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Regulated businesses

Financial services

This section contains the following topics:

Introduction and legislative history


Regulated activities


 Specified benchmarks


  Crowd funding


  Consumer credit


  Meaning of investments

Cryptocurrency

PRA and FCA authorisation


Exempted persons


Collective investment schemes


Financial promotion


Prospectus regulation


Enforcement
  Civil enforcement
  Financial Ombudsman Service
  Criminal enforcement


Market abuse regulation

Financial Services Compensation Scheme

Payment Services Regulations


Electronic Money Regulations


Introduction and legislative history

Financial services are regulated under very complex legislation contained in the Financial Services and Markets Act 2000 (as amended) together with extensive statutory regulations made under the act and detailed rules of conduct issued by the Financial Conduct Authority (formerly the Financial Services Authority) and the Prudential Regulatory Authority.

Legislation has been largely driven by a succession of financial scandals and mis-selling of investments of various kinds, as well more recently by EU legislation.

Prevention of Fraud (Investments) Act, 1939 and 1958


The regulation of financial services in the UK dates from 1939 with the Prevention of Fraud (Investments) Act, 1939 which was superseded by an act of the same name in 1958. This legislation was limited to to the regulation of dealers in certain securities who were not members of the London Stock Exchange or otherwise exempt, and the restriction of distribution of circulars relating to securities..

Financial Services Act 1986


In the 1970s and 1980s, a number of financial scandals int the UK financial services sector involved mis-selling of personal pension schemes, endowments and split capital investment trusts. These scandals prompted the government to appoint the Wilson Committee in 1980 to review the financial system and later Professor Laurence Gower to consider new legislation.


These reports were followed by the Financial Services Act 1986 which extended regulation to a wide range of investment business. The 1986 Act introduced the system of so-called self-regulatory bodies (SROs) including the SFA, IMRO, FIMBRA and LAUTRO. The overall regulator was the Securities and Investment Board (SIB). The regulatory scheme was to require investment businesses to join and submit to the regulation of the SRO appropriate to their sector.The 1986 Act also regulated the communication of invitations to acquire or dispose of investments (known as 'financial promotion'), and the creation of so-called collective investment schemes.Banks, insurance companies and the Lloyds of London insurance market, and cooperative and mutual societies were regulated under separate legislation.

Financial Services and Markets Act 2000


It became apparent that the SRO system was over-complex, costly and inefficient. The Labour Government initiated the replacement of the 1986 Act by the Financial Services and Markets Act 2000 which introduced a new single regulator known as the Financial Services Authority (FSA). This Act adopted many of the regulatory provisions of the 1986 Act, but added the regulation of bank and "deposit taking", insurance companies and the Lloyds insurance market., and cooperative and mutual socieities.

The FSMA also created the Listing Authority to regulate The London Stock Exchange and other share markets. The Act was later amended to implement (among other things) the EU Prospectus Regulations regarding the public offer and trading in certain securities.

Financial Services Act 2012


In the light of the 2008 banking crisis and other major developments in the financial services sector, the Coalition Government introduced the Financial Services Bill which received Royal Assent on 19 December 2012. The Financial Services Act 2012 came into force on 1 April 2013 and introduced the following major reforms:

* the Bank of England was given responsibility for protecting and enhancing financial stability, bringing together macro and micro prudential regulation;

* the Financial Services Authority (FSA) was replaced by the Financial Policy Committee, the Prudential Regulation Authority and the Financial Conduct Authority (FCA);

* the authorities were empowered to look beyond ‘tick-box’ compliance and foster a regulatory culture of judgment, expertise and proactive supervision;

* the FCA was givent a new product intervention power in the Act, which enables the regulator to act quickly to ban or impose restrictions on financial products. The FCA also has new powers of disclosure to publish details of warning notices issued in relation to disciplinary action and a new power to take formal action against misleading financial promotions and disclose the fact it has done so; and

* provision is made for the transfer of consumer credit regulation from the Office of Fair Trading to the FCA. The FCA will take on responsibility for consumer credit regulation from 1 April 2014.

Financial Services (Banking Reform) Act 2013


The Financial Services (Banking Reform) Act 2013 received Royal Assent on 18 December 2013. The Act implemented the recommendations of the Independent Commission on Banking (ICB) and key recommendations of the Parliamentary Commission on Banking Standards (PCBS). The chief provision of the 2013 Act was the ‘Ring-fencing’ of UK financial institutions


UK institutions (i.e. UK incorporated banks with the possibility of adding building societies) which carry on ‘core activities’ will have to be ‘ring-fenced’. The only core activity defined in the Act is accepting deposits. The Treasury will have power to make exceptions and to add other core activities. For example, the Treasury may introduce a small bank exemption and may exclude banking services for high net worth individuals or large companies from the definition of core activity.


