3â The Financial Services Authority

467 3â The Financial Services Authority

of the UK Listing Authority, which it undertook under substantially the same parameters as previously exercised by the London Stock Exchange.

Importantly, the FSA was given four statutory objectives: to maintain market confidence, to promote the public’s understanding of the financial services sector, to maintain consumer protection and to reduce financial crime.11 The purpose of the FSMA 2000 was to provide the FSA with an adequate statutory framework within which to operate, and to provide for the regulation and authorisation of businesses, including banks, building societies, insurance companies, friendly societies, credit unions, Lloyd’s, investment and pension advisers, stockbrokers, professional firms, fund managers and derivatives traders. Also under the provisions of the FSMA 2000, a Financial Services and Markets Tribunal was created, a single ombudsman was provided for under the new law and an improved compensation scheme was established to provide further protection for consumers.

A central objective of the FSMA 2000 was to modernise the financial regulatory arrangements that were contained in numerous pieces of legislation. Previously, financial services providers were regulated under the Credit Unions Act 1979, the much criticised Financial Services Act 1986, the Building Societies Act 1986, the Banking Act 1987 and the Friendly Societies Act 1992. The FSMA 2000 provides that if a person intends to undertake a regulated activity in the United Kingdom, they must either be authorised to do so by the FSA or exempt under the provision of the Act.12 If a person undertakes a regulated activity without authorisation by the FSA or an exemption, they are liable to criminal prosecution and could be subject to a custodial sentence of two years and/or a fine.The definition of a regulated activity is contained in the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001.13 Examples of regulated activities include accepting deposits, issuing e-money, dealing in investments, arranging home finance activities, managing investments, safeguarding and administering investments, advising on investments, advising on home finance activities, entering into funeral plan contracts, and agreeing to do most of the above activities. In order for an activity to be a regulated activity it must be carried on ‘by way of business’.14

(b)â FSA Handbook

The FSMA 2000 provides that the FSA is required to exercise its rule-making powers in writing through ‘rule-making instruments’.15 This is more commonly referred to as the FSA Handbook. This is an extremely extensive and detailed document that outlines the FSA’s rules and guidance, which have been issued

11For a more detailed discussion of these objectives and the amendments introduced by the Financial Services Act 2010, see Part 6 Chapter 1.

•Unfair Contract Terms Regulatory Guide (UNFCOG), which sets out the FSA’s powers under the Unfair Terms in Consumer Contract Regulations 1999, SI 1999/2083 and explains the FSA’s approach to using them.

The Handbook uses a series of letters to categorise its rules and provisions. For example, the letter R refers to general rules made under the FSMA 2000,17 specialised rules18 and listing rules.19 The great majority of the rules in the Handbook impose legal obligations on a regulated firm and, if breached by a firm, the FSA is entitled to utilise its extensive array of enforcement powers. The letter E relates to evidential provisions,20 and is also used in the Code of Practice for Approved Persons21 and in certain circumstances in the Code of Market Conduct.22 The letter G is utilised in relation to guidance under the FSMA 2000.23 D refers to directions and requirements under the 2000 Act.24

(c)â FSA Principles for Business

In October 1998, the FSA published a consultation paper that outlined its views on the creation of its Principles for Business.25 The FSA proposed to establish eight Principles for Business:

(1)Integrity: a firm must conduct its business with integrity;

(2)Skill, care and diligence: a firm must conduct its business and organise its affairs with due skill, care and diligence;

(3)Management and control: a firm must organise and control its affairs effectively;

(4)Prudence: a firm must conduct its business;

(5)Market conduct: a firm must observe proper standards of market conduct;

(6)Customers– general: a firm must pay due regard to the interests of its customers and treaty them fairly;

(7)Customers– relationships of trust: a firm must keep faith with any customer who is entitled to rely upon its judgement;

(8)Relations with regulators: a firm must deal with its regulators in an open and co-operative way.26

In October 1999, the FSA revised the principles and extended the number from eight to eleven.27 The current principles are:

1.A firm must conduct its business with integrity.

2.A firm must conduct its business with due skill, care and diligence.

27FSA, The FSA Principles for Businesses, Response on Consultation Paper 13 (London, 1999) 4. See also K. Connolly, ‘FSA response paper on principles for business’ (1999) 11(7) Journal of International Financial Markets N86.

