Notices

30.     The Act frequently refers to the Authority proceeding by way of giving a "warning notice" or a "decision notice". The requirement to proceed in this way has particular procedural consequences, both in terms of the contents of those types of notice and of how action initiated by them must be taken forward.     Those consequences are governed by the provisions of Part XXVI of the Act, to which reference should be made whenever the Authority is directed to proceed in this way.

GLOSSARY OF TERMS USED IN THE EXPLANATORY NOTES

31.     In addition to the defined terms above, for convenience, these explanatory notes also use certain other abbreviated terms as set out below.

Term used in these notes	Meaning
Banking Act	Banking Act 1987
CC Act 1974	Consumer Credit Act 1974
Companies Act	Companies Act 1985
competent authority	the competent authority for listing
DGFT	Director General of Fair Trading
EC directives	Directives adopted by the relevant European Community institution
FS Act 1986	Financial Services Act 1986
ICA 1982	Insurance Companies Act 1982
oeic	open-ended investment company
SROs	Self-Regulating Organisations, which are responsible for the regulation of investment business under the FS Act 1986

THE ACT

32.     The Act is in 30 Parts.

• Part I, The Regulator. This Part sets out the Authority's general duties and statutory objectives. It also, with Schedule 1, imposes requirements about the Authority's constitution and accountability and about the exercise of certain of its functions.

• Part II, Regulated and Prohibited Activities. This Part provides a power for the Treasury to set the scope of regulation by order, within the overall object and purpose of the Act. It prohibits 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. It also sets out arrangements for the regulation of financial promotion.

• Part III, Authorisation and Exemption. This Part sets out which persons are to be authorised for the purposes of the Act and gives the Treasury power to exempt certain persons from the requirement to be authorised. Authorised persons will include those persons given permission under Part IV and certain persons from other member States who are authorised in accordance with arrangements under the Treaty of Rome (the "Treaty") and the single market directives.

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 provision about the giving, variation and revocation of such permissions by the Authority.

Part V, Performance of Regulated Activities. This Part requires persons, such as employees and office holders, who perform specified types of function for authorised persons, to be approved by the Authority. It requires such approved persons to behave in a way that complies with any statements of principle issued by the Authority and gives the Authority certain disciplinary powers. It also gives the Authority powers to prohibit persons from carrying out functions in relation to regulated activities.

Part VI, Official Listing. This Part sets out the powers of the competent authority and the obligations of issuers listed securities. It makes provision for the maintenance of, and admission to, the official list, and for the making of listing rules (including listing rules in relation to sponsors).

Part VII, Control of Business Transfers. This Part creates a mechanism for the transfer of banking and insurance business, subject to a court procedure and regulatory scrutiny.

Part VIII, Penalties for Market Abuse. This Part confers on the Authority power to impose penalties for market abuse. The Act sets out the kinds of behaviour which constitute market abuse and requires the Authority to produce a code which help to determine whether particular behaviour amounts to market abuse.

Part IX, Hearings and Appeals. This Part establishes the Tribunal and sets out the procedure for referring cases to it where the Authority has decided to take regulatory action under the various powers conferred by the Act. It gives a right to appeal against a decision of the Tribunal on a point of law.

Part X, Rules and Guidance. This Part confers powers upon the Authority to set regulatory requirements for persons authorised under the Act. It gives the Authority power to issue guidance on requirements imposed by and under the Act. It also sets out the procedures that the Authority must follow in exercising those powers.

Part XI, Information Gathering and Investigations. This Part sets out the powers of the Authority and of the Secretary of State to require the production of information and documents, to require reports to be prepared, to conduct investigations and to gain access to premises with a warrant.

Part XII, Control over Authorised Persons. This Part requires persons who propose to acquire control over certain authorised persons to notify, and secure the approval of, the Authority.

