Part X: Rules and Guidance
250.This Part of the Act confers powers upon the Authority and the Treasury to set regulatory requirements for authorised persons. It also gives the Authority power to issue guidance on requirements imposed by or under the Act.
Chapter I: Rule-Making Powers
251.Chapter I concerns the Authority’s basic rule-making powers, the purpose for which rules can be made and the scope of the powers. There are other rule-making powers for specific purposes in relevant parts of the Act, including Parts XV, XVI, XVII, XX and XXII. This Chapter also sets out the relevant procedural requirements when making rules.
252.Parts V, VIII, XIX, and XX also contain specific powers which enable the Authority to impose requirements on particular classes of person. For example, through statements of principle, codes of practice and directions on approved persons; on any person in relation to market abuse; on members of Lloyd’s; and on members of the professions. Those powers are described in the relevant Parts of these explanatory notes.
Section 138: General rule-making power
253.This section confers a power on the Authority to make rules applying to authorised persons with respect to their carrying on of regulated and unregulated activities. Rules made under this section are referred to as “general rules” and can only be made to protect the interests of consumers. There need not be a direct relationship between the authorised persons to whom the rules apply and the consumers who are protected by the rules - so, for example, the Authority will be able to make rules under this section to protect the interests of beneficiaries of trusts, to further market integrity, as required by the Investment Services Directive, or to protect against systemic risk.
254.The bulk of the Authority’s handbook of rules and guidance will be constructed using the rule-making power in this section. The power will also enable the Authority to make other rules, including rules relating to firms’ systems and controls and rules regulating the conduct of firms’ business with customers. These could, for example, include “know your customer” rules and “disclosure” requirements.
255.The provisions in this section enable the Authority to make rules at differing levels of detail, from rules with a high level of generality, which the Authority refers to as principles, to detailed conduct of business provisions.
256.Sections 152 to 155 set down the procedural requirements which the Authority must follow when making rules.
Section 139: Miscellaneous ancillary matters
257.This section elaborates on the provisions which the Authority can make under the rule-making powers. It expressly enables the Authority to make rules in respect of the handling of client money by authorised persons. The rules could be used to require money to be held in trust.
258.This section also allows the Authority to make rules which require authorised persons to allow customers a “cooling off” period after entering into an agreement. For example, under section 76 of the ICA 1982, persons entering long-term insurance contracts have 14 days in which to cancel the policy and recover any premium paid. This section would allow the Authority to make rules requiring authorised persons to extend similar rights to customers.
Section 141: Insurance business rules
259.This section empowers the Authority to make insurance business rules prohibiting an authorised person who has permission to deal in contracts of insurance from carrying on a specified activity, which may be a non-regulated activity.
260.Subsection (3) enables the Authority to make rules in relation to contracts of long-term insurance entered into by an authorised person in the course of carrying on his business, in particular restricting the descriptions of property, or indices of value, by reference to which the benefits under such contracts may be determined.
Section 142: Insurance business: regulations supplementing Authority’s rules
261.This section enables the Treasury to make regulations applicable to non-authorised persons connected with authorised persons with permission in relation to contracts of insurance, preventing them from taking actions which would weaken the effect of “asset identification rules” made by the Authority under the powers in this Part. Breaches of these regulations are subject to criminal sanctions.
262.Subsection (3) gives the Treasury powers to make regulations which would prevent a company paying dividends or creating a mortgage or charge over its property, and which would make void any mortgages or charges made, in breach of those regulations.
Section 143: Endorsement of codes etc
263.This section confers a power on the Authority to make rules endorsing the City Code on Takeovers and Mergers (“the Takeover Code”) and the Substantial Acquisition Rules (“SARs”), or particular provisions of them.
264.This section provides a mechanism enabling the Authority to exercise its disciplinary powers over authorised persons for a breach of the endorsed provisions of the Takeover Code or SARs. The arrangements are designed to ensure that an adviser will cease to act where the Takeover Code or SARs have been breached. Subsections (3) and (4) have the effect that disciplinary or intervention powers in respect of endorsed provisions may be taken by the Authority if the Takeover Panel has requested it to do so.
265.Before making rules which endorse the Takeover Code or the SARs, the Authority must follow the usual procedures set out in section 155 for consulting on a draft of the proposed rules. By applying relevant provisions of section 155, subsection (8) of this section also requires the Authority to consult if it wishes to give a notification to the Takeover Panel that it considers the Panel's own consultation procedures are satisfactory. If the Authority does give such a notification, the effect under subsections (6) and (7) is that the Authority's endorsement of the Code or SARs extends automatically to subsequent amendments of the Code or SARs.
