Recognised investment exchanges and clearing houses
346.Part 18 of FSMA sets out the regime under which “recognised clearing houses” and “recognised investment exchanges” (together “recognised bodies”) are regulated. A person specified as a recognised body is exempt, for certain purposes, from the general prohibition in section 19 of FSMA from carrying on regulated activities (section 285 (exemption for recognised investment exchanges and clearing houses)).
347.Under the new arrangements, the Bank is to be responsible for the regulation of recognised clearing houses and the FCA is to be responsible for the regulation of recognised investment exchanges. The Bank’s financial stability objective (as amended by section 2) will apply to its functions under Part 18.
Section 28: Exemption for recognised investment exchanges and recognised clearing houses
348.Section 28 makes amendments to section 285 of FSMA. Section 285 defines “recognised investment exchange” and “recognised clearing house” for the purposes of FSMA and also describes in subsections (2) and (3) the exemption which each type of recognised body has from the general prohibition specified in section 19 of FSMA (the prohibition from carrying on regulated activities without authorisation). Subsection (2), for example, provides that a recognised investment exchange is exempt from the general prohibition as respects any regulated activity which is (a) carried on as a part of the exchange’s business as an investment exchange; or (b) which is carried on for the purposes of, or in connection with, the provision of clearing services by the exchange. (As a result, prior to the amendments made by the Act coming into effect, a recognised investment exchange need not be separately recognised as a recognised clearing house in order to provide clearing services.)
349.Subsection (2) replaces subsection (2)(b) (the second limb of the exemption for recognised investment exchanges which is referred to in the preceding paragraph). Subsection (3) makes provision in relation to subsection (3) (the exemption for recognised clearing houses). The general effect of these amendments is that a recognised investment exchange will need to apply for the status of, and be specified by the Bank of England as, a recognised clearing house in order to have a Part 18 exemption to provide clearing services. However, recognised investment exchanges will continue to benefit from an exemption in relation to any regulated activities carried on for the purposes of facilitating the provision of clearing services by another person. Recognised clearing houses will also (expressly) benefit from this exemption. An example could be where clearing services are provided by a related company (which might be regulated outside the UK) and the UK recognised clearing house or recognised investment exchange routes trades not arranged using its facilities to a separate clearing house.
350.Subsection (4) inserts a new subsection (4) into section 285 which confers on the Treasury a power to amend new subsection (2)(b) and new subsection (3)(b) from time to time (for example, to expand or narrow the activities for which a recognised body has exemption from the general prohibition). Section 49(2)(a) amends section 429 of FSMA (Parliamentary control of statutory instruments) to provide that orders under this subsection can only be made where a draft of the order has been laid before Parliament and approved by a resolution of each House.
Section 29 and Schedule 7: Powers in relation to recognised investment exchanges and clearing houses
351.Section 29(1) inserts new section 285A. New section 285A provides that for the purposes of Part 18, the FCA is the “appropriate regulator” in relation to recognised investment exchanges, and that the Bank is the “appropriate regulator” in relation to recognised clearing houses. Subsection (2) inserts new Schedule 17A to FSMA as set out in Schedule 7 to the Act.
352.Paragraph 1 of new Schedule 17A requires the Bank and the FCA to prepare and maintain a memorandum describing how they will work together in exercising their functions in relation to recognised bodies. Sub-paragraph (2) specifies the matters which must be included in the memorandum. Sub-paragraph (3) provides that a reference in paragraph 1 to a “function” of the Bank and FCA means any function however conferred. For example, it may be the case that a person specified as a recognised investment exchange is also the operator of a recognised payment system under Part 5 of the Banking Act 2009. In such a case the person would be regulated by both the Bank (under Part 5 of the Banking Act 2009) and the FCA (under Part 18). Therefore it is appropriate that the memorandum makes provision to ensure the authorities cooperate effectively whether in the discharge of functions under Part 18 of FSMA or, for example, under directly applicable European measures.