Part XIII, Incoming Firms: Intervention by the Authority. This Part confers power on the Authority to intervene in the activities of authorised persons from other member States who are authorised in accordance with rights under the Treaty and EC directives. It sets out the grounds on which the power is exercisable and the procedure for exercising it.

Part XIV, Disciplinary Measures. This Part gives the Authority powers to issue public statements about, or impose penalties on, authorised persons who fail to comply with requirements imposed by or under the Act.

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. It also confers a certain number of powers on the manager of the scheme.

Part XVI, The Ombudsman Scheme. This Part requires the Authority to establish a single, compulsory ombudsman scheme for the speedy and informal resolution of disputes between members of the public and authorised persons and confers certain powers on the operator of the ombudsman scheme for that purpose. It also provides for the ombudsman to adjudicate on certain other types of dispute, on a voluntary basis.

Part XVII, Collective Investment Schemes. This Part provides for the regulation of collective investment schemes.

Part XVIII, Recognised Investment Exchanges and Clearing Houses. This Part sets out the regulatory regime for investment exchanges and clearing houses and provides for competition scrutiny of the regulatory provisions and practices of those bodies.

Part XIX, Lloyd's. This Part makes the Society of Lloyd's an authorised person and gives the Authority certain powers to direct the affairs of the Society, its members and Lloyd's managing and members' agents. It also provides for the regulation of former underwriting members of the Society.

Part XX, Provision of Financial Services by Members of the Professions. This Part creates an exemption for members of the professions providing financial services to clients in particular circumstances and gives the Authority an oversight role and certain powers in relation to firms that benefit from the exemption.

Part XXI, Mutual Societies. This Part confers powers on the Treasury to transfer to the Authority and to the Treasury certain functions relating to the registration and regulation of building societies, friendly societies and industrial and provident societies and certain other mutual societies. It also confers powers to dissolve certain statutory bodies.

Part XXII, Auditors and Actuaries. This Part concerns the appointment of auditors and actuaries by authorised persons and their responsibilities.

Part XXIII, Public Record and Disclosure of Information. This Part requires the Authority to maintain a public record of authorised (and certain other) persons, and makes provision about the purposes for which confidential information may be disclosed by and to the Authority and other persons having functions under the Act.

Part XXIV, Insolvency. This Part gives the Authority powers to ask the courts to wind up, or initiate other insolvency procedures against, authorised (and certain other) persons. It also enables the Authority to be heard by the court when such proceedings are commenced by third parties.

Part XXV, Injunctions and Restitution. This Part gives the Authority and the Secretary of State powers to seek injunctions in relation to regulatory contraventions and offences for which the Authority has powers to prosecute. It also provides for restitution to be paid to those who have incurred a loss as a result of such a contravention.

Part XXVI, Notices. This Part contains provisions relating to the procedures which the Authority must follow when giving notice of proposed actions under various provisions of the Act. It relates, for example, to decisions not to give permissions or to refuse applications for approvals and to decisions to take regulatory action, such as imposing penalties or making public statements.

Part XXVII, Offences. This Part creates certain offences, including making misleading statements and supplying false information to the Authority. It also makes general provision about offences under the Act and contains provision about the institution of proceedings, for example under Part V of the Criminal Justice Act 1993 (insider dealing) and in relation to money laundering.

Part XXVIII, Miscellaneous. This Part contains provisions giving the Treasury power to direct the Authority and certain other bodies to comply with the UK's international obligations, including European Union decisions to take reciprocal trade action. It also contains provisions concerning gaming contracts, reviews of past business and a number of other matters.

Part XXIX, Interpretation.

Part XXX, Supplemental. This Part contains provisions dealing with the commencement of the legislation and its territorial scope. It confers certain powers on the Treasury in relation to consequential and transitional provisions and with Schedules 18 and 20 to 22 makes certain amendments to other legislation.

