Compulsory adviser registration is a topical issue in New Zealand at the moment. New Plymouth-based planner Geoff Nairn explains the UK experience.
Thursday, September 28th 2000, 10:17PM
by Geoff Nairn
Definitions
The Financial Services Act 1986
The Financial Services Act 1986 (FSA 86) was introduced after a period of practitioner self-regulation, with the main aim being to provide investor protection. This is achieved by ensuring that those individuals/firms conducting investment business in the United Kingdom or into the UK markets are authorised, this authorisation itself being delegated to self-regulating organisations.
The purpose of this authorisation is to ensure that they are fit and proper to conduct investment business. Under the provisions of the FSA 86 it is illegal for a firm or individual to offer or provide investment services without being authorised to do so. Authorisation therefore imposes obligations and restrictions on the firm and its officers, employees and representatives to conduct business within the limit of the authorisation and in compliance with the detailed legislation and regulations. The penalties for conducting unauthorised activities or for contravening the regulations include fines and/or imprisonment.
Applicable to the conduct of individuals is the Criminal Justice Act 1993, which prohibits dealing in securities by people who have acquired information of an unpublished price sensitive nature either directly or via another person as a result of their employment, office or profession. (Insider Trading). Further restrictions are imposed by The Investment Management Regulatory Organisations (IMRO) conduct of business rules.
In addition, the Money Laundering Rules 1993 also apply (the UK equivalent of our Financial Transactions Act).
The Investment Services Directive (ISD), was adopted in May 1993 as part of the European Union's (EU) single market programme. It aims to provide trading freedom for investment firms throughout the EU and to facilitate access by firms authorised under the Directive to EU stock exchanges
Her Majesty's Treasury
The Treasury is the Government body that enforces the Financial Services Act 1986. It also has responsibility for the Financial Services Authority.
The Financial Services Authority
The Financial Services Authority (FSA), formerly the Securities and Investment Board Ltd (SIB), is a company set up by the government as the designated agency in order to take over the responsibilities of the Financial Services Act 1986. The FSA is a limited company, the Chairman and members comprising of a mixture of both practitioners and users of the market who are appointed by the Treasury. The FSA was given the task of establishing both a network for authorisation and the rules to be applied to those firms that gained authorisation under the FSA 1986. In doing so, its aim was to ensure that all participants in the market are fit and proper persons.
The Self Regulating Organisations (SRO's) The Investment Management Regulatory Organisation (IMRO)
IMRO's area of responsibility is the regulation of fund managers, covering pension funds, unit trusts, open ended investment companies (OEICs), and individual management for investors.
The Securities and Futures Authority (SFA)
The SFA has responsibility for regulating those firms, which deal in investments, including derivatives. It was formed by the merger of The Securities Association (TSA) and the Association of Futures Brokers and Dealers (AFBD). As an organisation, the SFA owes much to the Stock Exchange from which it was originally formed.
The Personal Investment Authority (PIA)
PIA was recognised. This SRO has responsibility for the retail sector and was established in 18 July 1994 to replace FIMBRA and LAUTRO (Life Assurance & Unit Trust Regulatory Organisation) with some LAUTRO firms moving to IMRO.
Once a SRO has authorised a company it has the responsibility for monitoring the managers' day to day implementation of the regulations and compliance with their respective conduct of business rules and financial resources requirements. This is given effect through the submission of regular reports, periodic inspection and, as necessary enquiries and/or investigations (ie. in response to either complaints or rule breaches)
The SRO also maintains registers of individuals who undertake investment activities for the authorised firms. An SRO has the power to privately or publicly reprimand a firm, or it can impose a fine. In an extreme case a firm could be de-authorised, thus preventing it from carrying on investment business
The Recognised Professional Bodies (RPB)
The RPBs are the organisations recognised by the FSA as being responsible for the regulation of their members who carry on investment business as an addition to their normal line of business.
Powers of the regulators
Under the FS Act the FSA has no power to impose fines on those that it directly regulates. Hence when Prudential Assurance fell foul of the FSA, still the SIB at the time, it only received a public reprimand for its actions. The only other alternative would have been for the FSA to de-authorise the firm.
By contrast the SROs, who operate on the basis of an agreement between themselves and the firms they authorise, have a variety of powers at their disposal.
They can "intervene" to stop a firm taking on new business, impose restrictions on the firm and any individual registered with them. They can also fine the firm, issue a public reprimand, or a private warning where a firm is found to have breached the regulations.
Ultimately they can force the closure of a firm and the banning of a registered individual from working in the financial services industry.
The Future of Regulation
In May 1997, the Government laid proposals before Parliament to replace the current self-regulation system with a statutory system of regulation, and to introduce a new Financial Services Act in 1998. The proposals include plans to combine all the regulatory organisations into one, and to widen their scope to include regulation currently undertaken by the Bank of England, The Insurance Directorate of The Department of Trade & Industry, the Building Societies Commission, the Friendly Societies Commission and the Registry of Friendly Societies.
In October 1997, the first stage of this process was completed when the SIB was renamed the Financial Services Authority (FSA). Subsequently in June 1998 with the enactment of the Bank of England Act the FSA assumed responsibility for banking supervision.
Further to this, in 1998, all the SRO's moved their operations to the FSA's new Headquarters at Canary Wharf in London. In practical terms this means that whilst the SROs remain responsible for their regulatory functions this is delegated to FSA staff who now carry them out.
In May 2000 the FSA took over the listing authorisation competence from the London Stock Exchange. This was done in order to pave the way for the Stock Exchange to "float" its shares.
The Financial Services and Markets Bill was laid before Parliament and was enacted on 14 June 2000 as the Financial Services and Markets Act (FSMA). It is expected that the new law / regulation will come into force in the spring of 2001. The FSA will then become the most powerful regulatory agency in the world, covering every aspect of the financial services market with the exception of mortgages and general insurance (house contents, motor polices and other non-life). And there is even talk of the government bringing these under the control of the FSA.
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