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6 May 1998
NEW POWERS FOR THE FINANCIAL REGULATOR
Chief Secretary announces package of measures to tackle market abuse Tough new powers to help the new Financial Services Authority (FSA) tackle market abuse and financial crime were announced today by the Chief Secretary, Alistair Darling.
The measures, including steps to tackle insider dealing more effectively, will be included in the bill to modernise the financial services system.
This will further enhance the reputation of the UK financial markets as clean and fair places to do business by giving the FSA more effective powers to deal with the few bad apples, including the power to fine rogue traders.
The proposed package includes:
- giving the FSA the power to prosecute cases of insider dealing, other areas of market manipulation and breaches of the Money Laundering Regulations;
- the power to levy fines;
- a new civil regime for combating market abuse;
- a Code of Market Conduct, produced by the FSA, setting out behaviour which would be unacceptable in the markets;
- giving the FSA rule making powers concerning anti-money laundering systems; and
- the creation of a single tribunal to consider appeals against the FSA's use of its powers.
The Competent Authority for listing (presently with the London Stock Exchange) will also be given the power to fine issuers and directors for breaches of the listing rules.
These powers will be contained within the draft legislation that the Government will be publishing for consultation in the summer.
Announcing the measures the Chief Secretary said:
"We are determined to ensure that the financial markets are open and clean places to do business. London's reputation depends upon that. That's why we promised to crack down on insider dealing. Now we are delivering on that promise to make sure that insider dealers, and others who abuse the markets, do not get away with it.
"The FSA's job is to sustain confidence in the market and to assist in the detection and prevention of financial crime. The FSA will now have the powers it needs to do that job.
"Its powers of intervention and discipline will be tough and effective. In some areas we are significantly extending the options available to the FSA.
"These proposals will further enhance the UK's position as one of the best regulated and attractive financial markets in the world. We are determined to maintain London's position as one of the foremost financial markets."
On the FSA's power to levy fines, Mr Darling said:
"Putting the powerful regulatory sanction of fining on a statutory basis will greatly enhance the FSA's authority."
The introduction of a new civil regime for combating market abuse, including market manipulation and misuse of inside information, will mean that the FSA will be able to impose a fine on any person or firm, regulated or not, who engages in this type of abuse. The Chief Secretary made clear, however, that these powers are to complement and not replace the existing criminal offences in this area.
The Chief Secretary also announced that the FSA would, for the first time, be given powers to prosecute the criminal offences of insider dealing, market manipulation and breaches of the Money Laundering Regulations. He said:
"As the FSA will have the relevant knowledge and expertise it makes good sense to give them prosecution powers in this area."
On the civil fines regime, Mr Darling said:
"It is essential that the financial markets are protected from abuse. Damage to the markets damages the economy as a whole. For the first time, the regulator will have a set of coherent and comprehensive civil powers in this area."
The proposed legislation will also give the Treasury the power to prescribe the markets, and the products traded on those markets, which would be covered by the new regime. Mr Darling said that the initial coverage was likely to cover abuse, on or off-markets, which affects investments traded on recognised investment exchanges.
The new regime would be underpinned by a Code of Market Conduct, produced by the FSA following consultation, which would give greater certainty to the markets as to what kinds of behaviour were acceptable or not. The Chief Secretary said:
"It is not our intention that the new regime should stop generally acceptable market behaviour - far from it. Nor do we want to deter proper innovation in the financial markets. The aim of the Code is to provide market participants with a clearer understanding of the types of practices that will be tolerated and those that will not."
The Chief Secretary also announced the creation of a single tribunal to consider appeals against the FSA's use of its regulatory powers. The tribunal will be independent of the FSA and managed as part of the Court Service. He said:
"It is right to arm the regulator with an effective array of sanctions but these must be balanced by a satisfactory appeals mechanism. The new arrangements will be at least equal to, and in many cases better than, those available under the present system."
Mr Darling also announced new powers for the Competent Authority for listing (presently with the London Stock Exchange), giving them the power to fine issuers for breaches of the listing rules, as well as directors and ex-directors where they had been directly responsible for such breaches. He said:
"The Stock Exchange currently does a good job in setting and policing the listing rules but it lacks the full range of powers. I am determined to remedy that. Effective regulators must have effective powers."
The Chief Secretary also made clear that the current recognition and exemption regime for investment exchanges and clearing houses would be carried forward into the new legislation. He said:
"The UK's recognised investment exchanges and clearing houses enjoy a substantial reputation throughout the world. This is due in part to their special place within the regulatory framework.
"This is the right regime to be taken forward in the new bill given the expertise of such bodies in the operation of their own markets, and their strong incentives to deliver well regulated markets.
"However, the new legislation will give the FSA greater powers of intervention to make sure that, in the rare event that something does go wrong, swift corrective action can be taken."
The announcements were made in response to a Parliamentary Question from Ivor Caplin [Hove].
NOTES TO EDITORS
1. The full text of the parliamentary question and answer is attached.
2. A background note on the Government's progress in reforming financial regulation is attached.
IVOR CAPLIN [HOVE]: To ask the Chancellor of the Exchequer if he will make a statement about the measures to be included in the proposed bill reforming the regulation of financial services which are aimed at sustaining confidence in UK financial markets.
ALISTAIR DARLING: The financial markets play a pivotal role in ensuring the efficient allocation of resources within the economy. This is at the heart of growth and continued prosperity - resources going where they are best employed. It is vital that these markets are a fair and clean place to do business. The Financial Services Authority's (FSA) objectives will include sustaining confidence in the UK financial sector and markets and assisting in the detection and prevention of financial crime.