COMMENTARY ON SECTIONS

PART I: THE REGULATOR

33.     This Part sets out the Authority's general duties and statutory objectives. Together with Schedule 1, it specifies statutory requirements for the Authority's constitution and status and the exercise of certain of its functions. It sets out arrangements which the Authority is required to make for consulting practitioners and consumers. It provides powers for the Treasury to commission reviews of the economy, efficiency and effectiveness with which the Authority has used its resources and to arrange independent inquiries into regulatory matters of serious concern.

Section 1: The Financial Services Authority

34.     The Authority is a company limited by guarantee formed under the Companies Act 1985 ("Companies Act") as the Securities and Investment Board for the purpose of carrying out functions under the FS Act 1986. It later assumed functions under the Banking Act and exercised functions under other financial regulatory legislation, including for example under the ICA 1982 on behalf of the Treasury.

Section 2: The Authority's general duties

35.     This section requires the Authority to discharge its general functions in accordance with its objectives and with regard to a number of principles. The objectives do not in themselves impose specific statutory duties or functions on the Authority. Rather, the section requires the Authority to carry out its general functions insofar as possible in a way which 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.

36.     Subsection (2) lists the Authority's objectives - market confidence, public awareness, the protection of consumers and the reduction of financial crime - which are elaborated in sections 3 to 6.

37.     Subsection (4) applies those objectives to the Authority's functions in two distinct ways:

• they apply directly to the exercise of the Authority's rule-making, code issuing and general guidance functions taken as a whole;

• they apply to the policy and principles by which it exercises its other functions.

38.     Subsection (3) lists a number of matters to which the Authority must also have regard in making its rules and guidance and determining the policy and principles by which it exercises its other functions.

Section 5: The protection of consumers

39.     Subsection (2) sets out factors to which the Authority must have regard when considering the appropriate degree of protection. These are, briefly, the degree of risk involved, the sophistication and experience of the parties to the transaction, the need of customers for advice and information and the general principle that consumers should take responsibility for their decisions. There is no obligation on the Authority to place particular weight on any one of these factors.

Section 6: The reduction of financial crime

40.     This provision does not by itself impose any duties on firms. The Authority is expected to pursue this objective in co-operation with various law enforcement agencies.

Section 7: Duty of Authority to follow principles of good governance

41.     Part I and Schedule 1 set out, amongst other things, certain requirements of the Authority's constitution. The effect of this section is to require the Authority to have regard, subject to those requirements, to such generally accepted principles of good corporate governance in managing its affairs as it is reasonable to regard as applicable to it. Such principles might include those contained in the Combined Code of the Committee on Corporate Governance. However, some principles, such as relations with shareholders, are not relevant to the Authority as it is a company limited by guarantee and so need not be taken into account.

Section 8: The Authority's general duty to consult

42.     This section requires the Authority to make and maintain effective arrangements for consulting practitioners and consumers. These arrangements must include, but are not limited to, the establishment of Practitioner and Consumer Panels. The statutory obligation for the Authority to maintain panels to represent the interests of practitioners and consumers was not present in previous financial services, banking or insurance legislation. The Authority established panels of practitioners and consumers, on a non-statutory basis, before such a requirement was imposed under the Act. The effect of sections 9 and 10 is to require the Authority to continue to maintain those panels.

Section 11: Duty to consider representations by the Panels

43.     This section requires the Authority to consider representations made to it by either the Practitioner Panel or the Consumer Panel in accordance with the arrangements under section 8 and, where it disagrees with the views expressed or proposals made in such representations, to give its reasons in writing.

Section 12: Reviews

44.     This section enables the Treasury to commission independent reviews of the economy, efficiency and effectiveness with which the Authority has used its resources.

Section 13: Right to obtain documents and information

45.     The person appointed by the Treasury to perform a review under section 12 has a right of access to documents held by the Authority.

