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.