I intend that the new bill will equip the FSA with all necessary powers to enable them to fulfil these objectives. As was stated in answer to a question by my honourable Friend the member for Hove (Mr Caplin) on 7 April (OR, WA, Col. 152), the new legislation will enable the FSA to make rules binding on authorised firms for the protection of investors, depositors and policyholders. The FSA will also be able to make rules requiring firms to have appropriate anti-money laundering systems and controls in place. Breach of these rules will potentially trigger an array of intervention and disciplinary actions among which will be a power to levy fines on regulated institutions.
The new legislation on which we plan to consult in the Summer will also greatly enhance the FSA's ability to combat market abuse. I intend to introduce a new civil fines regime which will allow the FSA to impose fines on any person or firm, whether part of the regulated community or not, who engages in market abuse, for example market manipulation or misuse of privileged information. The intention is to deter abusive behaviour which undermines confidence in the UK financial markets and which, if unchecked, would ultimately damage the integrity of those markets. The legislation will give the Treasury the power to prescribe markets, and instruments traded on those markets, to be covered by the new regime. We are planning to consult on the basis that the initial coverage will be abuse, on or off-markets, which affects investments traded on recognised investment exchanges.
The legislation providing for the new civil fines regime will also require the FSA to produce a Code of Market Conduct to supplement the basic provisions defining the abuses. The aim of this Code, which the Court and Appeals Tribunal will have regard to, is to give guidance in general terms to market participants as to what kinds of behaviour are likely to be acceptable and what unacceptable. The FSA will be consulting on a draft of this Code shortly.
This new regime will complement, not replace the existing criminal offences of market manipulation and insider dealing. Where criminal offences have been committed criminal proceedings, as now, will be the appropriate course to take. As the FSA will have the relevant knowledge and expertise, I intend that the bill will allow the FSA to take criminal prosecutions of insider dealing and market manipulation offences itself. The DTI, SFO and CPS will retain concurrent powers. The FSA will also be able to prosecute criminal breaches of the Money Laundering Regulations.
It is right to provide the regulator with an effective array of sanctions, but these must be balanced by a satisfactory appeals mechanism. We are proposing to create a new single tribunal to consider appeals against the FSA's exercise of its regulatory powers. The tribunal will be entirely independent of the FSA, and will be managed as part of the Court Service.
I also intend to improve the range of sanctions available to the Competent Authority for listing (currently the London Stock Exchange) to deal with breaches of the listing rules by those admitted to the Official List. The bill will therefore give the Competent Authority the power to impose fines for breaches of the listing rules by issuers and directors.
In addition I propose to make a number of changes to improve the regulatory regime for investment exchanges and clearing houses. The UK has a wide range of respected and internationally competitive recognised investment exchanges and clearing houses which have played a large part in ensuring that UK markets are, and are perceived to be, fair and well- regulated.
I intend that the draft legislation to be published for consultation in the Summer will build on the existing exemption regime under which investment exchanges and clearing houses which fulfil certain regulatory criteria can be recognised by the FSA and be exempted from the need to be authorised. The new bill will incorporate improvements to this regime. This will include a power for the FSA to issue directions to recognised investment exchanges and clearing houses to take necessary steps to meet the recognition criteria.
Taken together with the other changes to be introduced in the new bill these measures will further enhance the UK's position as one of the best regulated, and thus the most attractive, financial, markets in the world.
FINANCIAL SERVICES REFORM The story so far....
May 1997 The creation of a new single regulator for financial services responsible for banking supervision and areas regulated by the SIB and Self-Regulatory Organisations.
June 1997 Economic Secretary, Helen Liddell calls on companies to second their brightest staff to the new regulator.
July 1997 The supervision and registration of building societies, friendly societies, credit unions and industrial and provident societies will transfer to the new regulator. Insurance regulation will be transferred from the DTI to the Treasury and, in due course, to the single regulator.
September 1997 In the interest of coherence and clarity there will be a new 'Financial Services Act', generally based on repeal and replacement of existing legislation rather than amending the existing legislation. The regulator will, as far as possible, have uniform powers and duties.
October 1997 The Chancellor announces that the new regulator will be called the Financial Services Authority (FSA). It will have statutory objectives which will cover market confidence, consumer protection, consumer education and financial crime.
December 1997 There will be a single statutory compensation scheme with a single board and harmonised arrangements. There will also be a single financial services ombudsman scheme replacing eight existing complaints handling schemes.
January 1998 Proposals to deliver cost-effectiveness. The FSA will be required to consult on its budget. The FSA will also be required to consult on any rule change and to publish a cost-benefit appraisal on the change.
January 1998 The FSA will have extensive supervisory powers over Lloyd's. Prudential supervision will be strengthened and the FSA will have significant responsibilities in relation to members' agents and managing agents. Names will not be subject to authorisation by the FSA under the proposed legislation but the power will be there should it be required at a later date.
February 1998 The Chief Secretary, Alistair Darling announces that the London Stock Exchange would continue as the competent authority for listing in the UK. However, the proposed legislation will allow the Government to transfer all or part of the LSE's functions to the FSA if it is thought desirable at some future time.
April 1998 The proposed bill will provide for the potential regulation of selling and advice on mortgages, non-life insurance and deposits. It is not expected that these will apply when the Bill is brought force, with the possible exception of mortgages. The Government is consulting on the future of the IBRC.
April 1998 Existing provisions requiring auditors to 'whistle blow' will be extended to actuaries. The FSA will also be able to make rules to require the appointment of actuaries to authorised firms on the same basis as they can now for auditors.
Today's announcement
May 1998 The Chief Secretary announces that the FSA will have tough new powers to tackle market abuse and financial crime. These will include a new civil fines regime and new prosecution powers. The FSA will be required to produce a Code of Market Conduct underpinning the new civil fines regime. There will also be an independent Appeals Tribunal.
Still to come.....
Summer 1998 Publication of the draft bill for consultation.