Ring-fenced institutions will not be allowed to carry on ‘excluded activities’. Only one activity is defined as such in the Act, namely ‘dealing in investments as principal’ (or the firm trading on its own account).The Treasury will have power to provide exceptions so that in some circumstances a ring-fenced firm could undertake its own trades.

Read more on the  Financial Services (Banking Reform) Act 2013.

What’s new item on this topic [see What’s new page or archive for full item]:

26/02/2014: Financial Services (Banking Reform) Act 2013 (Commencement No 1) Order 2014
This Order (SI 2014/377) is the first commencement order to be made under the Financial Services (Banking Reform) Act 2013. The Order brings into force (among other things) provisions relating to ring-fencing transfer schemes and regulatory regime for payment systems in the UK and the Payment Systems Regulator.

19/12/2013: Responses published on Banking draft secondary legislation consultation
The Government has published the responses to the consultation undertaken on the  four draft statutory instruments to be made in order to implement the Financial Services (Banking Reform) Act 2013 (see What’s New item: 19/12/2013: Banking Reform Bill receives Royal Assent).
The four statutory instruments to be made are the:
* Ring-fenced Bodies and Core Activities Order;
* Excluded Activities and Prohibitions Order;
* Banking Reform (Loss Absorbency Requirements) Order; and
* Fees and Prescribed International Organisations RegulationsNext steps: the Government plans to have all legislation necessary to implement the recommendations of the Independent Commission on Banking in place by the end of the current Parliament.

Regulated activities

The scheme of the FSMA is to forbid any person from carrying on of any "regulated activity" by way of business unless the person is authorised by the FCA or is exempt from regulation. The regulated activities are defined in detail in the  Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 (SI 2001/544) (as amended) (RAO).

Very broadly, the following activities are regulated (but the exact scope of and exclusions from the definitions must be read in the RAO):

•accepting deposits
•issuing e-money
•effecting or carrying out contracts of insurance as principal
•dealing in investments (as principal or agent)
•arranging deals in investments
•arranging home finance activities
•operating a multilateral trading facility
•managing investments
•assisting in the administration and performance of a contract of insurance
•safeguarding and administering investments
•sending dematerialised instructions
•establishing collective investment schemes
•establishing stakeholder pension schemes
•providing basic advice on stakeholder products
•advising on investments
•advising on home finance activities
•Lloyd's market activities
•entering funeral plan contracts
•entering into a home finance activity
•administering a home finance activity
•agreeing to do most of the above activities

Recent additions to the list of regulated activities

Specified benchmarks

The Financial Services Act 2012 (FSA 2012) amended the FSMA to give the Treasury power to add the following activities to the list of regulated activities:

* information about a person's financial standing;
* the setting of a 'specified benchmark'

The Treasury has amended the RAO so that with effect from 2 April 2013 the London Interbank Offered Rate, also known as 'LIBOR' is a 'specified benchmark'. Legaleze comment: this regulation was made in the light of the LIBOR rate fixing scandal.

What’s new item on this topic [see What’s new page or archive for full item]:

3/12/2014 FCA to regulate seven other benchmarks alongside LIBOR
Source: GOV.UK

In its response to the consultation on the possible extension of the legislation, HM Treasury has stated that legislation put in place to regulate LIBOR will be extended to cover seven other benchmarks, including WM/Reuters 4pm London Fix, the dominant global foreign exchange benchmark, and the Sterling Overnight Index Average (SONIA) and Repurchase Overnight Index Average (RONIA), which both serve as reference rates for overnight index swaps.

Any manipulation of the above benchmarks will therefore become a criminal offence, in the same way as manipulation of LIBOR.

The legislation will also be extended to cover:

* ISDAFix, which is the principal global benchmark for swap rates and spreads for interest rate swap transactions;

* London Gold Fixing and the LMBA Silver Price, which determine the price of gold and silver in the London market;

* ICE Brent index, which acts as the crude oil market’s principal financial benchmark

The legislation will also mean the administrators of, and submitters to, these benchmarks will be subject to a number of rules to a number of specific rules, and authorised firms will face a range of sanctions if they breach any of the Financial Conduct Authority’s (FCA) rules and principles—including financial penalties, suspensions and censures.

The Government intends to lay the necessary legislation early in 2015, so that the proposed legislative changes can be debated before Parliament. A revised statutory instrument has been published alongside the government response. In addition, the FCA is consulting on draft rules on its approach to regulation the benchmarks. The government intends for the legislation to commence on 1 April 2015.

04/02/2014: First day of business for new LIBOR administrator
ICE Benchmark Administration Ltd took responsibility for administering the London Inter Bank Offered Rate (LIBOR) on 3 February 2014. 
LIBOR was formerly administered by the British Bankers Association. The transfer of the administration of LIBOR was one of the key recommendations in the Wheatley Review, which followed allegations of LIBOR manipulation in 2012. Following a tendering process, ICE Benchmark Administration Ltd were considered the best placed to restore the international credibility of LIBOR.