353.Paragraph 2 requires the Bank, the FCA and the PRA to enter into a memorandum setting out how they will work together in exercising their functions in relation to persons who are recognised bodies and who are also PRA-authorised persons, or are members of a group in which a member is a PRA-authorised person. The exemption from the requirement to be authorised to carry on regulated activities, which is conferred on a person as a result of recognition under Part 18, extends only to activities which are carried on for the purposes of, or in connection with, a person’s business as an investment exchange or a person’s business which consists of the provision of clearing services. Therefore, if a person wishes to carry on a regulated activity which is not part of such business that person will need to seek authorisation from the FCA (or PRA and FCA as the case may be) and may be regulated by more than one body. This memorandum ensures the effective coordination of the regulation of such persons.
354.Paragraph 3 requires the Bank and the FCA (and, if relevant, the PRA) to review a memorandum entered into under paragraph 1 or paragraph 2 at least once each calendar year. Each memorandum made under these paragraphs (and any revised memoranda) must be sent to the Treasury (paragraph 4) and made public (paragraph 6). The Treasury are required to lay before Parliament a copy of each memorandum they receive under paragraph 4 (paragraph 5).
355.Paragraph 7 requires the FCA to notify the Bank where it has issued a direction under section 128 (suspension of investigations) to a recognised clearing house to suspend or to refrain from conducting an inquiry under its rules. Such a direction may be given where the FCA considers it desirable or expedient in connection with the exercise or possible exercise of a power relating to market abuse.
356.Paragraph 8 requires the FCA to notify the Bank of any requirement imposed on a recognised clearing house under section 313A (power to require suspension or removal of financial instruments from trading).
357.Part 2 of the new Schedule 17A applies certain provisions of FSMA to the Bank in its capacity as the regulator of recognised clearing houses. These powers are available to the FCA in relation to the regulation of recognised investment exchanges and are therefore explicitly made available to the Bank in relation to recognised clearing houses subject to certain modifications (including as made by paragraph 9(2)).
358.Paragraph 10 applies certain provisions of the new Part 9A (rules and guidance) in relation to rules made by the Bank under any provision made by or under FSMA, for example in relation to rules made under section 293(1) (notification requirements) or under any power conferred by the Treasury in regulations made under section 286 (as modified by section 30 (recognition requirements: power of FCA and Bank to make rules). For example, sub-paragraph (1)(i) applies new section 138J, subject to the omission of certain provisions, which will require the Bank to consult before making rules unless the Bank considers that the delay in complying would be prejudicial to financial stability (sub-paragraph (4)).
359.Paragraph 11 makes available to the Bank the powers conferred by section 165(1) and (3), to require a recognised clearing house, or a person connected to a recognised clearing house, to provide specified information and to produce specified documents which are reasonably required in connection with the exercise by the Bank of the functions conferred on it under Part 18, any of its other functions in pursuance of its financial stability objective (so the Bank could require a recognised clearing house to provide information reasonably required by the FPC) (sub-paragraph (2)) or which would facilitate the discharge by the FCA of its regulatory functions.
360.Paragraph 12 makes available to the Bank the power conferred by section 166 in order that it may require a recognised clearing house to provide a report to the Bank on any matter in relation to which the Bank may require information under section 165 as applied by paragraph 11.
361.Paragraph 13 makes available to the Bank the power to appoint persons to carry out investigations into the nature, conduct or state of the business of a recognised clearing house, a particular aspect of that business, or the ownership or control of a recognised clearing house. Sub-paragraph (2) provides that a person appointed as an investigator is to have the powers conferred by section 172 (additional power of person appointed as a result of section 168(1) and (4)) and 173 (powers of persons appointed as a result of section 168(2)). For example, an investigator may require a person who is not the subject of the investigation or is not connected with the person under investigation to attend a meeting with the investigator.
362.Paragraph 14 makes available to the Bank the power to appoint investigators under section 168(5) in particular cases, for example if there are circumstances suggesting that a clearing house, in the context of an application to be a recognised body, has given the Bank false or misleading information.
363.Paragraph 15 provides that an overseas regulator may request the Bank to require information to be provided (in exercise of the power conferred by section 165 as applied by paragraph 11).