3.A firm must take reasonable care to organise and control its affairs responsibly and effectively, with adequate risk management systems.

4.A firm must maintain adequate financial resources.

5.A firm must observe proper standards of market conduct.

6.A firm must pay due regard to the interests of its customers and treat them fairly.

7.A firm must pay due regard to the information needs of its clients, and communicate information to them in a way which is clear, fair and not misleading.

8.A firm must manage conflicts of interest fairly, both between itself and its customers and between a customer and another client.

9.A firm must take reasonable care to ensure the suitability of its advice and discretionary decisions for any customer who is entitled to rely upon its judgement.

10.A firm must arrange adequate protection for clients’ assets when it is responsible for them.

11.A firm must deal with its regulators in an open co-operative way, and must disclose to the FSA appropriately anything relating to the firm of which the FSA would reasonably expect notice.

The Principles have been described as a ‘keystone in the FSA Handbook’,28 and they ‘articulate the actions and behaviours that [the FSA] expect from firms’.29 The importance of the Principles is highlighted in the FSA Handbook.30

(d)â Risk-based approach

One of the most important and controversial aspects of the regulatory approach adopted by the FSA is its risk-based approach. The FSA outlined its risk-based approach towards financial regulation in 1997 when it stated that it would assume an adaptable method of supervision by targeting specific business practices and the level of risk associated with certain markets and firms. This means that a firm will be able to allocate its resources in a cost-effective and proportionate way so that it can focus on the most relevant risks from money laundering that it faces. The FSA has adopted a two stage policy. First, it has devised a list of services and products that categorise risk status, and secondly, it has put in place a new set of procedures to ensure that firms verify the identity of a client. The risk-based approach of the FSA towards the regulated sector will vary between the ‘highest’ and ‘lowest’ at-risk firms. According to the FSA, the most at-risk sections of the financial services industry are international banking in

28FSA, Principles for Business, above n. 25, at 6.

29FSA, ‘Principles-based regulation: looking to the future’, speech by John Tiner, Chief Executive Officer FSA, FSA Insurance Sector Conference, 21 March 2007, available at www.fsa.gov.uk/ pages/Library/Communication/Speeches/2007/0321_jt.shtml.

30The Full Handbook (London, 2011) Principle 2.1.

472 Banking regulation

on senior management. From a consumer’s point of view, a Principles-based approach can cultivate a culture of improvement and competition in the financial services sector.38 The Principles-based approach represents a move away from a risk-based approach, but the FSA has stated that ‘risk-based regulation will remain central to determining how we prioritise our resources, as principlesbased regulation steers our expectations of firms and the way we deal with them’.39

Q2 What is the risk-based approach of the FSA towards banking regulation?

(f)â Authorisation

In order for a regulated firm to undertake an activity or range of activities under the FSMA 2000, it generally has to be authorised by the FSA.40 Section 19 of FSMA 2000 provides that a person who undertakes a regulated activity must be authorised to do so, and may be liable to criminal proceedings and/or a fine if they perform such activities and are not authorised.41

(g)â Enforcement powers

Part II of the FSMA 2000 empowers the FSA and 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. The powers provided in this Part of the FSMA 2000 are in addition to the specific powers that the FSA has under the Act. These provisions allow the FSA to obtain information on an ad hoc basis and therefore supplement the FSA’s ability to make rules that require an authorised person to provide it with information on a routine basis under its general rule-making power. Section 165 of the FSMA 2000 provides that the FSA has the power to require information or documents that may reasonably be required in connection with the discharge of its functions under the FSMA 2000. The information or documents can be required from any person, including a legal person; this would include an authorised person, a formerly authorised person, a person connected with an authorised person, an operator, a recognised investment exchange and a recognised clearing house. Section 166 confers on the FSA the power to require an authorised person or a formerly authorised person to commission a report and provide it to the FSA in any manner which the FSA might specify. This is an important power for the FSA, as it enables them to require such reports from other persons carrying on a business who are, or were, connected to the

38 See FSA speech by John Tiner, above n.29.â 39â FSA, Focusing on Outcomes, above n. 31, at 4.

40The activities are those listed in the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001, SI 2001/3544.

41For a more detailed discussion of the authorisation mechanisms under FSMA 2000 see Financial Services Authority, ‘How do I get authorised’ (n/d), available at www.fsa.gov.uk/pages/doing/ how/index.shtml.