Commentary Recognised investment exchanges and clearing houses Section 29 and Schedule 7: Powers in relation to recognised investment exchanges and clearing houses
351.Section 29(1) inserts new section 285A. New section 285A provides that for the purposes of Part 18, the FCA is the “appropriate regulator” in relation to recognised investment exchanges, and that the Bank is the “appropriate regulator” in relation to recognised clearing houses. Subsection (2) inserts new Schedule 17A to FSMA as set out in Schedule 7 to the Act.
352.Paragraph 1 of new Schedule 17A requires the Bank and the FCA to prepare and maintain a memorandum describing how they will work together in exercising their functions in relation to recognised bodies. Sub-paragraph (2) specifies the matters which must be included in the memorandum. Sub-paragraph (3) provides that a reference in paragraph 1 to a “function” of the Bank and FCA means any function however conferred. For example, it may be the case that a person specified as a recognised investment exchange is also the operator of a recognised payment system under Part 5 of the Banking Act 2009. In such a case the person would be regulated by both the Bank (under Part 5 of the Banking Act 2009) and the FCA (under Part 18). Therefore it is appropriate that the memorandum makes provision to ensure the authorities cooperate effectively whether in the discharge of functions under Part 18 of FSMA or, for example, under directly applicable European measures.
353.Paragraph 2 requires the Bank, the FCA and the PRA to enter into a memorandum setting out how they will work together in exercising their functions in relation to persons who are recognised bodies and who are also PRA-authorised persons, or are members of a group in which a member is a PRA-authorised person. The exemption from the requirement to be authorised to carry on regulated activities, which is conferred on a person as a result of recognition under Part 18, extends only to activities which are carried on for the purposes of, or in connection with, a person’s business as an investment exchange or a person’s business which consists of the provision of clearing services. Therefore, if a person wishes to carry on a regulated activity which is not part of such business that person will need to seek authorisation from the FCA (or PRA and FCA as the case may be) and may be regulated by more than one body. This memorandum ensures the effective coordination of the regulation of such persons.
354.Paragraph 3 requires the Bank and the FCA (and, if relevant, the PRA) to review a memorandum entered into under paragraph 1 or paragraph 2 at least once each calendar year. Each memorandum made under these paragraphs (and any revised memoranda) must be sent to the Treasury (paragraph 4) and made public (paragraph 6). The Treasury are required to lay before Parliament a copy of each memorandum they receive under paragraph 4 (paragraph 5).
355.Paragraph 7 requires the FCA to notify the Bank where it has issued a direction under section 128 (suspension of investigations) to a recognised clearing house to suspend or to refrain from conducting an inquiry under its rules. Such a direction may be given where the FCA considers it desirable or expedient in connection with the exercise or possible exercise of a power relating to market abuse.
356.Paragraph 8 requires the FCA to notify the Bank of any requirement imposed on a recognised clearing house under section 313A (power to require suspension or removal of financial instruments from trading).
357.Part 2 of the new Schedule 17A applies certain provisions of FSMA to the Bank in its capacity as the regulator of recognised clearing houses. These powers are available to the FCA in relation to the regulation of recognised investment exchanges and are therefore explicitly made available to the Bank in relation to recognised clearing houses subject to certain modifications (including as made by paragraph 9(2)).
358.Paragraph 10 applies certain provisions of the new Part 9A (rules and guidance) in relation to rules made by the Bank under any provision made by or under FSMA, for example in relation to rules made under section 293(1) (notification requirements) or under any power conferred by the Treasury in regulations made under section 286 (as modified by section 30 (recognition requirements: power of FCA and Bank to make rules). For example, sub-paragraph (1)(i) applies new section 138J, subject to the omission of certain provisions, which will require the Bank to consult before making rules unless the Bank considers that the delay in complying would be prejudicial to financial stability (sub-paragraph (4)).
359.Paragraph 11 makes available to the Bank the powers conferred by section 165(1) and (3), to require a recognised clearing house, or a person connected to a recognised clearing house, to provide specified information and to produce specified documents which are reasonably required in connection with the exercise by the Bank of the functions conferred on it under Part 18, any of its other functions in pursuance of its financial stability objective (so the Bank could require a recognised clearing house to provide information reasonably required by the FPC) (sub-paragraph (2)) or which would facilitate the discharge by the FCA of its regulatory functions.
360.Paragraph 12 makes available to the Bank the power conferred by section 166 in order that it may require a recognised clearing house to provide a report to the Bank on any matter in relation to which the Bank may require information under section 165 as applied by paragraph 11.