Section 144: Price stabilising rules
266.This section allows the Authority to make rules regarding actions which may be taken by authorised firms to stabilise the price of investments. Section 397(4) and 397(5)(b) provide that a person who is alleged to have created a false or misleading impression as to the market in certain investments has a defence to a charge under that section (such as misleading statements) if he proves that he was acting in conformity with rules made under this section.
267.Subsection (5) provides that the Authority may make rules which provide a similar defence to persons who have stabilised investments in compliance with the price stabilisation rules of an overseas body which is specified by the Authority. If an overseas body which is specified under this section changes its rules, the amended body’s rules will be taken by the Authority to be endorsed under this section if the Authority has confirmed that it is satisfied with the overseas body’s consultation procedures.
268.Subsection (4) confers on the Treasury a power to make regulations setting the outer boundaries of the Authority’s power to make price stabilising rules.
Section 145: Financial promotion rules
269.This section confers a power on the Authority to make rules applying to authorised persons in relation to the regulation of financial promotion under Parts II and XVII of the Act.
270.Subsection (3) enables the Treasury to restrict this power.
Section 147: Control of information rules
271.Subsection (1) enables the Authority to make rules about the disclosure and use of information held by an authorised person. These rules are commonly known as “Chinese walls” rules. Chinese walls are barriers in the form of procedures, systems, management and physical separation which firms may employ in order to ensure that information obtained by one part of a firm is not communicated in inappropriate circumstances to another part of the firm (for example, where it would advantage one client at the expense of another). This power is broadly in line with that currently contained in section 48(2)(h) of the FS Act 1986.
272.Under subsections (2)(a) and (c), rules may require that information be withheld or not used for a customer’s benefit where it would otherwise have to be disclosed or used, while subsections (2)(b) and (d) provide that rules may specify circumstances in which an authorised person may withhold or not use information which would otherwise have to be disclosed or used. This means that, if an authorised person maintains Chinese walls in accordance with Authority rules made under the section, then he will not be subject to obligations as to the disclosure and use of information that would otherwise apply.
Section 148: Modification or waiver of rules
273.This section concerns the power of the Authority to waive or modify certain kinds of rules, as set out in subsection (1), at the request of an authorised person or with their consent. Subsection (4) specifies the circumstances in which the Authority may waive or modify these rules.
274.Waivers or modifications of rules can have indefinite effect or can be revoked by the Authority. Breaches of conditions attached to a waiver or modification are equivalent to a breach of rules.
275.Subsections (6) and (7) concern the obligation on the Authority to publish rule waivers or modifications. They provide that the Authority must publish waivers or modifications in such a way as to bring them to the attention of the people who are likely to be affected, unless the Authority thinks it would be inappropriate to do so. In considering whether publication would be appropriate, the Authority should take into account whether it believes that publication would unreasonably prejudice the authorised person’s commercial interests or contravene any international obligations of the United Kingdom. The Authority would also need to take into account whether a breach of the rule in question would give rise to a right of action by a person under section 150. Persons affected by the modification or waiver will include clients of the authorised person and other authorised persons who might wish to benefit from similar arrangements.
276.In deciding whether certain of the conditions for withholding publication are met, subsection (8) requires the Authority to consider whether it can publish a waiver or modification of a rule without disclosing the identity of the authorised person concerned.
Section 149: Evidential provisions
277.This section enables the Authority to make rules which, if breached, will not lead to any disciplinary or other sanction provided for under the Act. Rules made under this section must state that they will not give rise to sanctions under the Act, but they must also indicate that their contravention can be relied on as indicating that another rule has been contravened, or that compliance with the rule can be relied on as indicating that another rule has been complied with. In particular, this power will enable the Authority to elaborate on rules, including principles, which are framed at a higher level of generality. The power can be used to promulgate codes, such as a code of practice, whereby rules comprising the code carry evidential status as to whether a higher level principle, which is underpinned by the code, has been breached.
Section 150: Actions for damages
278.This section sets out the circumstances in which persons who suffer loss as a result of a rule breach by an authorised person have a right of action for damages for resulting losses. This section does not remove any common law cause of action which a person might otherwise have. It allows a class of people to recover losses just by showing that there has been a breach of a rule as a result of which they have suffered loss rather then having to rely on that breach as evidence of negligence.