Section 14: Cases in which the Treasury may arrange independent inquiries

46.     This section, together with sections 15 to 18, provides the mechanism for the Treasury to appoint a person to hold an independent inquiry into the circumstances surrounding regulatory events which give rise to serious questions or public concern about the regulatory framework or the effectiveness of regulation in practice. They provide a statutory basis for launching the type of inquiry which has been conducted in the past into the failures of the Bank of Credit & Commerce International ("BCCI") in 1991 and Barings in 1995. The Bingham Inquiry into BCCI was conducted on a non-statutory basis and therefore had no powers to require witnesses to attend or give evidence. The Barings Inquiry was conducted by the Board of Banking Supervision, an advisory body within the Bank of England using powers under the Banking Act.

47.     The types of events into which an inquiry may be held are set out in this section. There are two cases. The first case, set out in subsection (2), relates to events concerning persons carrying on regulated activities or collective investment schemes. To trigger the power, it must appear to the Treasury that two conditions are met. The first of these is that the events posed, or could have posed, a grave risk to the financial system, or caused, or could have caused, significant damage to the interests of consumers. The second condition is that a serious failure in the regulatory system, or in the operation of that system, might have caused or exacerbated the risk or damage, or potential risk or damage.

48.     The second case, set out in subsection (3), relates to the listing function under Part VI. Here the Treasury must be concerned with the damage, or potential damage, that might have been caused by a serious failure in the listing regime or its operation.

49.     Subsection (4) provides that in either case the Treasury may initiate an inquiry only where they consider that it is in the public interest to do so.

Section 15: Power to appoint person to hold an inquiry

50.     Under subsection (1), the Treasury may appoint a person whom they consider appropriate to conduct an investigation and, under subsection (2), may give directions to that person concerning the scope of the inquiry, how it is to be conducted, when it is to be completed by, and the form of any report of the inquiry. The power to direct the inquiry enables the Treasury to ensure that it focuses on the important questions, and that it is concluded in a manner and on a timescale that is appropriate in light of any public concern there might be.

Section 16: Powers of appointed person and procedure

51.     This section gives the person holding the inquiry discretion as to how the inquiry is conducted, and provides that person with powers to obtain evidence, both in the form of documents and through the examination of witnesses. These powers are the same as those exercisable by the High Court, or the Court of Session in Scotland.

Section 17: Conclusion of inquiry

52.     This section requires a written report setting out the results of the inquiry and, where appropriate, making recommendations. The Treasury then have discretion whether to publish all or part of the report. However, the Treasury must make sure that they do not publish any material contained in the report which, if published, they consider would seriously prejudice the interests of a particular person, for example because there was a likelihood of subsequent court action in relation to the events covered, or publication would be incompatible with the UK's international obligations, such as those under the confidentiality provisions of one of the single market directives. A copy of any part of the report which is published must be laid before Parliament by the Treasury.

Section 18: Obstruction and contempt

53.     The powers of the person appointed to conduct an inquiry are enforceable through certification to the High Court or Court of Session. The person conducting the inquiry must provide the court with a certificate stating the requirement that was imposed and the nature and facts of the alleged failure to comply. The court may then enquire into the matter, hearing witnesses and seeing documents as necessary. If it finds that a person has failed to comply with requirements placed upon him by the person holding the investigation, the court may deal with them as it would with a person in contempt of court.

PART II: REGULATED AND PROHIBITED ACTIVITIES

54.     This Part provides the mechanism for defining the scope of regulation under the Act and for establishing the extent of the prohibition on issuing unapproved financial promotions.

Section 19: The general prohibition

55.     This section contains the basic prohibition on unauthorised persons carrying on regulated activities in the United Kingdom. It is referred to in the Act as "the general prohibition" and prohibits persons who are not authorised or exempt under Part III from carrying on any regulated activity in the United Kingdom. Section 418 elaborates on when regulated activities will be considered to be carried on in the United Kingdom. Contravention of the general prohibition is a criminal offence (see section 23). Agreements made in the course of carrying on an activity in contravention of the general prohibition may be unenforceable (see sections 26, 27 and 29).