Cryptocurrency

AAccording to the Financial Conduct Authority, cryptocurrency is a virtual currency that is not issued or backed by a central bank or government. They have experienced significant price volatility in the past year which, in combination with leverage, places you at risk of suffering significant losses and potentially losing more than you have invested.

What’s new items on Crytocurrency [go to What’s new? page or archive for more details]:

14/03/2018 Leading cryptocurrency exchange granted UK licence

Source: Financial Conduct Authority

Coinbase, one of the world's largest cryptocurrency exchanges, has been granted a licence from the Financial Conduct Authority (FCA). The company said this licence acted as an endorsement of its anti-money laundering and processing standards. Chris Hill, commercial technology partner at Kemp Little, thought the licence could give investors confidence to do business with such entities in future. Jonathan Rogers, partner at Taylor Wessing, says the demonstrable compliance Coinbase has shown to receive this licence could be an important part of cryptocurrency becoming part of the mainstream, while Bradley Rice, senior regulation lawyer at Ashurst, believes the move was 'bigger than cryptocurrencies' in its import. Nigel Rowley, managing partner at Mackrell Turner Grant, says the licence was a 'positive step' for the cryptocurrency market, but warned lawyers to remain cautious about the market.

Initial Coin Offerings

The FCA has issued warnings about ICOs

According to the Financial Conduct Authority, initial coin offerings (ICOs) are a form of raising funds from the public using a virtual currency, also known as cryptocurrency. An ICO can also be known as ‘token sale’ or ‘coin sale’. ICO issuers accept a cryptocurrency, like Bitcoin or Ether, in exchange for a proprietary ‘coin’ or ‘token’ that is related to a specific firm or project. ICOs vary widely in design. The digital token issued may represent a share in a firm, a prepayment voucher for future services or in some cases offer no discernible value at all. Often ICO projects are in a very early stage of development.

Are ICOs regulated by the FCA?

Whether an ICO falls within the FCA’s regulatory boundaries or not can only be decided case by case.

Many ICOs will fall outside the regulated space. However, depending on how they are structured, some ICOs may involve regulated investments and firms involved in an ICO may be conducting regulated activities.

Some ICOs feature parallels with Initial Public Offerings (IPOs), private placement of securities, crowdfunding or even collective investment schemes. Some tokens may also constitute transferable securities and therefore may fall within the prospectus regime.

Businesses involved in an ICO should carefully consider if their activities could mean they are arranging, dealing or advising on regulated financial investments. Each promoter needs to consider whether their activities amount to regulated activities under the relevant law. In addition, digital currency exchanges that facilitate the exchange of certain tokens should consider if they need to be authorised by the FCA to be able to deliver their services.

Crowd funding

Most forms of arranging crowdfunding will be regualted activities and/or financial promotions subject to the Financial Services and Markets Act 2000 and therefore regulated by the Finanxial Conduct Authority.

Further information is available from the FCA pages onn crowdfunding and authorisation.

Types of crowdfunding referred to by the FCA as being regulated are:

* loan-based crowdfunding: also known as ‘peer-to-peer lending’, this is where consumers lend money in return for interest payments and a repayment of capital over time


* investment-based crowdfunding: consumers invest directly or indirectly in new or established businesses by buying investments such as shares or debentures

* donation-based crowdfunding: people give money to enterprises or organisations they want to support

* pre-payment or rewards-based crowdfunding: people give money in return for a reward, service or product (such as concert tickets, an innovative product, or a computer game).

Consumer credit business

The Consumer Credit Act 1974 (as amended) (“CCA”) introduced regulation of consumer credit business and consumer hire business have been regulated and subordinate legislation. A licence issued by the Office of Fair Trading is required to carry on business.

Pawn broking: insofar as it involves consumer credit business, is regulated under this legislation.

The CCA was substantially amended by the Consumer Credit Act 2006 and regulations made in order to implement amendments required by Directive 2008/48/EC of the European Parliament and of the Council on credit agreements for consumers (OJ No L133, 22.5.2008, p66).

The CCA regime has been re-structured in the process of the regulation of consumer credit businesses being transferred from the Office of Fair Trading to the Financial Conduct Authority with effect from 1 April 2014.