364.Paragraph 16 applies section 176 (entry of premises under warrant) such that a justice of the peace may issue a warrant if satisfied that there are reasonable grounds for believing that a person on whom an information requirement has been imposed by the Bank, or by a person appointed by the Bank, has failed to comply with it.
365.Paragraph 17 applies, with certain modifications, new sections 192C to 192N (inserted by section 27) to the Bank such that the Bank may issue a direction to a qualifying parent undertaking of a recognised clearing house which is not an overseas clearing house (within the meaning of section 313(1) of FSMA) where it considers that it is desirable to give the direction for the purpose of the effective regulation of one or more recognised clearing houses in that group. As a result of the application of new section 192J, the Bank may make rules requiring qualifying parent undertakings of recognised clearing houses to provide specified information or to produce documents of a specified description and makes available the disciplinary powers under new sections 192K to 192N. Sub-paragraph (6) imposes on the Bank a requirement to consult the FCA or the PRA before issuing directions under section 192E in certain cases (for example where the parent undertaking concerned is also the parent undertaking of a PRA-authorised person).
366.Paragraphs 18 to 21 apply sections 342 to 344 and 345A to 345E in relation to auditors of recognised clearing houses or persons with close links to such persons.
367.Paragraph 18 applies section 342 (information given by an auditor to a regulator) such that a person who is, or has been, an auditor of a recognised clearing house does not contravene any duty to which he is subject merely because he or she gives to the Bank information on a matter on which he has, or had, become aware in his capacity as an auditor of a recognised clearing house, or his opinion on any such matter. Section 342(5) (as applied) confers on the Treasury a power to make regulations prescribing the circumstances in which an auditor must communicate matters to the Bank. Paragraph 19 applies section 343 (information given by auditor: person with close links) which makes similar provision in relation to auditors of persons with close links with recognised clearing houses (as defined in subsection (8) as applied, for example, a parent undertaking of a recognised clearing house).
368.Paragraph 20 applies section 344 (duty of auditor resigning to give notice) such that an auditor of a recognised clearing house is required to give notice to the Bank where he resigns from office, or is removed from office by the recognised clearing house concerned.
369.Paragraph 21 applies new sections 345A to 345E (inserted into FSMA by paragraph 6 of Schedule 13) so as to make available to the Bank (in the event that an order is made by the Treasury under section 345A(1)) disciplinary powers in relation to relevant auditors who have, for example, failed to comply with a requirement to disclose information prescribed in regulations made by the Treasury under section 342 (as applied by paragraph 18).
370.Paragraph 22 applies section 347 (as amended by paragraph 37 of Schedule 8) to require the Bank to maintain a record of every recognised clearing house.
371.Paragraph 23 applies sections 348 (restriction on disclosure of confidential information by Authority etc) to 350 (disclosure of information by Inland Revenue) and 353 (removal of other restrictions on disclosure) in relation to any information received by the Bank. This has the effect, for example of requiring the Bank to keep information received in the discharge of its functions under Part 18 in confidence, save where specified gateways are available.
372.Paragraph 24 applies to the Bank in its capacity as regulator of recognised clearing houses various powers conferred by Part 24 of FSMA upon the regulator of authorised persons and recognised investment exchanges in the event of an authorised person’s / recognised investment exchange’s insolvency. These powers are as follows: the power to participate in court proceedings relating to a voluntary arrangement in connection with any recognised clearing house (section 356); the power to participate in court proceedings relating to trust deeds for creditors in Scotland in connection with any recognised clearing house (section 358); the power to make an application for administration of a recognised clearing house (section 359); the power to participate in proceedings where another person has made an administration application in respect of a recognised clearing house (section 362); the power to participate in receivership proceedings relating to a recognised clearing house (section 363); the power to participate in proceedings relating to the voluntary winding up of a recognised clearing house (section 265); the power to petition for the winding up of a recognised clearing house (section 371). Paragraph 24 also makes provision applying section 362A, with the effect that the Bank’s consent will be required to the appointment of an administrator in respect of a recognised clearing house.
373.Paragraph 25 confers on the Bank the power to apply for an order under section 423 of the Insolvency Act 1986 where a recognised clearing house has entered transactions at an undervalue while carrying on a recognised activity for the purposes of, or in connection with, the provision of clearing services.
