance due to two factors: first, the range of enforcement techniques
available to the FSA and SROs is broadly similar;97 and second, since June 1998
SROs have subcontracted most of their functions to the FSA.
A number of problems relating to enforcement have arisen under FSA 1986.
Perhaps the simplest has been the relative inexperience of the regulators in
operating the system combined with the on-going process of development of the
rules. The failure to take effective action in relation to pensions misselling can be
91 The court in SEC vTexas Gulf Sulphur Co 466 F. 2d 1301, 1307–1308 (2nd Cir 1971) viewed
disgorgement of profits as authorised by s 27 of the Securities Exchange Act 1934. In SEC vBlatt,
583 F.2d 1325, 1335 (5th Cir 1978) it was held that the amount to be disgorged is limited to the
amount with interest by which the defendant profited from his wrongdoing, as any more would be a
penalty. See further Loss and Seligman, Securities Regulation (New York: Little, Brown & Co, 1991)
vol 8, part 9.
92 See generally Gaillard (ed), Insider Trading (Kluwer, 1992); Loss and Seligman, n 91 above; and A.
Alcock, ‘The Rise and Fall of Private Actions under Rule 10b-5’ (1998) JBL 230.
93 These are persons who buy or sell securities contemporaneously with and on the opposite side to an
insider trader. See new section 20A(a) of the 1934 Act.
94 Statistics are provided by the FSA/SIB Annual Reports.
95 The FSA 1997/98 Annual Report shows that since 1988, 371 cases have been referred for criminal
investigation and 90 per cent of those brought to trial have been convicted.
96 See MacNeil and Wotherspoon, Business Investigations ch 4.
97 A notable exception is that FSA does not currently have the power to fine whereas the SROs do.
September 1999] Financial Services and Markets Bill
ßThe Modern Law Review Limited 1999 739
largely attributed to this cause.98 A second problem has been the identification of
the separate roles of SIB/FSA and the SROs in enforcement. This problem was
recognised in the Large Report,99 commissioned by the Treasury to inquire inter
alia into the role of regulators in the Maxwell affair. A third problem has been the
complexity arising from the overlapping jurisdiction of different regulators,
evident in the lack of regulatory co-operation between the SFA and the Bank of
England in relation to the securities trading activities of Barings Bank.100
Techniques continued from FSA 1986 to FSMB
Many of the enforcement techniques developed under the FSA 1986 regime will
simply be carried over into the FSMB regime. Perhaps most importantly, the
reliance on informal methods of finding information and securing compliance with
rules will continue.101 In this respect, enforcement within the financial sector
shows similarities to other regulatory regimes.102 However, the main formal
powers provided for by FSA 1986 will also be carried over into the FSMB regime.
FSA will retain a power to seek injunctions to prevent or terminate breaches of
FSMB or rules made under it.103 As regards investigations into breaches of FSMB
or rules made under it, the Bill retains a general power enabling FSA to compel the
production of information from an authorised person or persons connected with
them and to carry out investigations into the business of an authorised person
where FSA considers that there is a good reason to do so.104 The power to carry out
investigations into unauthorised business is also retained. Entry to premises under
warrant for the purposes of securing documents which have been requested but not
produced also forms part of FSMB.105 Disciplinary procedure under FSA 1986
varies as between the FSA and the individual SROs and while some elements are
carried over to FSMB, the new system will not replicate any of the existing models.
The following provisions dealing with contraventions are carried over from FSA
1986 to FSMB: (a) a power to seek a court order requiring restitution of profits
earned from a contravention or losses suffered from a contravention of FSMB or
rules made under it;106 (b) intervention in the running of an authorised business;107
98 See J.M. Black and R. Nobles, ‘Personal Pensions Misselling: The Causes and Lessons of Regulatory
Failure’ (1998) 61 MLR 789.
99 n 16 above, 19.
100 See n 24 above, section 14.
101 The FSA states in Consultation Document 17 Financial services regulation: enforcing the new regime
23 ‘The FSA will not normally need to use its statutory powers to compel authorised firms to provide
it with the information required by the FSA to supervise their activities’ and 34 ‘As indicated earlier,
not all breaches of the FSA’s Rules or the requirements of the Bill will warrant formal disciplinary
action’.
102 See Rowan-Robinson, Watchman and Barker, Crime and Regulation (T&T Clark, 1990) ch 9. See
also Diver (n 83 above) who suggests that an appropriate performance measure for developing an
enforcement policy is the social utility produced as measured by the harm prevented less the
enforcement costs incurred.
