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Receiving
Royal Assent on 14 June 2000, the Financial Services
and Markets Act 2000 (FSMA) was brought into force
at midnight on the 30 November 2001, commonly known
at the time as N2.
The effect of this Act is to constitute the Financial
Services Authority (FSA)
as a super-regulator, with powers to regulate insurance,
investment business and banking as well as pensions
on divorce. |
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The FSMA abolishes the Self-Regulating
Organisations (SRO)
and replace the existing two-tier regulatory regime
for investment business established under the
Financial Services Act 1986, with an integrated
regime and a single regulator being the FSA. The
FSMA will at the first stage reproduce and update
the existing rulebook but the second stage will
introduce new features.
The FSMA will create the market
abuse regime that will apply to members of the
public as well as regulated individuals; the FSMA
will establish the Financial Services and Markets
Tribunal; the FSMA will create a financial promotion
regime prohibiting persons or an exempt person
from communicating financial activities; the FSMA
will create a single compensation and ombudsman
scheme called the Financial
Ombudsman Service (FOS); and the FSMA will
appoint individuals within regulated firms to
be registered with the FSA as approved persons.
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Mainstream financial
activity
The Financial Services and Markets Act 2000 replaces and updates
the Financial Services Act 1986, professional firms that carry
on mainstream financial activity will be regulated directly
by the Financial Services Authority. Mainstream financial
activity will include direct advice to clients on the choice
of investment products, discretionary investment management
and certain types of corporate finance activities such as
listings and public offers.
If a professional
firm does not conduct mainstream financial activity
they can under section 327 of the FSMA be designated an exempt
professional firm and can then be supervised and regulated
by a designated professional body (DPB) rather than the FSA.
However, they must comply with their DPB restricted activities
rules, the exemptions within the regulated activities order
and non exempt activities order as specified by HM Treasury.
Regulated activity
For regulated activity under the Financial Services and Markets
Act 2000 a professional firm wishing to provide mainstream
financial services will need to achieve authorisation from
the Financial Services Authority. Subsequent to authorisation
the firm would be regulated by the FSA and must comply with
the FSA's Handbook of Rules and Guidance.
A firm that is an authorised person under
section 31 of the FSMA can be a person who has a Part IV permission
to carry on one or more regulated activities as: an EEA firm
qualifying for authorisation under Schedule 3 of the FSMA
(EEA Passport Rights); a Treaty firm qualifying for authorisation
under Schedule 4 of the FSMA (Treaty Rights); and a person
who is otherwise authorised by a provision of, or made under,
the FSMA. The activities that could be regulated activity
under a Regulated Activities Order (RAO) are:
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Dealing in shares as principal or agent; |
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Safeguarding and administering investments
on behalf of clients; |
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Managing discretionary investments; |
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Entering into a regulated mortgage
contract; |
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Advising on, and/or arranging the acquisition
or disposal of shares and life policies; |
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Advising on, and/or arranging
the assignment of life policies. |
If an exempt professional firm conducts
regulated activity that is outside the terms of the section
327 conditions and therefore is not exempt
regulated activity, the firm could be in breach of the
general prohibition and committing a criminal offence.
Regulated Activities Order
A RAO within Schedule 2 of the FSMA contains a list of regulated
activities, the definitive list of regulated activities being
contained in the Regulated Activities Order as specified by
HM Treasury are as follows:
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A deposit; |
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Futures and
options; |
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Stocks and
shares; |
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Funeral contracts; |
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Instruments
giving entitlement to investment; |
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Rights to
or interests in investments; |
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Units in a
collective investment scheme; |
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Regulated
mortgage contracts; |
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Those rights
under stakeholder
pensions; |
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Lloyds syndicate
capacity and membership; |
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Instruments
creating or acknowledging indebtedness, eg bonds, loan
stock, debentures; |
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Government
and public securities except certain loan stock eg National
Savings Certificates; |
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Rights under
a contract of insurance; |
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Contracts
for differences. |
Within the Regulated Activities Order there
will be a number of exclusions and activities carried on within
these terms will not be regulated activity. Therefore exempt
professional firms, as with other firms that are not authorised,
will be able to carry on business within the terms of the
exclusions without breaching the general prohibition.
FSA powers
Contained in Section 19 of the Financial Services and Markets
Act 2000, general
prohibition is the prohibition stating that no person
may carry on a regulated activity in the United Kingdom, or
purport to do so, unless he is an authorised person or an
exempt person.
Areas where general prohibition apply are:
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Effecting and carrying
out contracts of insurance; |
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Establishing
a stakeholder pension scheme; |
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Acting as a stakeholder
pension scheme manager; |
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Acting as
managing agent at Lloyds; |
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Advising a person to become
a member of a Lloyds syndicate; |
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Market making
and dealing in the same way as a stockbroker; |
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Establishing
a collective investment scheme; |
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Entering
into broker fund arrangements; |
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Entering into as lender
or administering a regulated mortgage contract; |
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Entering as
provider into a funeral plan contract. |
A Direction
power taken by the Financial Services Authority is set
out under section 328 of the FSMA. It allows the FSA to prevent
use of the exemption by members of a particular profession
or particular types of firm within that profession. Alternatively,
the FSA can make a Direction in terms of regulated activity
and exempt professional firms could not then carry on that
activity.
Designated professional body
A designated professional body will be so designated by HM
Treasury under section 326 of the Financial Services and Markets
Act 2000. A DPB could include the Law Society and Institutes
of Chartered Accountants and will be responsible for supervising
and regulating exempt professional firms. A DPB must cooperate
with the Financial Services Authority, especially with regard
to sharing information.
There are certain exempt regulated activities
under the FSMA regulated activities that may be carried on
by members of a profession, which is supervised and regulated
by a designated professional body without breaching the general
prohibition.
The Financial Services and Markets Act 2000
requires a designated professional body to make restricted
activity rules, which have to be approved by the Financial
Services Authority. An exempt professional firm must carry
on, and hold itself out as carrying on, only regulated activities
allowed by these rules.
A non
exempt activities order under section 327(6) of the Financial
Services and Markets Act 2000 states that the activities must
not be of a description, or relate to an investment of a description,
specified in an Order made by HM Treasury for the purposes
of this sub-section. This together with the restricted
activities rules of designated professional bodies will
prohibit exempt professional firms from carrying on specific
types of regulated activity.
Exempt professional firm
This is a person to whom, under section 327 of the Financial
Services and Markets Act 2000, the general prohibition does
not apply. Exempt professional firms can carry on certain
exempt regulated activities that are subordinate to and derived
from their professional services, under the supervision and
regulation of a designated professional body. These exemptions
could be:
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Introduce a client to an
authorised person such as an independent
financial adviser (IFA); |
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Arrange a transaction on
behalf of a client with or through an authorised person
where: |
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The advice given to the client is by
an authorised person; or |
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It is clear that the client has not
sought advice from the professional firm. |
Exempt professional firms will in general
therefore be carrying on very different regulated activities
from IFA.
With regard to disclosure
rules most firms that were previously regulated for investment
business by their recognised
professional bodies (RPB) before 30 November 2001 will
be exempt professional firms from N2. The rules of the RPB
instruct the firms when they were allowed to disclose that
they are regulated for investment business. However, since
N2 exempt professional firms will not be authorised and the
Financial Services Authority will consider it misleading to
assume it is authorised.
Under Section 24(1) of the FSMA it is a
criminal offence for a person to describe himself as an authorised
person if he is not. Therefore, disclosure rules will require
an exempt professional firm to avoid any representation to
its clients that it is authorised by the FSA or that the regulatory
protection offered by the FSMA will apply.
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