The Financial Services and Markets Act 2000 (Regulated Activities) (Amendment) (No 2) Order 2013 (2013 No 1881) provided that with effect that with effect from 1 April 2014, the following activitiesl became regulated activities (formerly regulated under the Consumer Credit Act 1974):

* Credit broking etc;
* Activities relating to debt;
* Entering into etc a regulated credit agreement;
* Provision of credit information services

Comment: in a bad example of what in our view is messy legislation, the CCA has been emasculated by legislative reforms introduced under the Financial Services Act 2013 and secondary legislation, notably the Financial Services and Markets Act 2000 (Regulated Activities) (Amendment) (No 2) Order 2013 ( 2013 No 1881).
The CCA was a coherent piece of legislation. Now, however, some of the basic definitions such as a consumer credit agreement and consumer hire agreement have been left in the CCA but much of that Act has been repealed. The detailed regulation, and the regime for regulationg consumer credit businesses, will as from 1 April 2014 be subject to the Financial Services and Markets Act 2000 and subordinate legislation including the Regulated Activities Order.

For further information on the new regime regulated by the FCA, see the FCA pages on Consumer credit firms.

What’s new items on Consumer credit [go to What’s new? page or archive for more details]:

02/12/2014: New FCA credit rules aim to protect consumers from unfair treatment
http://www.fca.org.uk/news/ps14-18-credit-broking-and-fees

The Financial Conduct Authority (FCA) is introducing rules which will ban credit brokers from charging fees to customers and from requesting customers’ payment details for that purpose, unless they comply with new requirements ensuring customers are given clear information about who they are dealing with, what fees apply and how to pay the fee.

Consumers will also have a 14-day right of cancellation where credit broking contracts are entered into as distance contracts, eg online. The new rules aim to tackle poor practice in the credit broking market, which is causing serious detriment to consumers. They come into force on 2 January 2015.

Pay day loans:

13/11/2014: Price cap rules to come into force for payday loans in January 2015

The Financial Conduct Authority (FCA) will implement its proposals to introduce price cap rules for ‘payday lenders’ following consultation and consideration of the responses. The new rules are due to come into effect from 2 January 2015.

Among other things, the effect of the new rules will be that no borrower will ever pay back more than twice the amount which they borrowed, and a borrower taking out a loan for 30 days and repaying on time will not pay more than £24 in fees and charges per £100 borrowed.

Comment: the FCA has commented that of the 400 companies that offer payday lending as part of their business, only up to four are likely to survive after the new caps come into effect. The most likely survivors will be Wonga, QuickQuid and Dollar Financial which represent around 70 per cent of the market.

12/11/2014: Plevin v Paragon Personal Finance Ltd

[2014] UKSC 61 Hearing Date: 2 November 2014 Supreme Court
http://www.bailii.org/uk/cases/UKSC/2014/61.html

The Supreme Court, has dismissed the appeal of Paragon Personal Finance Ltd, the defendant credit company, [see Plevin v Paragon Personal Finance Ltd and anor; Conlon v Black Horse Ltd Hearing Date: 16 December 2013.]

Meaning of 'investments'

'Investments' are defined in the RAO and include broadly:

•deposits
•electronic money
•rights under a contract of insurance
•shares
•instruments creating or acknowledging indebtedness
•sukuk (shariah compliant debt instruments)
•government and public securities
•instruments giving entitlement to investments
•certificates representing certain securities
•units in a collective investment scheme
•rights under a stakeholder pension scheme
•rights under personal pension scheme
•options
•futures
•contracts for differences
•Lloyd's syndicate capacity and syndicate membership
•rights under funeral plan contracts
•rights under regulated mortgage contracts
•rights under a home reversion plan
•rights under a home purchase plan
•rights to or interests in anything that is a specified investment listed, excluding 'Rights under regulated mortgage contracts', 'Rights under regulated home reversion plans' and Rights under regulated home purchase plans'

Guidance is available on the website of the Financial Conduct
Authority, especially under the pages ' Do I need to be authorised?'. There is also authoritative guidance on the scope of some of the regulated activities in the FCA's 'Perimeter Guidance Manual' (PERG).

PRA and FCA authorisaton

By virtue of the changes to the FSMA made by the FSA 2012, the Prudential Regulatory Authority (PRA) was established as a part f the Bank of England as the Regulator of banks and other deposit-taking institutions, insurance companies and major investment firms. The Financial Services Authority was abolished and the Financial Conduct Authority (FCA) was established in its place.

The PRA is responsible for granting authorisation to banks, building societies, credit unions, insurance companies and Lloyds insurance market syndicates, and certain major investment firms which may present significant risks to the stability of the financial system. The PRA is developing its 'Handbook' containing the detailed rules and guidance affecting the regulation of PRA regulated firms.

The FCA is responsible for regulating all other firms carrying on regulated activities. The FCA maintains the 'FCA Handbook' containing the detailed rules and guidance affecting authorised firms. The PRA and the FCA have a working protocol to deal with regulation of firms which are dually regulated by the PRA and the FCA.

