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.
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The FSMA will
create the market abuse regime that will apply to members
of the public as well as regulated individuals; |
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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; |
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The
FSMA will create a single compensation and scheme called
the Financial
Ombudsman Service (FOS); |
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The FSMA will
appoint individuals within regulated firms to be registered
with the FSA as approved persons. |
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