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   Financial Services Law
  Financial Services Law
  Original approach   Reviewing the system
  Intermediaries   Financial Services and Markets Act 2000
     
     

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Original Approach
Parliament introduced a scheme of regulation for investment business as the Financial Services Act 1986 which came into effect from April 1988. At that time the Securities and Investment Board (SIB) was responsible for this regime and required that all investment businesses apply for authorisation through their respective self-regulatory organisations (SRO), by a recognised professional body (RPB) or be exempt from investment activity, otherwise it is a criminal offence to provide investment advice without authorisation or exemption with the maximum penalty of two years prison sentence, a fine or both.

To be authorised, a member must meet certain requirements as specified by their regulator such as capital adequacy and training. In October 1997 all functions of SIB were transferred to the Financial Services Authority (FSA). The Financial Services Act 1986 had a significant effect on intermediaries where polarisation rules differentiated between tied agents or company representatives selling the products of only one company and an independent financial adviser (IFA) providing unbiased advice.

Other rules deal with best advice, product disclosure, advertising, commissions, cold calling, customer agreements, product bias, inducements, churning and complaints. From N2 this act will be integrated and updated by the Financial Services and Markets Act 2000 (FSMA).


Intermediaries
The Financial Services Act 1986 introduced polarisation rules that had a significant effect in the way intermediaries represented their clients. As a result there are two types of adviser: those that sell the products of one company and are known as tied agents or company representatives and independent financial advisers that will review all the products available on the market and provide unbiased advice.

Within the FSMA the FSA is required to pursue four statutory objectives and in the context of polarisation the most relevant are consumer protection and public awareness. If it is seen that the statutory objects are not being achieved, then it will be reported that the system must change.


Reviewing the system
The director general of the Office of Fair Trading (OFT) has extensive responsibilities for reviewing the system covering consumer protection and encouraging competition. The OFT aims to maximise consumer welfare by; protecting consumers by preventing abuse; empowering consumers by giving them access to information and redress; and promoting competitive and responsible supply.

The OFT aims to promote competition and create efficient working of markets for goods and services by; removing or limiting restrictions on the competitive process; and improving the effectiveness of competition law. This will enable consumers to buy goods and services they want at the best possible price. The director general of the Office of Fair Trading is responsible under section 122 of the Financial Services Act 1986 to review the rules and practices of the financial services industry.

Their review reported that polarisation rules significantly restrict or distort competition by limiting innovation in the retail sale of packaged financial products. On 8 November 2000 the FSA and the Treasury announced steps to liberalise the polarisation rules to allow consumers greater choice. As a result of the director generals report to the treasury, the Financial Services Authority has liberalised polarisation and the government has introduced the Financial Services and Markets Act 2000 to replace and update the Financial Services Act 1986.


Financial Services and Markets Act 2000
Receiving Royal Assent on 14 June 2000, the Financial Services and Markets Act 2000 was brought into force after N2. The effect of this act will be to constitute the Financial Services Authority as a super-regulator, with powers to regulate insurance, investment business and banking. It will also abolish the Self-Regulating Organisations 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 scheme called the Financial Ombudsman Service (FOS);
   
The FSMA will appoint individuals within regulated firms to be registered with the FSA as approved persons.
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