Applications for authorisation: the detailed requirements and procedures for PRA and FCA authorisation are set out in the respective Handbooks. In summary, the firm must meet certain 'threshold conditions', and certain persons who are deemed to be 'controllers' of the firm and persons exercising 'controlled functions' (such as senior managem,ent and persons advising customers) must be approved.

Tacit consent: given the very complex and specific provisions of the FSMA relating to the authorisation of firms to carry on regulated activities,tacit consent does not apply.

Permissions: if a firm's application is approved, the PRA or the FCA will specify in the firm's 'permissions' the precise scope of the regulatory activities which the firm will be allowed to carry out.

Legaleze comment: the application process, and compliance with the detailed rules thereafter, is a complex and onerous process. Expert advice should be obtained.

The Financial Services Register is the official database of all authorised firms. This register should be consulted to verify whether a particular firm is authorised, and to check the scope of its permissions, the identity of individuals carrying out 'controlled functions' within the firm, any disciplinary measures taken, the names of any appointed representatives, and other details.

Exempted persons

Certain categories of persons are exempt from authorisation under the FSMA including among others:

* EEA firms authorised by their home regulator and entitled to 'passport' their authorisation in the UK;
* Financial publishers and writers which meet the conditions;
* Appointed representatives who accept supervision for certain activities by authorised firms;
* Firms which are regulated by a Designated Professional Body andapproved by such body to carry out certain limited regulated activities. See:
http://www.fca.org.uk/about/why-we-do-it/our-remit/links/Recognised-bodies

Collective investment schemes

The FSMA s.235 et seq. has a special regime which regulates 'collective investment schemes' (CIS). The establishment and operation of a collective investment scheme is a regulated activity in itself. However, the CIS regime has a wider scope, in that the definition of a CIS is wide, and authorised firms, as well as non-authorised firms, may not promote or approve the promotion of a CIS except in limited circumstances.

In order to be lawfully promoted, a CIS must be authorised by the FCA. Types of schemne which may be authorised are:
* ; certain unit trust schemes;
* 'open-ended invesment companies'; and
* non-UK schemes which are recognised by the UK either by virttue of EU legislation or by bilateral agreements.

Definition of a collective investment scheme:
In order to fall within the definition of a collective investment scheme, a scheme must meet the following criteria:

(1) It is an arrangement with respect to property of any description, including money, the purpose or effect of which is to enable persons taking part in the arrangements (whether by becoming owners of the property or any part of it or otherwise) to participate in or receive profits or income arising from the acquisition, holding, management or disposal of the property or sums paid out of such profits or income.

(2) The arrangements must be such that the persons who are to participate (“participants”) do not have day-to-day control over the management of the property, whether or not they have the right to be consulted or to give directions.

(3) The arrangements must also have either or both of the following characteristics:
(a) the contributions of the participants and the profits or income out of which payments are to be made to them are pooled;
(b) the property is managed as a whole by or on behalf of the operator of the scheme.

Consequences of a scheme which is unregulated: if a CIS is not authorised or recognised, it is deemed to be an 'unregulated' CIS with the consequence that establihing and opearting it is a criminal offence, and participants may be entitled to withdraw their investment and or claim compensation (se Enfocement below).

Legaleze comment:
The above definition is extremely wide. A CIS is commonly thought to relate to investments which are 'pooled' in some way. However, it should be noted that:


* a CIS may relate to 'property of any description', not only investments;


* pooling is only one of two possible criteria to qualify under point (3) above; even if the property in question is not pooled, it will meet the other criterion in (3)(b) if the property is not pooled but is managed as a whole by the operator of the scheme;


* a key element of the definition is that the participants in the scheme must not have 'day-to-day control over the management of the property; but if they do not have such control, the scheme may be included in the definition even if the participants have the right to be consulted or give directions.


The wide scope of the CIS definition may be gauged by the need for a number of exemptions from the definition, which are set out in the Financial Services and Markets Act 2000 (Collective Investment Schemes) Order 2001 (SI 2001 No 1062). In particular, 'bodies corporate' are exempted (except for limited liability partnerships).

Many investment schemes (‘CIS’) involving land and other property, ranging from gold coins to ostriches, have been structured so as not to amount in law to a CIS. The case of

The Financial Services Authority v Asset  L. I. Inc (trading as  Asset Land Investment  Inc) and ors  [2013] EWHC 178 (Ch) (see below) is an unusual example of a fully argued case where operator of the scheme relied heavily upon the legal documentation but the judge made a decision upon the practical effect of the arrangements and the statements made by selling agents to investors.

 

Further guidance: further information about CIS and the scope of the definition of a CIS may be obtained friom the FCA pages on CIS and in the 'Perimeter Guidance Manual' (PERG).

