Commentary Financial Conduct Authority and Prudential Regulation Authority The FCA
92.New section 1A renames the FSA the “Financial Conduct Authority”. Subsection (4) requires the FCA to comply with the requirements set out in new Schedule 1ZA which makes provision in relation to the constitution of the FCA and other matters. Subsection (6) provides that references in the Act, or in any other enactment, to the FCA’s functions under FSMA includes its functions under the Act, the Insolvency Act 1986, the Banking Act 2009, and provisions of EU law specified by order by the Treasury for this purpose.
93.New section 1B sets out how the FCA must discharge its general functions, which are defined in subsection (6) as its functions of: making rules; preparing and issuing codes; giving general guidance; and determining the general policy and principles by reference to which it performs particular functions under the Act. In particular, the FCA must, so far as reasonably possible, act in a way which is compatible with its strategic objective (described in subsection (2)) and advances one or more of its operational objectives (described in new sections 1C, 1D and 1E). In addition, so far as is compatible with acting in a way which advances its consumer protection (new section 1C) or integrity (new section 1D) operational objectives, the FCA must discharge its general functions in a way which promotes effective competition in the interests of consumers (subsection (4)). The effect of this duty is that where the FCA decides to act in pursuance of an operational objective and has the choice between two options, one of which would have a negative impact on competition (option 1), the other which would have a positive impact on competition (option 2), the FCA must choose option 2 unless this would be incompatible with its objectives.
94.Subsection (5) provides that in discharging its general functions the FCA must also have regard to the regulatory principles which apply to the FCA and the PRA (as set out in new section 3B) and must have regard to the importance of taking action intended to minimise the extent to which it is possible for certain types of business to be used for a purpose connected with financial crime (as defined in new section 1H(3)). This duty is placed on the FCA (rather than the PRA) as the FCA is to have responsibility for regulating the conduct of business of authorised persons (and certain other entities) and is therefore best placed to take regulatory action to tackle financial crime.
95.New section 1C sets out the FCA’s “consumer protection” operational objective. Subsection (2) specifies the factors to which the FCA must have regard when it is considering what degree of protection for consumers may be appropriate in a particular instance. This list includes the “have regard” specified in subsection (2)(c) concerning the needs which consumers may have for the timely provision of information and advice that is accurate and fit for purpose. For example, should the FCA consider that consumers of a particular regulated financial service are not being provided with appropriate information at the right time (for example, before entering into an agreement for the provision of the service) then the FCA, in the interests of ensuring an appropriate degree of protection for those consumers, may make rules prescribing the information to be provided by firms. Similarly, the FCA could take steps in the course of discharging its general functions to specify the form in which information should be presented to certain kinds of consumers in order to ensure that it is fit for purpose, for example, in terms of being clear and fair (such as being drafted in plain English and identifying key facts) and generally being presented in a comprehensible format, or to specify that advice should cover certain matters in order to ensure that it is not misleading. The list also includes the “have regard” specified in subsection (2)(e) which specifies the general principle that those providing regulated financial services (as defined in new section 1H(2)) should be expected to provide consumers with a level of care that is appropriate having regard to the degree of risk involved in relation to the investment or other transaction and the capabilities of the consumers in question. Subsection (2)(f) requires the FCA to have regard to the differing expectations that consumers may have in relation to different kinds of investment or other transaction. Thus the FCA should have regard to the fact, for example, that consumers wishing to invest in a “social investment” product may expect a societal benefit from their investment, rather than a purely financial one
96.The requirement to “have regard” to certain matters in assessing whether an appropriate degree of protection has been provided does not prevent the FCA from having regard to other factors as may be appropriate in a particular instance.
97.“Consumers” is defined in new section 1G. This definition is an extended form of the definition used in sections 425A and 425B of FSMA. This is because the definition of “general functions” in the new section 1B extends to those functions under Part 6 of FSMA (official listing). Therefore it is appropriate, for example, for the definition to extend to listed issuers in their capacity of “consumers” of the regulated financial services provided by sponsors and primary information providers (defined in new section 1H(8)). This definition does not mean that the FCA is required to take a universal approach to determining what constitutes an appropriate degree of protection for consumers. Rather, the FCA can rely on this objective to address issues relating to the interests of different types of consumer in a wide range of markets for regulated financial services. For example, the FCA could determine that it is appropriate to make rules requiring authorised persons to disclose certain types of information before selling a financial product to a “retail” consumer, but may make no similar provision for cases in which authorised persons are dealing with certain types of “wholesale” customer on the basis that the latter category of customer can be reasonably expected to have a better awareness of the risks and features of investing in the product in question.