361.Paragraph 13 makes available to the Bank the power to appoint persons to carry out investigations into the nature, conduct or state of the business of a recognised clearing house, a particular aspect of that business, or the ownership or control of a recognised clearing house. Sub-paragraph (2) provides that a person appointed as an investigator is to have the powers conferred by section 172 (additional power of person appointed as a result of section 168(1) and (4)) and 173 (powers of persons appointed as a result of section 168(2)). For example, an investigator may require a person who is not the subject of the investigation or is not connected with the person under investigation to attend a meeting with the investigator.
362.Paragraph 14 makes available to the Bank the power to appoint investigators under section 168(5) in particular cases, for example if there are circumstances suggesting that a clearing house, in the context of an application to be a recognised body, has given the Bank false or misleading information.
363.Paragraph 15 provides that an overseas regulator may request the Bank to require information to be provided (in exercise of the power conferred by section 165 as applied by paragraph 11).
364.Paragraph 16 applies section 176 (entry of premises under warrant) such that a justice of the peace may issue a warrant if satisfied that there are reasonable grounds for believing that a person on whom an information requirement has been imposed by the Bank, or by a person appointed by the Bank, has failed to comply with it.
365.Paragraph 17 applies, with certain modifications, new sections 192C to 192N (inserted by section 27) to the Bank such that the Bank may issue a direction to a qualifying parent undertaking of a recognised clearing house which is not an overseas clearing house (within the meaning of section 313(1) of FSMA) where it considers that it is desirable to give the direction for the purpose of the effective regulation of one or more recognised clearing houses in that group. As a result of the application of new section 192J, the Bank may make rules requiring qualifying parent undertakings of recognised clearing houses to provide specified information or to produce documents of a specified description and makes available the disciplinary powers under new sections 192K to 192N. Sub-paragraph (6) imposes on the Bank a requirement to consult the FCA or the PRA before issuing directions under section 192E in certain cases (for example where the parent undertaking concerned is also the parent undertaking of a PRA-authorised person).
366.Paragraphs 18 to 21 apply sections 342 to 344 and 345A to 345E in relation to auditors of recognised clearing houses or persons with close links to such persons.
367.Paragraph 18 applies section 342 (information given by an auditor to a regulator) such that a person who is, or has been, an auditor of a recognised clearing house does not contravene any duty to which he is subject merely because he or she gives to the Bank information on a matter on which he has, or had, become aware in his capacity as an auditor of a recognised clearing house, or his opinion on any such matter. Section 342(5) (as applied) confers on the Treasury a power to make regulations prescribing the circumstances in which an auditor must communicate matters to the Bank. Paragraph 19 applies section 343 (information given by auditor: person with close links) which makes similar provision in relation to auditors of persons with close links with recognised clearing houses (as defined in subsection (8) as applied, for example, a parent undertaking of a recognised clearing house).
368.Paragraph 20 applies section 344 (duty of auditor resigning to give notice) such that an auditor of a recognised clearing house is required to give notice to the Bank where he resigns from office, or is removed from office by the recognised clearing house concerned.
369.Paragraph 21 applies new sections 345A to 345E (inserted into FSMA by paragraph 6 of Schedule 13) so as to make available to the Bank (in the event that an order is made by the Treasury under section 345A(1)) disciplinary powers in relation to relevant auditors who have, for example, failed to comply with a requirement to disclose information prescribed in regulations made by the Treasury under section 342 (as applied by paragraph 18).
370.Paragraph 22 applies section 347 (as amended by paragraph 37 of Schedule 8) to require the Bank to maintain a record of every recognised clearing house.
371.Paragraph 23 applies sections 348 (restriction on disclosure of confidential information by Authority etc) to 350 (disclosure of information by Inland Revenue) and 353 (removal of other restrictions on disclosure) in relation to any information received by the Bank. This has the effect, for example of requiring the Bank to keep information received in the discharge of its functions under Part 18 in confidence, save where specified gateways are available.
372.Paragraph 24 applies to the Bank in its capacity as regulator of recognised clearing houses various powers conferred by Part 24 of FSMA upon the regulator of authorised persons and recognised investment exchanges in the event of an authorised person’s / recognised investment exchange’s insolvency. These powers are as follows: the power to participate in court proceedings relating to a voluntary arrangement in connection with any recognised clearing house (section 356); the power to participate in court proceedings relating to trust deeds for creditors in Scotland in connection with any recognised clearing house (section 358); the power to make an application for administration of a recognised clearing house (section 359); the power to participate in proceedings where another person has made an administration application in respect of a recognised clearing house (section 362); the power to participate in receivership proceedings relating to a recognised clearing house (section 363); the power to participate in proceedings relating to the voluntary winding up of a recognised clearing house (section 265); the power to petition for the winding up of a recognised clearing house (section 371). Paragraph 24 also makes provision applying section 362A, with the effect that the Bank’s consent will be required to the appointment of an administrator in respect of a recognised clearing house.