What’s new item on CIS [see What’s new page or archive for full item]:

14/04/2014: Court of Appeal agrees land bank firm is an unlawful collective investment

The Court of Appeal (CA) has upheld the ruling of the High Court in The Financial Services Authority v Asset  L. I. Inc (trading as  Asset Land Investment  Inc) and ors  [2013] EWHC 178 (Ch). The High Court ruled that a land banking scheme was an unregulated collective investment scheme within s.235 Financial Services and Markets Act 2000 (‘FSMA’) and therefore illegal.

The FCA announced that the CA’s judgment makes clear that the law around collective investment schemes (CIS), which require Financial Conduct Authority (FCA) authorisation, does apply to these types of scheme and that any effort to avoid authorisation on technical legal points will be unlikely to succeed.

12/06/2013: Collective Investment in Transferable Securities (Contractual Scheme) Regulations 2013
These Regulations (SI 2013/1388) come into force on 6 June 2013 and are made under the European Communities Act 1972 s.2(2). The Regulations provide for the formation of undertakings for collective investment constituted in accordance with contract law. Such undertakings are called contractual schemes and are a new class of collective investment scheme (as defined by the Financial Services and Markets Act 2000 s.235 (“FSMA”). A contractual scheme may be either a co-ownership scheme, which has no legal personality distinct from the persons who take part as investors, or a partnership scheme, which is a limited partnership under the Limited Partnerships Act 1907.

04/06/2013: FCA bans retail distribution of unregulated collective investment schemes and close substitutes
www.fca.org.uk/your-fca/documents/policy-statements/ps13-03
The Financial Conduct Authority (“FCA”) has announced that promotions of risky and complex fund structures will be restricted to knowledgeable investors and high net worth individuals, New rules will prohibit the promotion of Unregulated Collective Investment Schemes (“UCIS”) and certain “close substitutes” together to be defined as “Non-Mainstream Pooled Investments” (“NMPIs”) to most retail investors in the UK.

Financial promotion

The advertising and promotion of investments is also regulated under the FSMA. In general, only persons regulated by the FSA may approve an advertisement or promotion of an investment, subject to certain exemptions set out in regulations made under the FSMA.

A financial promotion is an invitation or inducement to engage in investment activity. Investment activity is defined under FSMA s.21(8) as:

* entering or offering to enter into an agreement the making or performance of which by either party constitutes a controlled activity;

* •exercising any rights conferred by a controlled investment to acquire, dispose of, underwrite or convert a controlled investment

Under FSMA s.21, an unauthorised person may not communicate a financial promotion in the UK, in the course of business, unless either:

* its contents are approved for the purposes of .21 by an authorised person; or

* it is subject to an exemption under the Financial Services & Markets Act 2000 (Financial Promotion) Order 2005 (FPO)

Controlled activities and controlled investments are prescribed under Schedule 1 of the FPO and include such things as buying shares or bonds, selling insurance and managing investments.

The FCA gives further guidance on financial promotions in the 'Perimeter Guidance Manual' (see PERG 8).

For further comment on financial promotion in the context of fund raising for companies, see https://www.legaleze.co.uk/members/finance_and_funding_equity_funding.aspx

What’s new item on this topic [see What’s new page or archive for full item]:

25/04/2012: FSA discourages promotion of traded life policy investments
The Financial Services Authority has confirmed its guidance that traded life policy investments (“TLPIs”) are high risk products that should not be promoted to the vast majority of retail investors in the UK. The FSA guidance is available at:
http://www.fsa.gov.uk/library/policy/final_guides/2012/fg1212

 

Prospectus regulation

The FSMA also requires a company to issue a prospectus complying with detailed requirements and approved by the FSA prior to making a public offer of “transferable securities”, subject to certain exceptions.

For further detail on Prospectus regulation, see: Finance and funding/Equity investment

Enforcement

Civil enforcement


An agreement made by a person in the course of carrying on a regulated activity without authorisation or exemption is unenforceable against the other party. The other party is entitled to recover any money or other property paid or transferred by him under the agreement; and to compensation for any loss sustained by him as a result of having parted with it.
There are similar provisions relating to unauthorised deposit-taking and credit agreements.
If in consequence of an unlawful financial promotion a person enters as a customer into an agreement to acquire or dispose of an investment, the agreement is unenforceable against him and he is entitled to recover any money or other property paid or transferred by him under the agreement; and to compensation for any loss sustained by him as a result of having parted with it. The court may allow the agreement or obligation to be enforced if it is satisfied that it is just and equitable in the circumstances of the case.

Market abuse regulation


Part VIII of FSMA provides a regime for the regulation of 'market abuse'. The, market abuse regime applies to is behaviour (whether by one person alone or by two or more persons jointly or in concert) which:

(a) occurs in relation to certain investments admitted to trading on a prescribed stock exchange or market, or in respect of which a request for admission to trading on such a market has been made; in addition it applies to derivative investments which are related investments; and

(b) falls within any one or more of the prescribed types of behaviour.