Section 20: Authorised persons acting without permission

56.     Authorised persons may only carry on in the United Kingdom those regulated activities for which they have been given permission by the Authority under Part IV or by or under any other provision of the Act, for example under Schedule 3, 4 or 5.

57.     If an authorised person carries on regulated activities for which he does not have permission the consequences may include any of the sanctions available under Parts IV (Permission to Carry on Regulated Activities), XIII (Incoming Firms: Intervention by Authority) or XIV (Disciplinary Measures). However, if an authorised person acts outside the scope of his permission, he will not commit a criminal offence, and any contract which a person enters into when acting outside the scope of his permission will not be made unenforceable simply by virtue of that fact. Subsection (3) permits the Treasury to prescribe cases in which a breach permission gives rise to a right of action for damages.

Section 21: Restrictions on financial promotion

58.     This section prohibits unauthorised persons from issuing financial promotions, unless the content of the promotion is approved by an authorised person (who will be subject to rules made by the Authority), or unless an exemption applies. The regulation of financial promotions under the Act is similar to the regulation of investment advertisements and cold-calling under the FS Act 1986. However, section 21 reflects changing technologies and the fact that the borderline between advertisements and unsolicited calls has become blurred. Sections 238 to 241 contain additional provisions relating to the promotion of collective investment schemes.

59.     The prohibition applies to "invitations" or "inducements" to engage in investment activity, which are made in the course of business. The Treasury are given power, if necessary, to determine the meaning of "in the course of business". The prohibition will potentially catch communications whether they are made in the United Kingdom, into the United Kingdom from elsewhere, or from the United Kingdom to another country. Communications from outside the United Kingdom can potentially be caught only if they can have an effect in the United Kingdom (subsection (3)). It is expected that the exemption order which the Treasury intends to make under subsection (5) will further limit the territorial application of the financial promotion regime, so that communications issuing from overseas will generally only be caught if they are directed at the United Kingdom. This will be of particular significance in the context of internet communications.

60.     Subsection (5) confers a power on the Treasury to make exemptions from the prohibition, similar to the power to make exemptions from the investment advertisement prohibition under the FS Act 1986. It is possible for these exemptions to be made conditional on compliance with rules made by the Authority under section 145.

61.     Subsection (6) makes clear that the circumstances that can be specified under subsection (5) extend to circumstances for which subsection (3) expressly makes provision. Subsection (6) thus clarifies that an exemption can be made for communications which originate outside the United Kingdom even if they are capable of having an effect here. Subsection (6)(a) and (b) deal expressly with the possibility of exemptions for communications originating in specific countries, or specific groups of countries such as EU countries. Subsection (6)(d) would allow all communications originating overseas to be exempted if that became appropriate. If such provision were made, subsection (7) would allow the Treasury to repeal subsection (3).

62.     Subjections (8) to (12) govern what constitutes "engaging in investment activity". Subsections (9) and (10) give the Treasury power to determine the scope of the prohibition on financial promotion. It is expected that "controlled activities" will be the activities which are regulated under the Act, together with activities which would be regulated, but for an exclusion in an order made under section 22(1). This broad approach reflects the position under the FS Act 1986.

Section 22: The classes of activity and categories of investment

63.     This section makes provision as to the classes of regulated activity, if carried on by way of business, and types of investment which are to be regulated under the Act. These are to be prescribed by the Treasury by order to be made under subsection (1). An activity will only be a regulated activity if it is carried on by way of business and is specified in the order under subsection (1). The Treasury will have the power under section 419 to specify circumstances in which an activity shall or shall not be regarded as being carried on by way of business.

64.     Schedule 2 indicates the general range of activities and investments that the Treasury may include within the order defining the scope of regulation, but it does not exhaustively list them. It is therefore possible that other activities or investments may be brought within the scope of the regulation under the Act. However, the general nature of the activities set out in Schedule 2 serves as a limitation on the extent of the Treasury's power to bring further activities within the scope of the Act.