374.Paragraph 26 gives the Bank the power to make an application to court under section 380(1), (2) or (3) for an injunction, for example, in the event that the Bank consider it reasonably likely that a recognised clearing house will contravene a relevant requirement (which is defined in sub-paragraph (2)).
375.Paragraph 27 makes available to the Bank the power to apply to the court for an order requiring a person to make a payment where it is satisfied that a person has contravened a relevant requirement and that profits have accrued as a result of the contravention. The definition of “relevant requirement” for this purpose is set out in paragraph 26(2).
376.Paragraph 28 gives the Bank the power to require a recognised clearing house to make a payment where the condition in sub-paragraph (2)(a) or (b) is met.
377.Paragraph 29 applies the provisions of Part 26 (notices) in relation to warning or decision notices given by the Bank under new section 192L (qualifying parent undertakings) (inserted by section 27), and under new section 312G (proposal to issue a public censure or impose a financial penalty) and new section 312H (decision to issue a public censure or impose a financial penalty) (inserted by section 33). For example, section 387 sets out the matters which must be included in a warning notice.
378.Paragraph 30 applies section 398 such that it is an offence for a person, who, in purported compliance with a requirement listed in that paragraph knowingly or recklessly gives the Bank information which is false or misleading.
379.Paragraph 31 provides that the Bank may initiate proceedings with regard to the prosecution of certain offences under the Act (as specified in sub-paragraph (1)).
380.Paragraph 32 applies paragraph 17 of Schedule 1ZB which has the effect of requiring the Bank to put in place arrangements for the recording of decisions made by the Bank in the exercise of its functions relating to recognised clearing houses.
381.Paragraph 33 applies paragraph 19 of Schedule 1ZB and has the effect of requiring the Bank to produce an annual report concerning the discharge of its functions relating to recognised clearing houses. The Bank is required to provide the Treasury with a copy of the report, which the Treasury must lay before Parliament.
382.Paragraph 34 requires that the Bank must be given notice of (1) any application for an administration order; (2) any petition presented for a winding up order; (3) any proposed resolution for a voluntary winding up order or (4) any proposal to appoint an administrator in respect of a UK clearing house. The term “UK clearing house” is defined for the purposes of Part 18 of FSMA in section 313 of FSMA, as amended by paragraph 36 of Schedule 8. A copy of the notice given to the Bank is required to be filed (in Scotland, lodged) with the court. Once the Bank has received any such notice, the application for the relevant order, resolution or appointment may not be determined until two weeks have elapsed from the day upon which the Bank received the notice unless the Bank has informed the person who gave the notice that it has no objection to the application and does not intend to exercise a stabilisation power under Part 1 of the Banking Act 2009 in respect of the UK clearing house concerned.
383.Paragraph 35 confers on the Bank the power to direct persons appointed as insolvency practitioners in relation to a company which is, or which has been a UK clearing house. Before giving any direction under this power, the Bank must (1) be satisfied that it is desirable to give the direction, having regard to the public interest in protecting and enhancing the stability of the UK financial system; protecting and enhancing public confidence in the stability of the UK financial system and maintaining the continuity of central counterparty clearing services, and (2) consult with the Treasury, the FCA, and where the UK clearing house in question is a PRA-authorised person, the PRA. The term “central counterparty clearing services” is defined for the purposes of Part 18 of FSMA section 313 of FSMA, as amended by paragraph 36 of Schedule 8.
384.Any direction given to an insolvency practitioner pursuant to paragraph 35 would have to be compatible with the statutory provisions governing corporate insolvency proceedings; and sub-paragraph (4) provides that the directions are enforceable by an injunction (or in Scotland by an order for specific performance under section 45 of the Court of Session Act 1988). When acting (or taking no action) in accordance with a direction under paragraph 35, the insolvency practitioner will not be liable for damages, provided that the practitioner’s action (or inaction) was not in bad faith or in contravention of section 6(1) of the Human Rights Act 1998.