The types of behaviour covered by market abuse regulation include in summary:

(i) Where an insider deals, or attempts to deal, in a qualifying investment or related investment on the basis of inside information relating to the investment in question.

(ii) Where an insider discloses inside information to another person otherwise than in the proper course of the exercise of his employment, profession or dutie.;

(iii)Where the behaviour (not falling within paragraphs (i) or (ii) above:

* is based on information which is not generally available to those using the market but which, if available to a regular user of the market, would be, or would be likely to be, regarded by him as relevant when deciding the terms on which transactions in qualifying investments should be effected, and

* is likely to be regarded by a regular user of the market as a failure on the part of the person concerned to observe the standard of behaviour reasonably expected of a person in his position in relation to the market.

(iv) Where the behaviour consists of effecting transactions or orders to trade (otherwise than for legitimate reasons and in conformity with accepted market practices on the relevant market) which:

* give, or are likely to give, a false or misleading impression as to the supply of, or demand for, or as to the price of, one or more qualifying investments, or

* secure the price of one or more such investments at an abnormal or artificial level.

(v) Where the behaviour consists of effecting transactions or orders to trade which employ fictitious devices or any other form of deception or contrivance.

(vi) Where the behaviour consists of the dissemination of information by any means which gives, or is likely to give, a false or misleading impression as to a qualifying investment by a person who knew or could reasonably be expected to have known that the information was false or misleading.

(vii) Where the behaviour (not falling within paragraphs (v), (vi) or (vii):

* (a) is likely to give a regular user of the market a false or misleading impression as to the supply of, demand for or price or value of, qualifying investments, or

* would be, or would be likely to be, regarded by a regular user of the market as behaviour that would distort, or would be likely to distort, the market in such an investment,

and the behaviour is likely to be regarded by a regular user of the market as a failure on the part of the person concerned to observe the standard of behaviour reasonably expected of a person in his position in relation to the market.

The FCA publishes rules and a code for guidance in this regard.

What’s new items [go to What’s new? page or archive for more details]:

20/11/2014: Market abuse regulations changing

The Financial Services and Markets Act 2000 (Market Abuse) Regulations 2014, SI 2014/3081, will come into effect on15 December 2014. The prohibition on market manipulation set out in the Financial Services and Markets Act 2000 (FSMA 2000) is extended until the new civil regime on market abuse under the EU Market Abuse Regulation takes effect on 3 July 2016. The prohibition would otherwise cease to apply on 31 December 2014.

Financial Services Compensation Scheme

The Financial Services Compensation Scheme (FSCS) is established under Part  XV of FSMA. The FSCS covers business conducted by firms authorised by the UK regulators, the FCA and PRA . European firms (authorised by their home state regulator) that operate in the UK may also be covered.

The FSCS may provide compensation for loss caused by a breach of contract or statutory obligations by an authorised firm, where the firm is insolvent or otherwise unable to meet its obligations  It was set up mainly to assist private individuals, although smaller businesses are also covered. Larger businesses are generally excluded, although there are some exceptions to this for deposit and insurance claims.

The FSCS covers losses arsing from the following financial products and services subject to certain conditions and limitations:

* Deposits with Banks and Building Societies and Credit Unions;

* Insurance policies;

* Home Finance (including mortgage advice);

* Investments;

* Pensions;

* Endowments

Eligibility Rules and Limitations

As a fund of last resort, there are limits to what the FSCS can do and to the amounts of compensation it can pay. The level of compensation payable will depend on the basis of the claim. The FSCS only pays compensation for financial loss. Compensation limits are per person per firm, and per claim category (listed below).

Different limits and rules apply in the case of a claim against an insurer or a bank that was insolvent before the FSCS became operational (1 December 2001), or if the claim is against an investment firm that was declared in default before the FSCS became operational.

The maximum levels of compensation are:

* Deposits: £85,000 per person per firm (for claims against firms declared in default from 31 December 2010): 100% of £85,000.

* Investments: £50,000 per person per firm (for claims against firms declared in default from 1 January 2010): 100% of the first £50,000.

* Home Finance (e.g. mortgage advice and arranging): £50,000 per person per firm (for claims against firms declared in default from 1 January 2010): 100% of the first £50,000.

* Insurance Business: 90% of the claim with no upper limit. Compulsory insurance is 100%.

* General insurance advice and arranging:Protects 90% of the claim with no upper limit. Compulsory insurance

Further information is available form the FSCS website.

