UK: The New Financial Services And Markets Act 2000

Last Updated: 6 April 2001
Article by Robert Fenner

The Financial Services and Markets Act 2000 ("the Act"), which received Royal assent on 14 June 2000 and is expected to come into force in the near future, is designed to redefine the regulation of financial services and markets. In effect, the Act provides the framework within which a single regulator for the financial services industry, known as the Financial Services Authority ("the Authority") will operate. The Authority will have a full range of statutory powers, and will be supported by a Financial Services and Markets Tribunal. The Act also establishes the framework for a single ombudsman and compensation schemes to provide further protection for consumers.

Background

Before the new Act, regulation of the financial services industry was the responsibility of a range of different bodies:

1. The Authority (formerly the Securities & Investments Board)

2. The Self-Regulating Organisations (SROs)

3. The former supervision and surveillance branch of the Bank of England

4. The Building Societies Commission

5. The Insurance Directorate of the Treasury

6. The Friendly Societies Commission

7. The Registry of Friendly Societies.

The financial services industry was subject to a number of enactments, including the Financial Services Act 1986, the Building Societies Act 1987 and the Banking Act 1987, all supplemented by secondary legislation.

In May 1997 the Government announced its proposals to introduce legislation to reform the regulation of financial services and transfer responsibility for regulation to the Authority. The Authority will have powers to regulate the Lloyd’s Insurance market. The recognised professional bodies regime under the Financial Services Act 1986 will not continue. Professional firms, such as solicitors, accountants and actuaries, who undertake mainstream regulated activities under the Act will be authorised and regulated directly by the Authority. There are exceptions for professionals from the ambit of the Act, subject to arms length oversight and certain powers of the FSA.

The Financial Services And Markets Act 2000.

The Act is divided into 30 parts and 22 Schedules. Some of the most important new provisions are dealt with below:

Part I – The Regulator

This part deals with the regulator itself and sets out the Authority’s general duties and statutory objectives. Together with Schedule 1, it sets out the statutory requirements for the Authority’s constitution and status and the exercise of certain functions. Part 1 details the regulatory objectives which are:

  1. Market confidence
  2. Public awareness
  3. The protection of consumers; and
  4. The reduction of financial crime.

The objectives themselves do not impose specific statutory duties or functions on the Authority. Instead, Clause 2 requires the Authority to carry out its general functions insofar as possible in a way that is compatible with the objectives and which, taking into account any need to balance the objectives as a whole, it considers most appropriate to their fulfilment.

The objectives are applied to the Authority’s functions in two distinct ways:

  1. They apply directly to the exercise of the Authority’s rule-making, code-issuing and guidance functions taken as a whole;
  2. They apply to the policy and principles by which it exercises its other functions.

The Authority has a general duty to consult practitioners and consumers. These arrangements must include, but are not limited to, the establishment of Practitioner and Consumer Panels. This statutory obligation was not enshrined in previous legislation.

There are provisions providing that the Treasury can commission independent reviews of the economy, efficiency and effectiveness with which the Authority has used its resources. Such a person has a right of access to any documents held by the Authority.

There is also a new provision dealing with independent enquiries into circumstances surrounding regulatory events which "give rise to serious questions or public concern about the regulatory framework or the effectiveness of regulation in practice". There are two events which may prompt such an enquiry. Firstly, an event posing a grave risk to the financial system (such as the failure of the Bank of Credit and Commerce International in 1991). The second arises where the Treasury is concerned with the damage, or potential damage, that might be caused by a serious failure in the listing regime or its operations.

There is a provision allowing the Treasury to initiate an enquiry only when it considers that it is in the public interest to do so.

Part II - Regulated and Prohibited Activities

The Treasury has a power to set the scope of regulation by order within the overall object and purpose of the Act. It restricts persons who are not authorised (or exempt) from carrying on a regulated activity in the United Kingdom, and from holding themselves out as being authorised or exempt.

Part III - Authorisation and Exemption

This part deals with persons who are to be authorised for the purposes of the Act and gives the Treasury power to exempt certain people from the requirement to be authorised.

Part IV - Permission to Carry on Regulated Activities

This part entitles persons to apply for the Authority's permission to carry on particular regulated activities and makes provisions relating to the dealing, variation and revocation of such permissions by the Authority.

Part VI – Official Listing

This part, in general, replicates the existing powers and functions of the London Stock Exchange as the competent authority for listing and gives it new powers to impose penalties for breach of the listing rules.

Part XV – The Financial Services Compensation Scheme

This part requires the Authority to create a scheme for the payment of compensation to consumers who suffer financial loss as a consequence of the inability of an authorised person to meet its liabilities.

Part XVI – The Ombudsman Scheme

Under this part, the Authority is required to establish a single, compulsory ombudsman scheme for the speedy and formal resolution of disputes between members of the public and authorised persons and this section also confers certain powers on the operator of the ombudsman scheme for such a purpose.

Part XIX - Lloyds

This part relates to the society of Lloyd's and gives the Authority certain powers to direct the affairs of the society, its members and Lloyd’s managing and members agents.

There are numerous other parts dealing with, among other things, insolvency, injunctions and restitution, offences and public record and disclosure of information.

The Future

It is certain that the new Financial Services and Markets Act will be a radical departure from the regulatory framework we have seen before. Certainly it is hoped that the consolidation of the power in the single Financial Services Authority will co-ordinate and modernise financial regulatory arrangements which previously suffered beneath a wealth of governing bodies and regulatory regimes.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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