98.None of the FCA’s objectives impose on the FCA a statutory duty to take action, for example, to secure an appropriate degree of protection for all persons who fall within the definition of “consumer” nor should they be interpreted as establishing a standard of conduct to be expected of regulated firms. Instead, the objectives provide a mandate for the FCA to take action. The FCA could take action, for example, under its consumer protection objective for the purposes of protecting only one category of person who falls within the definition of “consumer”. The FCA need not ensure that action taken for the purposes of advancing this operational objective secures an appropriate degree of protection for all persons who fall within that definition. In addition, the FCA may take action in pursuance of this operational objective which has the effect of securing an appropriate degree of protection for one or more categories of person within the definition of consumer and which also has the effect of protecting persons who fall outside the definition.
99.New section 1D sets out the FCA’s “integrity” objective. The term “integrity of the UK financial system” has a non-exhaustive definition (subsection (2)). For example, the term includes, among other things, the soundness, stability and resilience of the financial system. Examples of action which the FCA may take in pursuance of this operational objective are: (i) the FCA may choose to exercise its powers make rules banning the short-selling of a financial instrument for the purposes of addressing a threat to the stability of the UK financial system; (ii) the FCA may choose to make rules to address risks of money laundering or the use of the financial system to fund terrorist activity; and (iii) the FCA may make disclosure rules under Part 6 of FSMA imposing requirements on listed issuers of financial instruments as to the information which must be disclosed to the market.
100.New section 1E sets out the FCA’s “competition” objective. The FCA may take action in pursuance of this operational objective to promote effective competition in the interests of consumers in the markets for services falling within the definition of “regulated financial services” (new section 1H(2)) and services provided by persons specified as recognised investment exchanges under Part 18 of FSMA. Subsection (2) lists a number of matters to which the FCA may have regard in considering the effectiveness of competition in a particular market. This is a non-exhaustive list of factors which may be relevant to the assessment of the effectiveness of competition but highlights a number of factors which are regarded as particularly indicative. These include: the ease with which consumers may access regulated financial services, including consumers in areas affected by social or economic deprivation (subsection (2)(b)); the ease with which customers can change the person from whom they obtain such services (subsection (2)(c)); and the ease with which new entrants can enter the market (subsection (2)(d)).
101.New section 1F defines the term “relevant markets” for the purposes of new section 1B(2). New section 1G defines the term “consumer” for the purposes of new sections 1B to 1E and new section 1H defines certain other terms for the purposes of new sections 1B to 1G. New section 1I defines the term “the UK financial system” for the purposes of FSMA.
102.New section 1J confers on the Treasury a power to make an order amending certain definitions (for example the definition of “consumer” and “regulated financial services” used for the purposes of new section 1E(1)(a) and (b), new section 1G and new section 1H(2) and (5) to (8)). This power could be used, for example, to amend the definition of “consumer” by adding a new category of person to that definition in order to ensure that the FCA could rely on its “consumer protection” operational objective for the purposes of discharging its general functions (for example the power to make rules) to protect consumers of the new regulated product or service. An order under this section is subject to the affirmative procedure (see the amendments to section 429 of FSMA made by section 49 of the Act).
103.New section 1K requires the FCA to include in general guidance issued under new section 139A (inserted by section 24) guidance on how it intends to advance its operational objectives in discharging its general functions in relation to different categories of authorised persons or regulated activity. For example, the FCA must give guidance as to how it proposes to regulate authorised persons who accept deposits differently from authorised persons who effect or carry on contracts of insurance.
104.Subsection (1) of new section 1L provides that the FCA must maintain arrangements for supervising authorised persons. The concept of “supervision” encompasses matters such as monitoring the activities of authorised persons in light of the FCA’s objectives, forming a view on the person’s long term strategy for doing business, providing advice and, where appropriate, warnings, monitoring compliance with regulatory requirements and taking disciplinary action where appropriate.
105.Subsection (2) of new section 1L requires the FCA to maintain arrangements designed to enable it to determine whether people who are not authorised persons are complying with regulatory requirements and, where appropriate, for enforcing compliance. For example, the FCA must maintain arrangements to monitor whether people are carrying on regulated activities in breach of the general prohibition in section 19 of FSMA and, where appropriate, take action against such persons.