Financial Ombudsman Service


The Financial Ombudsman Service provides a non-judcicial means of resolving most complaints by consumers against firms subject to the FSMA. Complaints must generally be brought within six months from the firm sending the consumer a final response to a complaint (which has to mention the six-month time limit). The maximum compensation is £100,000.
It has been held that if a consumer accepts the Ombudsman's award, he may not subsequently take legal action in the courts for further compensation, even if he accepted the award with an express reservation of the right to take further action.:

14/02/2014: Acceptance of FOS award precludes further compensation in the courts
http://www.bailii.org/ew/cases/EWCA/Civ/2014/118.html
Clark and another v In Focus Asset Management & Tax Solutions Ltd
[2014] EWCA Civ 118  Hearing Date: 14 February 2014
The Court of Appeal held that as a matter of statutory interpretation, where Parliament was silent on an issue, the common law still applied, unless it had been excluded expressly or by implication. The rule was that no action could be brought on ‘res judicata’ [i.e. on a case in which a decision has previously been made]. The fact that s. 225(1) of the Act described the scheme as one for resolving disputes was a powerful indication that Parliament had not intended consumers to be able to bring legal proceedings as well as accept an award.

Criminal enforcement


A person who contravenes the prohibition on carrying on a regulated activity without authorisation is guilty of an offence and liable on conviction on indictment, to imprisonment for a term not exceeding two years or a fine, or both.
An authorised person (“A”) is guilty of an offence if A carries on a credit-related regulated activity in the United Kingdom, or purports to do so, otherwise than in accordance with permission.and is liable on conviction on indictment, to imprisonment for a term not exceeding two years, or a fine, or both.
There is a due diligence defence.
A person who contravenes the prohibition on financial promotion is guilty of an offence and liable on conviction on indictment, to imprisonment for a term not exceeding two years or a fine, or both.
There is a defenceif the the accused can show) that he believed on reasonable grounds that the content of the communication was prepared, or approved for the purposes of section 21, by an authorised person. There is also a due diligence defence.

Payment Services Regulations 2009 (PSRs)

The Payment Services Directive (PSD) aims to provide a common regulatory approach to the provision of electronic payment services. It came into force in the UK on 1st November 2009 through the Payment Services Regulations 2009 (PSRs).

Money transmission is central to the functioning of the economy. Money circulates continuously between individuals, businesses and government, for example when buying goods and services, receiving income or paying taxes. The leading examples of these are the main inter-bank schemes (Bacs, CHAPS, Link, Faster Payments and Cheque & Credit) and the three- and four-party card schemes (most notably Visa, MasterCard and American Express).

For further information, see the FCA's Guidance on the scope of the Payment Services Regulations (PERG 15)

What’s new [see What’s new page or archive for full item]:

28/02/2018 Payment Systems Regulator confirms plans to protect victims of payment scams

Source: https://www.psr.org.uk/psr-publications/news-announcements/PSR-confirms-plans-to-protect-victims-of-payment-scams

The Payment Systems Regulator has announced the outcome of its consultation on introducing a contingent reimbursement model for victims of authorised push payment (APP) scams. APP fraud occurs when fraudsters trick victims into paying an amount due to a legitimate supplier or vendor to the fraudster by means of a cheque or bank account. The fraud often leaves the payer without remedy and cause serious loss even insolvency of the payer.

The consultation ran from November 2017 to January 2018 and gave interested partied the opportunity to provide feedback on the regulator’s plans. There was broad agreement on the need to better protect people against APP scams and reduce the harm they cause.

Following the consultation, the regulator plans to introduce a contingent reimbursement model. A payment services industry code will be in place by September 2018, paving the way for victims of APP scams to have better protection.

14/11/2014: New Payment Systems Regulator consults on how it intends to regulate
http://www.fca.org.uk/static/documents/psr/psr-cp14-1-cp-a-new-regulatory-framework-for-payment-systems-in-the-uk.pdf

The PSR has published a consultation paper setting out how it proposes to regulate the £75 trillion payments industry Its proposals aim to further its three main objectives: to promote competition, to promote innovation and to ensure payment systems are developed and operated in the interests of their users. Those wishing to comment on the proposals should do so by 12 January 2015.

19/12/2013: Banking Reform Bill receives Royal Assent
The Government’s Banking Reform Bill (‘the Bill’) has received Royal Assent, now becoming the Financial Services (Banking Reform) Act 2013 (‘the Act’).
One of the reforms made by the Act is the establishment of the Payment Systems Regulator by the FCA to regulate operators of and participants in ‘payment systems’ i.e. systems which are operated by one or more persons in the course of business for the purpose of enabling persons to make transfers of funds, and includes a system which is designed to facilitate the transfer of funds using another payment system.

Electronic Money Regulations 2011 (EMRs)

The EMRs, which implements the second Electronic Money Directive (2EMD) in the UK, came into force on 30 April 2011. 2EMD aims to encourage the growth of the electronic money market.

For further information, see the FCA's Guidance on the scope of the Electronic Money Regulations 2011 (PERG 3A)

[Page updated: 24/03/2018]

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