279.The section creates a presumption that private persons (as defined by the Treasury) who suffer loss as a result of a rule breach have a right of action for damages. The right does not extend to breaches of financial resources rules, listing rules or other rules which may be specified by the Authority. Customers would only generally suffer loss as a result of a breach of financial resources rules if the authorised person concerned became insolvent. In those circumstances, the relevant person’s rights in the insolvency would not be altered by a separate right of action. Additionally, it might not be appropriate to attach a right of action to certain other rules, such as those drawn at a high level of generality.
280.There is a presumption that persons other than private persons do not have a right of action for damages, although the Treasury may by regulations specify that breaches of certain rules are actionable by non-private persons.
Section 151: Limits on effect of contravening rules
281.Breach of the Authority’s rules does not make a person guilty of an offence, nor does it make a transaction unenforceable or void.
Section 152: Notification of rules to the Treasury
282.This section places a requirement on the Authority to give copies of new rules to the Treasury or, when it amends or revokes a rule, to give written notice of the fact to the Treasury.
Section 153: Rule-making instruments
283.This section requires the Authority to publish its rules in writing. As a result of subsection (3), if rules do not specify the power under which they are made, they will not have effect.
Section 155: Consultation
284.This section imposes consultation requirements on the Authority when it proposes to exercise its rule-making powers. Generally, draft rules issued for consultation must, as a result of subsection (2), be accompanied by a cost-benefit analysis of the proposals, an explanation of the purpose of the proposed rules and a statement that representations about the Authority’s proposals may be made to the Authority within a specified time. They must also be accompanied by a statement of the Authority’s reasons for believing that the proposed rules are compatible with its objectives.
285.Subsection (4) provides that the Authority must have regard to representations made to it when consulting on proposals to make rules. Subsections (5) and (6) provide that if the Authority decides to make the rule, it must give a feedback statement on the representations it received. If the rules which are introduced differ significantly from those which the Authority consulted on, the Authority must publish a statement of that fact, together with a cost-benefit analysis concerning the new provisions.
286.The Authority does not have to prepare a cost-benefit analysis when it considers that its proposals will not result in a material increase in costs. It would, however, still need to consult on the content of the proposed rules. Also, where the Authority proposes to exercise its powers to charge fees, the requirement to produce a cost-benefit analysis does not apply but the Authority is required to consult on the proposed expenditure which would result from the fee-raising exercise. Part III of Schedule 1 contains further provisions regarding the Authority’s fee-raising powers.
287.Consultation requirements will not apply if the Authority considers that any delay resulting from the consultation would harm consumers.
Section 156: General supplementary powers
288.This section confirms that the Authority’s rules may make different provision for different cases and that the rules may make incidental, supplemental, consequential and transitional provisions.
Chapter II: Guidance
289.Chapter II concerns the Authority’s power to issue and charge for guidance on its rules, the legislation and other matters relating to its functions, including its regulatory objectives.
Section 157: Guidance
290.This section enables the Authority to issue and charge for guidance on all the matters listed in subsection (1).
291.Subsection (2) confirms that the Authority can use its financial resources or its other resources to support the giving of information and advice by third parties where the Authority considers it could have given the advice or information under this section.
292.Subsection (3) provides that when giving guidance on its rules which is intended to have broad application, the Authority will need to meet various of the requirements of section 155, including those requiring consultation and the publication of a cost-benefit analysis. Subsection (4) clarifies that the Authority can charge for its guidance, whether it is offered generally or in response to a specific request.
Chapter III: Competition Scrutiny
293.Chapter III provides for competition scrutiny of the Authority’s rules, guidance, codes and practices.
Section 160: Reports by the Director General of Fair Trading
294.This section concerns reports by the DGFT on possible adverse effects on competition of the Authority’s regulating provisions and practices. A significant adverse effect on competition is defined in section 159(2) and (3). It includes things which have the effect of requiring or encouraging exploitation of the strength of a market position.
295.Subsection (1) provides that the DGFT must keep the Authority’s practices and regulating provisions (which are defined in section 159 and include rules, guidance and codes) under review. The DGFT can, at any time, investigate the Authority’s practices and regulating provisions under the powers conferred by section 161.
296.Following an investigation, if the DGFT finds that regulating provisions or practices, either singly or in combination, have a significant adverse effect on competition then he must produce a report. The DGFT has discretion as to whether to produce a report or not if he finds that there is no such effect.