373.Paragraph 25 confers on the Bank the power to apply for an order under section 423 of the Insolvency Act 1986 where a recognised clearing house has entered transactions at an undervalue while carrying on a recognised activity for the purposes of, or in connection with, the provision of clearing services.
374.Paragraph 26 gives the Bank the power to make an application to court under section 380(1), (2) or (3) for an injunction, for example, in the event that the Bank consider it reasonably likely that a recognised clearing house will contravene a relevant requirement (which is defined in sub-paragraph (2)).
375.Paragraph 27 makes available to the Bank the power to apply to the court for an order requiring a person to make a payment where it is satisfied that a person has contravened a relevant requirement and that profits have accrued as a result of the contravention. The definition of “relevant requirement” for this purpose is set out in paragraph 26(2).
376.Paragraph 28 gives the Bank the power to require a recognised clearing house to make a payment where the condition in sub-paragraph (2)(a) or (b) is met.
377.Paragraph 29 applies the provisions of Part 26 (notices) in relation to warning or decision notices given by the Bank under new section 192L (qualifying parent undertakings) (inserted by section 27), and under new section 312G (proposal to issue a public censure or impose a financial penalty) and new section 312H (decision to issue a public censure or impose a financial penalty) (inserted by section 33). For example, section 387 sets out the matters which must be included in a warning notice.
378.Paragraph 30 applies section 398 such that it is an offence for a person, who, in purported compliance with a requirement listed in that paragraph knowingly or recklessly gives the Bank information which is false or misleading.
379.Paragraph 31 provides that the Bank may initiate proceedings with regard to the prosecution of certain offences under the Act (as specified in sub-paragraph (1)).
380.Paragraph 32 applies paragraph 17 of Schedule 1ZB which has the effect of requiring the Bank to put in place arrangements for the recording of decisions made by the Bank in the exercise of its functions relating to recognised clearing houses.
381.Paragraph 33 applies paragraph 19 of Schedule 1ZB and has the effect of requiring the Bank to produce an annual report concerning the discharge of its functions relating to recognised clearing houses. The Bank is required to provide the Treasury with a copy of the report, which the Treasury must lay before Parliament.
382.Paragraph 34 requires that the Bank must be given notice of (1) any application for an administration order; (2) any petition presented for a winding up order; (3) any proposed resolution for a voluntary winding up order or (4) any proposal to appoint an administrator in respect of a UK clearing house. The term “UK clearing house” is defined for the purposes of Part 18 of FSMA in section 313 of FSMA, as amended by paragraph 36 of Schedule 8. A copy of the notice given to the Bank is required to be filed (in Scotland, lodged) with the court. Once the Bank has received any such notice, the application for the relevant order, resolution or appointment may not be determined until two weeks have elapsed from the day upon which the Bank received the notice unless the Bank has informed the person who gave the notice that it has no objection to the application and does not intend to exercise a stabilisation power under Part 1 of the Banking Act 2009 in respect of the UK clearing house concerned.
383.Paragraph 35 confers on the Bank the power to direct persons appointed as insolvency practitioners in relation to a company which is, or which has been a UK clearing house. Before giving any direction under this power, the Bank must (1) be satisfied that it is desirable to give the direction, having regard to the public interest in protecting and enhancing the stability of the UK financial system; protecting and enhancing public confidence in the stability of the UK financial system and maintaining the continuity of central counterparty clearing services, and (2) consult with the Treasury, the FCA, and where the UK clearing house in question is a PRA-authorised person, the PRA. The term “central counterparty clearing services” is defined for the purposes of Part 18 of FSMA section 313 of FSMA, as amended by paragraph 36 of Schedule 8.
384.Any direction given to an insolvency practitioner pursuant to paragraph 35 would have to be compatible with the statutory provisions governing corporate insolvency proceedings; and sub-paragraph (4) provides that the directions are enforceable by an injunction (or in Scotland by an order for specific performance under section 45 of the Court of Session Act 1988). When acting (or taking no action) in accordance with a direction under paragraph 35, the insolvency practitioner will not be liable for damages, provided that the practitioner’s action (or inaction) was not in bad faith or in contravention of section 6(1) of the Human Rights Act 1998.
385.Paragraph 36 provides that the Bank may require recognised clearing houses to pay fees in connection with the discharge of its qualifying functions including functions under or as a result of Part 18.
386.Paragraph 37 provides that any fees owed to the Bank under paragraph 36 may be recovered as a debt due to the Bank.