106.New section 1M imposes on the FCA a duty to make and maintain effective arrangements for consulting practitioners and consumers on the extent to which its general policies and practices are consistent with its general duties specified in new section 1B such as the extent to which it has promoted competition in the interests of consumers in accordance with its duty under new section 1B(4).
107.New section 1N makes provision for the FCA Practitioner Panel and new section 1O places on a statutory footing the Smaller Business Practitioner Panel. New section 1P also establishes a Markets Practitioner Panel to represent the interests of persons likely to be affected by the exercise by the FCA of its functions relating to markets. New section 1Q makes provision for the Consumer Panel. New section 1R imposes on the FCA a duty to consider representations made in accordance with arrangements established under new section 1M.
108.New section 1S enables the Treasury to appoint an independent person to conduct a review of the economy, efficiency and effectiveness with which the FCA has used its resources in discharging its functions. New section 1T specifies that a person conducting a review under new section 1S has certain rights to access documents reasonably required for the purposes of the review, and to require a person holding, or accountable for, any such document to provide such information and explanations as are reasonably necessary for the review.
109.Part 1 of new Schedule 1ZA (The Financial Conduct Authority) sets out requirements for the FCA’s constitution and imposes certain obligations on the FCA. Part 2 deals with the status of the FCA. Part 3 makes provision in relation to penalties and fees and Part 4 gives the FCA and those who work for it limited immunity from liability in damages and makes other miscellaneous provisions such as specifying that any amount required by rules to be paid to the FCA may be recovered as a debt due to the FCA.
110.Paragraphs 2 to 6 of new Schedule 1ZA make provision in relation to the constitution of the FCA.
111.The FCA must have a governing body consisting of:
112.The majority of the members of the governing body of the FCA are to be non-executive members, including the chair (paragraph 2(3) and (4)). The appointment process and terms of service for the appointed members (which are determined by the Treasury) are designed to ensure the independence of the appointed members (paragraph 3(3) and (4)). In addition, the Bank’s Deputy Governor for prudential regulation is not to take part in any discussion by, or decision of, the FCA which relates to the exercise of the FCA’s functions in relation to a particular person, or a decision not to exercise those functions (paragraph 6). (The terms of service of the Bank’s Deputy Governor in his or her capacity as a member of the governing body of the FCA will be determined by the FCA).
113.Paragraph 5 provides for the acts of the FCA to be valid irrespective of a vacancy in the office of the chair of the FCA, the chief executive of the FCA or the Bank’s Deputy Governor for prudential regulation or a defect in the appointment of a person to any of those offices or of any other person as an appointed member (as defined in paragraph 2(6)). This is to prevent the FCA’s rules, and any action it takes in pursuit of its functions, being rendered invalid purely as a result of such a vacancy or defect in appointment.
114.Paragraph 8 allows the FCA’s functions, with the exception of its legislative functions, to be delegated. However, the governing body must discharge the legislative functions set out in sub-paragraph (3); these are: rule-making; issuing codes under sections 64 and 119 of FSMA; issuing statements of policy on, for example, financial penalties and other disciplinary measures; and giving directions relating to exemptions from the general prohibition. The governing body may delegate the function of issuing general guidance to a committee or sub-committee but not to an individual officer or member of staff (sub-paragraph (4)).
115.Paragraph 9 requires the FCA to maintain satisfactory arrangements for recording decisions made in exercise of its functions and the safe-keeping of those records.
116.Paragraph 10 requires the FCA to publish a record of each meeting of its governing body. The record must specify any decisions taken at the meeting (including decisions to take no action) and set out a summary of the deliberations in relation to each decision. The record is to be published within 6 weeks of the meeting unless no meeting has been held in that period whereupon the record is to be published within 2 weeks of the next meeting. This arrangement reflects the fact that the FCA’s governing body (which is expected to approve the record of each meeting prior to publication) is expected to meet once a month except in the summer when it is likely that there will be one month where no meeting is held. The record is not expected to contain confidential firm-specific information.
117.Paragraph 11 requires the FCA to report at least once a year to the Treasury on the discharge of its functions, and on the extent to which it has acted compatibly with its strategic objective and advanced its operational objectives. The FCA is also required to report on how far it has complied with its “competition” duty referred to in new section 1B(4); its consideration of its regulatory principles and the importance of taking action intended to minimise the extent to which it is possible for a business carried on by an authorised person or a recognised investment exchange, or in contravention of the general prohibition, to be used for a purpose connected with financial crime; and on such other matters as directed by the Treasury. The report must be accompanied by a statement setting out the remuneration of the members of the governing body, and any other information or reports the Treasury may direct. It must also include an account of the how the FCA has complied with the general duty to coordinate (section 3D), the use of the PRA powers of direction over the FCA (sections 3I and 3J), and how the FCA has cooperated with regulatory bodies outside the UK. The Treasury is to lay the report before Parliament. Paragraphs 12 and 13 require the FCA to hold a public meeting to discuss its annual report, and to publish a report of the meeting.