297.Subsections (5) and (6) provide that the DGFT must send a copy of any report he produces to the Competition Commission (the “Commission”), the Treasury and the Authority. The DGFT must, so far as is practicable, exclude from the published version of the report any matter which relates to the affairs of a person which might seriously prejudice that person’s interests. (Subsection (9) provides that such matters do not need to be excluded from the version which goes to the Commission, the Treasury and the Authority.)
Section 161: Power of Director to request information
298.This section provides that, in carrying out his functions under section 160, the DGFT has powers to request relevant documents from any person, and to request relevant information from any business.
299.Subsections (5) and (6) provide that if a person fails to produce a required document, or piece of information, then the DGFT may report the matter to the court, and if the court is satisfied that there was no reasonable excuse for this failure, that person may be dealt with as if he were in contempt of court.
Section 162: Consideration by the Competition Commission
300.This section concerns the role and duties of the Competition Commission following receipt of a report from the DGFT. It is supplemented by the provisions of Schedule 14.
301.There are two types of report which the Commission must consider under this section and on which it must produce a report. The first is a report by the DGFT which concludes that particular regulating provisions or practices of the Authority have a significantly adverse effect on competition (type A). The second is a report by the DGFT which concludes that particular regulating provisions or practices do not have such an effect, but where the DGFT has referred the matter to the Commission for further consideration (type B). (If the DGFT does not ask the Commission to consider a type B report, then that is the end of the matter.)
302.Subsection (4) provides that the Commission’s report must state its conclusions as to whether the regulatory provisions or practices have a significantly adverse effect on competition. If it concludes that there is no such effect (that is, it agrees with a type B report or disagrees with a type A report), then that is the end of the matter. No further action can be taken.
303.If, however, the Commission concludes that there is such an effect, then subsection (5) requires it to state in its report whether it considers that the effect is justified. In taking this decision, subsection (7) requires the Commission, as far as is reasonably possible, to reach a conclusion which the Authority could have reached given the obligations which the Act places on the Authority and the functions which it confers. In its report, the Commission has to state what action, if any, ought to be taken by the Authority in the light of the unjustified anti-competitive effect. This could include the Authority changing its rules or practices in specified ways.
304.Any report produced by the Commission under this section has to be sent to the Treasury, the Authority and the DGFT. Subsection (2) provides that the Commission does not need to produce a report where there has been a change of circumstances which makes it unnecessary. For example, the Authority may, once it has received the DGFT’s report, change the rule in question, or stop engaging in a particular practice, so that the adverse effect on competition identified by the DGFT is removed.
Section 163: Role of the Treasury
305.This section concerns the Treasury’s powers to take action following an adverse report from the Commission.
306.If the Commission’s report is that the significantly adverse effect on competition is not justified, subsection (2) requires the Treasury, unless exceptional circumstances exist, to direct the Authority to take appropriate action. Subsection (4) provides that the Treasury must have regard to the Commission’s conclusion as expressed in its report. The special circumstances in which the Treasury do not have to direct the Authority to make changes following an adverse Commission report are where:
the Authority has already taken action, for example through changes to its rules or practices, which means that the Commission’s recommendations are no longer relevant; or
the Treasury concludes that the existence of exceptional circumstances mean that it would not be appropriate or necessary to direct the Authority to make changes. For example, the Treasury may conclude that there would be a grave risk to the financial system if certain regulating provisions were changed.
307.Subsection (7) provides that the Authority cannot be directed by the Treasury to take any action which it would not have the power to take itself. If the Commission were to recommend changes which did not, for example, provide an appropriate level of protection for consumers, the Treasury could not direct the Authority to make those changes.
308.If the Commission’s view is that a significantly adverse effect is justified, subsections (5) and (6) allow the Treasury to override that decision and direct the Authority to make changes where there are exceptional circumstances, for example, in order to meet international obligations.
309.Subsections (10), (11) and (12) provide that if the Treasury decide, because of exceptional circumstances, not to take action following a Commission report that a regulating provision or practice has an adverse effect on competition, or decide to take action in the opposite case, they must produce a statement giving their reasons. Any such statement must be made available to the public and must be laid before Parliament.
Section 164: The Competition Act 1998
310.This section makes clear that neither the prohibition in Chapter I (of agreements preventing, restricting or distorting competition within the United Kingdom) nor the prohibition in Chapter II (of abuse of a dominant position in a market which may effect trade in the United Kingdom) of the Competition Act 1998 apply to any action taken by a person in order to comply with the Authority’s regulating provisions or practices.