385.Paragraph 36 provides that the Bank may require recognised clearing houses to pay fees in connection with the discharge of its qualifying functions including functions under or as a result of Part 18.
386.Paragraph 37 provides that any fees owed to the Bank under paragraph 36 may be recovered as a debt due to the Bank.
Section 30: Recognition requirements: power of FCA and Bank to make rules
387.This section inserts a new subsection (4F) into section 286 of FSMA (qualification for recognition) which confers on the Treasury a power to make regulations setting out the requirements which must be satisfied by an investment exchange or a clearing house in order for it to qualify as a recognised body. Subsection (4F) provides that the Treasury may, in regulations made under section 286, confer on the Bank or the FCA (as the case may be) the power to make rules for the purposes of the regulations or any specified provision made by the regulations. This power will enable the Treasury to confer on the appropriate regulator the power to make rules relating to the recognition requirements whether those requirements are specified under directly applicable European regulation (and only referred to in the domestic regulations) or are set out in the domestic regulations. This enables further, or more prescriptive requirements (for example, concerning what constitutes “adequate resources”), to be imposed if necessary.
Section 31: additional power to direct UK clearing houses
388.Section 31 inserts a new section 296A which confers an additional power of direction on the Bank over UK clearing houses. (The term “UK clearing house” is defined for the purposes of Part 18 of FSMA in section 313 of FSMA, as amended by paragraph 36 of Schedule 8.) This additional power of direction may only be used where the Bank is satisfied that it is necessary to do so, having regard to four public interest criteria: (1) protecting and enhancing the stability of the UK financial system; (2) maintaining public confidence in the stability of the UK financial system; (3) maintaining the continuity of the central counterparty clearing services provided by the clearing house and (4) maintaining and enhancing the financial resilience of the clearing house.
389.There are limitations on the purposes for which a direction under this power may be given: The power may not be used to require a clearing house to take steps to comply with any recognition requirements provided for in regulations made under section 286 of FSMA, any other obligation imposed upon it by or under FSMA, or any obligation imposed upon it by any directly applicable EU regulation specified (or of a description specified) in an order made by the Treasury pursuant to section 296. The power also may not be used for the purpose of compelling a UK clearing house to accept any transfer to it of the property, rights or liabilities of another clearing house.
390.Where the procedural requirements of section 298 (as amended by paragraph 16 of Schedule 8) applicable to the giving of directions under new section 296A are not followed (i.e. where the direction is given in reliance on section 298(7)), the Bank is required to give reasons as to (1) why the direction was given, and (2) why no prior notice that the direction was to be given was given.
Section 32: Recognised bodies: procedure for giving directions under s.296 etc
391.Section 32 sets out the procedural arrangements to be followed before the Bank or the FCA (as the case may be) may (a) give directions to a recognised body or (b) revoke a recognition order. These changes are designed to simplify the powers.
392.Subsection (2) omits paragraphs (b) and (c) of subsection (1) of section 296 of FSMA; as a result, the Bank and the FCA will no longer need to take steps to bring to the attention of the members of the recognised body, and any other persons which it considers are likely to be affected, its proposal to issue a direction or revoke a recognition order. Subsections (3) and (5) make provision consequential on the change to subsection (1).
393.Subsection (4) replaces subsection (4) such that the minimum period for making representations in response to a notice issued by the Bank or the FCA (as the case may be) setting out its intention to issue a direction is such period as is specified in the notice, rather than a minimum period being set out on the face of the legislation. This will enable the appropriate regulator to prescribe a shorter period than is currently the case under FSMA (which prescribes a minimum period of two months), for example, where the Bank needs to act urgently in the interests of addressing a potential threat to financial stability.
394.Subsection (6) amends subsection (7) so as to enable the appropriate regulator to give a direction without following the procedure set out in section 298 where it reasonably considers it necessary. This aligns the circumstances in which the power can be used with those in which the PRA and the FCA may vary, with immediate effect, a person’s permission to carry on authorised activities (see new sections 55J and 55Y(3) inserted by section 11).
Section 33: Power to take disciplinary measures against recognised bodies
395.Section 33 inserts into FSMA new sections 312E to 312K. New sections 312E and 312F confer on the Bank and the FCA new disciplinary powers.