103 FSA 1986, s 61(1) and FSMB clause 330.
104 FSA 1986, s 105 and FSMB clause 137. FSMB clause 141 provides for an investigator appointed by
the FSA to have the power to compel a person under investigation to answer questions and produce
documents. However, unlike FSA 1986 s 105, it is specifically provided by FSMB clause 144 that a
statement obtained by the use of this power is not admissible in evidence in criminal proceedings
unless the person under investigation himself produces the statement or the proceedings are for
perjury or failure to comply with a requirement imposed on him under the Act. This reflects the ruling
of the European Court of Human Rights in Saunders vUK (1997) 23 EHRR 313.
105 Clause 146, largely replicating FSA 1986 s 199.
106 FSA 1986, s 61(1) and FSMB clause 332.
107 FSA 1986, ss 65–68 and FSMB clauses 166–169.
The Modern Law Review [Vol. 62
740 ßThe Modern Law Review Limited 1999
(c) the suspension or withdrawal of permission to carry on a regulated activity;108
(d) disqualification of individuals from employment in a regulated activity;109 (e)
the imposition of fines for breaches of FSMB or rules made under it110 and (f) in
the case of a private person, a right of action for damages resulting from a
contravention.111
Changes made by FSMB
As regards the investigation of contraventions, FSMB does not depart significantly
from the existing framework established by FSA 1986. The proposal to allow FSA
entry to premises without a warrant has been dropped.112 In relation to market
abuse, misleading statements which induce the making of a regulated agreement,
market manipulation and the offence of insider dealing under the CJA 1993, FSMB
proposes that the FSA should have the power to compel any person (not just the
person under investigation or authorised persons generally) to give information.113
Disciplinary procedure will see some change with the move to a single system for
all authorised and approved persons. Clause 338 of FSMB proposes that a
decision-making procedure will be introduced which involves the issue of a
warning notice setting out the reasons for the proposed action and giving the
subject of the notice 28 days to respond. The Treasury Progress Report published
in March 1999 indicated that the draft Bill would be amended in several respects to
ensure that disciplinary procedures were fair and transparent and this has now
occurred.114 Clause 108 of FSMB provides that a decision to carry out the proposed
action must be made in the form of a decision notice which can be appealed to the
Financial Services & Markets Tribunal, an independent tribunal run as part of the
Court Service. The FSA has indicated that it will establish an Enforcement
Committee115 to which FSA staff would refer all decisions to impose civil fines for
108 FSA 1986, s 28 and FSMB clause 40.
109 FSA 1986, s 59 and FSMB clause 113.
110 There is no power in FSA 1986 allowing the FSA to impose fines but the SROs have such a power in
their rulebooks and have imposed fines.
111 FSMB clause 120. A similar provision applying to private investors is contained in s 62 FSA 1986.
See I. MacNeil, ‘FSA 1986: Does s 62 provide an effective remedy for breaches of Conduct of
Business Rules?’ (1994) 15(6) Co Law 172.
112 The power was contained in clause 101 of the draft FSMB but see para 6.9 of the Treasury Progress
Report, n 5 above. There is no similar power under FSA 1986. The result is that the FSA will not have
powers of investigation as extensive as the Director General of Fair Trading, who has a power of entry
without a warrant under the Competition Act 1998. This seems anomalous as the FSA will often be
investigating conduct which constitutes a criminal offence whereas investigations undertaken by the
DGFT under the Competition Act 1998 will generally not involve criminal offences.
113 Clause 143 FSMB. The FSA comments in Consultation Document 17 para 68, ‘It is important to note
that the exercise of compulsory investigation powers is often required not for the purpose of
compelling answers from the person under investigation, but for the purpose of obtaining relevant
information or evidence from witnesses.’
114 Disciplinary procedures, and in particular compliance with the provisions of the Human Rights Act
1998, emerged as the main contentious issue during the consultation on the draft Bill. The main
changes from the draft Bill are (a) a new statutory duty on the FSA to establish and publish
procedures and to act in accordance with such procedures (clause 340) (b) an explicit right to request
to see the evidence on which a case rests and a duty on the FSA to disclose such evidence (clause
338(5) ) (c) a prohibition on the FSA publicising enforcement action until the full process, including
any tribunal procedures, has been completed (clause 339(6)), and (d) deletion of the Lord
Chancellor’s proposed power to make rules on when relevant evidence might be admissible before the
Financial Services and Markets Tribunal.
115 It is envisaged that this will include practitioner and public interest representatives – see Consultation
Document 17, 69.
September 1999] Financial Services and Markets Bill
ßThe Modern Law Review Limited 1999 741
market abuse, to impose a restitution order or to order a disciplinary sanction in
relation to non-compliance. The procedure of the Enforcement Committee will be
subject to the requirement of FSMB that there must be separation of the
investigative and decision-making functions of the FSA relating to
contraventions.116
In relation to sanctions, FSA has a general power under FSMB to fine authorised
persons and there are specific powers to levy civil fines in relation to market
abuse.117 FSA will also be given new powers of prosecution in relation to offences
under clauses 344 and 345 of FSMB as well as money laundering offences and
insider dealing. It will also be open to the FSA on it own initiative to order
restitution of profits earned or compensation for loss suffered as a result of a breach
of a relevant requirement.118 This is in addition to the possibility of seeking a court
order requiring restitution. The power to take disciplinary action against approved
persons also represents a new power introduced by FSMB although in some
respects it can be seen as a continuation of the powers currently exercised by the
SROs against registered individuals.