118.Paragraph 14 provides that the Treasury may require the FCA to comply with any provisions of the Companies Act 2006 dealing with accounts and audit which would otherwise not apply to it. A Treasury direction may modify provisions of the Companies Act 2006 dealing with accounts and audit in their application to the FCA.
119.Paragraph 15 provides for the FCA’s annual accounts to be audited by the Comptroller and Auditor General; the National Audit Office carries out audit functions of the Comptroller and Auditor General. The Treasury must lay before Parliament the certified accounts of the FCA and the report of the Comptroller and Auditor General on them.
120.Paragraph 16 specifies that, in relation to any of its functions, the FCA is not to be regarded as acting on behalf of the Crown and its members, officers and staff are not be regarded as Crown servants.
121.The FSA is a company limited by guarantee; prior to the Act coming into force, it was exempt by virtue of paragraph 14 of Schedule 1 to FSMA from the need to use “limited” as part of its name. Paragraphs 17 and 18 continue that exemption for the FCA.
122.Paragraph 19 provides that in determining its policy with regard to the level of penalties to impose under powers in the Act, the FCA may take no account of its expenses or anticipated expenses; there is to be no link or incentive to fund the FCA by levying penalties on the persons it regulates.
123.Paragraph 20 provides that the FCA, in respect of each of its financial years, must pay to the Treasury its penalty receipts after deducting and retaining its enforcement costs. Sub-paragraph (2) defines “penalty receipts” for this purpose as any amounts received by the FCA by way of penalties imposed under FSMA. Sub-paragraph (3) defines “enforcement costs” for these purposes as the expenses incurred by the FCA in connection with the exercise or consideration of the exercise of its enforcement powers (as defined by sub-paragraph (4)) in particular cases or the recovery of penalties. The effect of this provision is that the FCA may retain from penalty receipts funds to cover its enforcement costs. Sub-paragraph (6) provides that the Treasury may give a direction to the FCA as to how it is to comply with its duty under sub-paragraph (1); a direction may in particular specify what expenditure is or is not to be treated as an enforcement cost (for example, the costs of employing staff or engaging third parties to provide services to the FCA in connection with particular cases). Sub-paragraph (9) provides that the Treasury must pay into the Consolidated Fund any sums received under this paragraph.
124.Paragraph 21 requires the FCA to operate a scheme to ensure that penalty receipts which the FCA is, under paragraph 20, entitled to retain are applied for the benefit of regulated persons (as defined by sub-paragraph (2)). The scheme must ensure that those who have become liable to pay a penalty to the FCA in any financial year do not receive a benefit under the scheme in the following year.
125.Paragraph 22 requires the FCA to consult on these arrangements.
126.Paragraph 23 provides for a rule-making power for the FCA to raise fees to meet the costs it incurs in the discharge of its qualifying functions. Qualifying functions means its functions under FSMA, the Act, the Banking Act 2009, the Insolvency Act 1986, and certain EU legislation. It may use the fees to meet its expenses, to repay borrowing incurred and to meet expenses incurred in connection with the commencement of the Act, and to maintain adequate reserves. Sub-paragraph (7) requires that the FCA may not take into account any penalties which it has received, or expects to receive, in setting the fees under FSMA.
127.Paragraph 24 provides that fees may not be charged when a person gives notice of their intention to exercise EEA passporting rights under Schedule 3 to FSMA or where any person whose application for approval under section 59 has been granted.
128.Paragraph 25 provides immunity for the FCA and its members, officers and staff from liability in damages except where the act or omission is shown to have been in bad faith or where damages are sought under the Human Rights Act 1998. This immunity applies where the FCA or its staff are exercising investigative powers by virtue of an appointment by the PRA or the Bank under sections 166 to 169 of FSMA.
129.Paragraph 26 treats the actions of an accredited financial investigator (within the meaning of the Proceeds of Crime Act 2002) who is an employee of the FCA or undertaking an investigation for the FCA as being done in the exercise or discharge of a function of the FCA.
130.Paragraph 27 provides that any amount (other than a fee) which is required by rules to be paid to the FCA may be recovered as a debt due to the FCA.