396.New section 312E confers on the FCA and the Bank the power to publish a statement that a recognised body has contravened a relevant requirement (defined in subsections (2) and (3) respectively). This is consistent with the power available to the FCA and the PRA to publish similar statements in relation to authorised persons (section 205 (public censure)).
397.New section 312F confers on the Bank and the FCA the power to impose on a recognised clearing house or recognised investment exchange (as the case may be) a financial penalty. This is consistent with the power available to the FCA and the PRA in relation to authorised persons (section 206 (financial penalties)).
398.New section 312G requires the Bank and the FCA, before publishing a statement under section 312E, or imposing a financial penalty, to issue a warning notice. This is consistent with the requirement imposed on the PRA and the FCA (section 207 (proposal to take disciplinary measures)). If, after considering any representations received in response to the warning notice, the Bank or the FCA decide to take the proposed disciplinary step, the relevant regulator must issue a decision notice in accordance with the requirement imposed by the new section 312H. Again, this is consistent with the requirement imposed on the FCA and the PRA in relation to a decisions to take disciplinary measures in relation to authorised persons (section 208 (decision notice)). A person who receives a decision notice under this section has the right to refer the matter to the Tribunal (subsection (4)).
399.New section 312I requires the Bank and the FCA (as the case may be) to provide a copy of a statement published under section 312E to the recognised body concerned, and to any person to whom a copy of the decision notice was given under section 393(4) (third party rights).
400.New section 312J requires the Bank and the FCA to prepare and issue a statement of policy with respect to the imposition of financial penalties under new section 312F and the amount of penalties under that section. The policy as regards the amount of a penalty must include having regard to the seriousness of the contravention in question and the extent to which the contravention was deliberate or reckless. Before issuing a statement of policy under this section, the Bank and the FCA are required to publish a copy of the statement in draft form and conduct a consultation exercise (new section 312K).
Section 34: Repeal of special competition regime
401.Section 34 omits Chapter 2 (competition scrutiny) and Chapter 3 (exclusion from the Competition Act 1998) of Part 18.
402.Chapter 2 of Part 18 makes provision for the scrutiny by the OFT and the Competition Commission of regulatory provisions issued by a recognised body and sets out various roles for the Treasury and Chapter 3 disapplies certain provisions of the Competition Act 1998.
403.Chapter 2 is now considered to be redundant, particularly as a result of the coming into force of section 290A (refusal of recognition on ground of excessive regulatory provision), which permits the appropriate regulator to refuse to make a recognition order if it appears that an existing or proposed regulatory provision of the applicant (in connection with relevant business) imposes or will impose an excessive requirement on a person affected directly or indirectly by it. The repeal of Chapter 2 means there is no need to maintain the exclusions from the Competition Act 1998 in Chapter 3.
Section 35 and Schedule 8: Sections 28 to 34: minor and consequential amendments
404.Section 35 introduces Schedule 8 which makes minor amendments to FSMA in consequence of the conferral of the functions under Part 18 on the Bank (in relation to recognised clearing houses) and the FCA (in relation to recognised investment exchanges).
405.Paragraphs 2 to 36 of Schedule 8 make amendments to Part 18 mainly to amend references to the FSA to the Bank or the FCA (as appropriate). The effect of the amendments made by paragraphs 11, 14(3)(b) and 15(3)(c) is that the Bank and the FCA (as the case may be) may take certain forms of action to enforce such directly applicable requirements (specified in European law) as are specified in an order made by the Treasury.
406.Paragraph 37 makes amendments to section 392 (warning and decision notices: application of provisions relating to third party rights and access to evidence) so that sections 393 (third party rights) and 394 (access to material of the relevant regulator) apply where a warning notice or decision notice is given under the new section 312G or 312H.
407.Paragraph 38 makes amendments to section 412A of FSMA (approval and monitoring of trade-matching and reporting systems) to transfer to the FCA the FSA’s functions under that section and paragraph 39 makes similar amendments to section 412B (procedure for approval and suspension or withdrawal of approval).