The choice of enforcement method
Following the introduction of FSMB, the FSA will, at least in some areas such as
market abuse and misleading statements and practices , have several enforcement
options. The first, perhaps less obvious option, is to take no action, at least in the
sense of the exercise of formal powers. This is clearly recognised by FSA as a valid
response to a contravention of FSMB or rules made under it.119 A second option is
the bringing of disciplinary action against an authorised firm or approved person in
respect of a contravention. As is the case under FSA 1986 this option will also be
available under FSMB in respect of a breach of a high-level Principle.120 In relation
to civil fines for market abuse, the FSA proposes that relevant considerations
should be: the nature and seriousness of the misconduct in question; the conduct of
the person concerned; the nature of the relevant market; the extent to which other
enforcement authorities (such as the Stock Exchange) can take action; the action
taken by the FSA in similar cases: and the impact of a fine on financial markets or
the interests of consumers.121 The institution of criminal proceedings in relation to
116 Clause 340(2), added to the Bill following the recommendation of the Joint Committee (First Report,
para 201).
117 FSMB clause 98. No civil fine will be imposed where there has been a criminal prosecution relating
to substantially the same allegations of fact (see Consultation Document 17, 49).
118 The FSA states in Consultation Document 17 that it will only take action to secure redress for
consumers where this provides a more effective and efficient route for protecting the interests of
consumers than the other avenues provided by FSMB (primarily the complaints procedure required
for authorised firms and the Financial Services Ombudsman who will deal with complaints which
cannot be resolved by authorised firms).
119 The FSA states in Consultation Document 17, 34 ‘not all breaches of the FSA’s Rules or the
requirements of the Bill will warrant formal disciplinary action’.
120 The FSA has stated that ‘it will not invoke the Principles as a basis for disciplinary action in an
arbitrary and unpredictable fashion’ but has equally made clear that the Principles are available to
cover gaps in any detailed rules or evidential provisions: FSA Consultation Document 17, 39. On the
issue of whether disciplinary action taken for breach of a principle satisfies the requirement of Article
7 of the European Convention of Human Rights that an offence must be clearly defined in law, see the
advice given by Lord Lester of Herne Hill QC and Monica Carss-Frisk to the Joint Parliamentary
Committee on the FSMB (Annex D to the First Report).
121 ibid 51–55.
The Modern Law Review [Vol. 62
742 ßThe Modern Law Review Limited 1999
offences which can be prosecuted by the FSA122 will be determined by applying
the evidential and public interest tests contained in the Code for Crown
Prosecutors.
Conclusion
FSMB makes a real attempt to overcome some of the failings of the FSA 1986
system of regulation. The abandonment of self-regulation is of little real
significance but other features of FSMB are likely to have a genuinely positive
effect on financial regulation. They include the move to a single regulator, a
simpler framework for rule-making which includes clear objectives, a more
prominent role for cost-benefit analysis and a more consistent approach to
individual responsibility for compliance. In this respect FSMB does respond to
failings of the FSA 1986 system of regulation and is more than simply a
reorganisation of the regulators. It is more difficult to be positive about the
proposals for civil sanctions for market abuse. In principle, civil sanctions are a
sensible response to the difficulties of securing criminal convictions but the
introduction of a new regulatory concept of market abuse is not necessary.
To the extent that both FSA 1986 and FSMB represent only a framework for the
process of regulation, it is difficult to judge in advance the extent to which the new
system will represent an improvement. Much will depend on the manner in which
the FSA approaches rule-making and enforcement: initial indications from the
FSA’s consultation documents indicate that there will not be major changes from
the approach which has developed recently under FSA 1986. The new system will
at least have the benefit of the twelve years in which the FSA 1986 system of
regulation will have been in operation: the expectations and potential difficulties
associated with financial regulation are now clearer than they were in the early
1980s and the importance of regulatory compliance has increased greatly as it has
become clear that it has a significant influence on a firm’s business reputation.
122 Offences under FSMB, Part V of the Criminal Justice Act 1993 (insider dealing) and regulation 5 of
the Money Laundering Regulations 1993. The FSA states in Consultation Document 17 that its
powers to prosecute criminal offences apply to England & Wales only. This may represent FSA
policy but appears to be a very restrictive interpretation of FSMB clauses 344 and 345.
September 1999] Financial Services and Markets Bill
ßThe Modern Law Review Limited 1999 743
To continue reading
Request your trial