The Finance Services Act 1986 - Essay Example

FSA Ltd v Dinmore (LT 20/07/2001 How might the investigation process and the judges reasoning differ of the case being heard in December 2008 Introduction The Finance Services Act 1986 (hereinto referred as the "Old Act) is the original legislation that regulates the conduct of investment business and incidentally, advertising of investments in the United Kingdom.1 Taking effect from April 1988, the Old Act provided a new framework for investor protection through wide-ranging statutory powers and the establishment of new criminal offences relevant to the financial services industry.2 Under the Old Act, there are two kinds of intermediaries or advisers: 1) tide agents, or the company representatives that sell the products, and 2) independent financial advisers, that will reviews all the products available on the market and provide unbiased advice.3 The Old Act provides different polarisation rules between the two that had effect in the way intermediaries represented their clients.4 The Securities and Investment Board (SIB) was the over-all regulator of the investment businesses in the United Kingdom under the Finance Services Act 1986. The SIB is assisted by several-self regulating organizations and recognized professional bodies. The self-regulating bodies used to be: the Securities and Futures Authority Limited (SFA); Investment Management Regulatory Organization (MRO); Financial Intermediaries, Managers, and Brokers Regulatory Association (FIMBRA); and Life Assurance Unit Trust Regulatory Organization (LAUTRO).5 Because of the many regulatory bodies involved, many rules and regulations were enacted, thus confusion in the enforcement of Old Act did arise. There was a fear on the part of the those involved in the selling of financial services and they cannot give advice to their clients the way they want because of the fear that they will contravene the regulatory code and there was a heavy fine on the part of the financial service firm in case of bad advice given to clients.6 Another negative effect may be is that there was confusion on what procedure to apply in the investigation of offences and the enforcement of appropriate actions the Old Act considering the number of regulations produced by the number of self-regulating bodies involved The Financial Services and Markets Act 2000 In the year 2000, a new legislation was passed replacing the Old Act. The New Act is called the Finance Services and Markets Act 2000 (hereinto referred as the New Act or FSMA). It received Royal Assent on 14 June 2000 and was brought into force at midnight on 30 November 2001, commonly known at that time as N2. Under the FSMA, the Securities and Investment Board (SIB) and the supporting regulatory bodies under the Old Act were replaced with the Finance Services Authority (FSA) as the over-all regulator of the Act. The FSA became the super-regulator of the Act, being fully in force from 30 November 2001. Under the FSMA, the FSA has four objectives: maintaining market confidence; promoting public understanding of the financial system; the protection of the consumer; and fighting financial crimes.7 Key Changes under the FSMA The FSMA retained the fundamental principle of the Old Act8. Aside from establishing the FSA as the super-regulating body, the FSMA also introduced significant changes to UK financial services law, to include9: 1) a revised Financial Promotion Scheme; 2) powers to impose penalties for market abuse; 3) regulation, marketing and promotion of collective investment schemes; 4) recognition of investment exchanges and clearing houses; 5) delegation to the London Stock Excahnge of the relevant powers to regulated listing activity and to approve all prospectuses; 6) establishment of a Single Ombusdman and compensation scheme, replacing the various schemes already in existence, to provide further protection to consumers; 7) establishment of a Financial Services and Markets Tribunal (FSMT) to hear appeals against decisions of the FSA. For European or International considerations, the New Act also defines various situations where a person not regarded under the old regime as carrying on a regulated activity in the UK will also be regarded under the new regime, including10: 1) where the person's registered or head office is in the Uk but the activity is carried out in another State in the European Economic Area ("EEA"); 2) where the person's registered or head office is in the UK, the activity is carried out in a non-EEA State but the day to day management of the activity is the responsibility either of the registered or head office in the UK or of another establishment maintained by that person in the UK; 3) where the person's registered or head office is not in the UK but the activity is carried out from establishment maintained by such person in the UK. Financial Promotion Under the FSMA, the existing restrictions on financial promotion will also be extended to mortgage products, deposits taking by credit unions, and the Lloyd's insurance market.11 Financial promotion is an expression commonly used to describe the communication of an invitation or inducement to engage in investment activity as outlined in that section.12 In addition, the term "financial promotion" is defined and used by the Financial Services Authority (FSA) in its handbook of rules and guidance (FSA Handbook).13 Reference in this note to the term "communication" should be read as meaning financial promotion, unless the context indicates otherwise.14 Section 21 of the FSMA provides that a person is prohibited from communicating an invitation or inducement to engage in investment activity unless he/she is authorized or exempted, or the content of the communication has been approved by an authorized person.15 Exemptions from this restriction are available under the key piece of secondary legislation, the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (SI 2005/1529) (as amended) (FPO) that came into force on 1 July 2005 (replacing the original Financial Services and Markets Act 2000 (Financial Promotion) Order 2001 (SI 2001/1335) (as amended).16 One important exemption has been introduced to reduce the cost of informal capital raising17, particularly for promotions to high net worth and sophisticated investors - typical characteristics of "business angels" who invest in "start-ups" and small companies, however, certain conditions should be met for such promotions to be exempted from regulation:18 "Respondents to the 'Informal Capital Raising' consultation made it clear that existing regulations were standing in the way of small firms being able to promote investment opportunities to individual investors, often known as business angels. Firms wishing to raise finance from investors have to get their promotional material approved by a person authorised by the Financial Services Authority. This approval is not necessary if the firm promotes to people it knows are certified as high net worth individuals or sophisticated investors."19 Changes in the Prosecution and Investigation Process of the FSA No significant changes have been made to the prosecution and investigation process of the FSA under the Old Act and the FSMA. It only gave extensive powers of investigation, enforcement of discipline to the FSA. However, instead of taking the case findings directly in court, it must first be submitted to the newly established Financial Services and Markets Tribunal (FSMT) for appeal. Sharma and Balkermore (2003)20 provide the investigation and enforcement procedures of the FSA: A. Informal request for information Pursuant to the Principles for Business and Statement of Principles for Approved Persons and Code of Practice, the firms and approved persons owe a general obligation of openness and co-operation with the regulators. Listed companies and sponsors will also owe similar obligations to the FSA in the FSA's capacity as the UKLA under the Listing Rules. The FSA's powers under this category are wide ranging. The fact finding investigations will mostly centre upon relevant documentation. The word "document" has a very wide definition and will include information recorded in any form. This will include meetings, access to premises, documents, taped telephone calls, and electronic data. B. Formal Enquiries The FSA has statutory powers pursuant to the FSMA to require firms and certain persons to provide particular information or documentation. This is usually by way of written request, specifying the type of information and when and where it is to be provided. The FSA may also commission a report from a "skilled person" such as an accountant, actuary or person with technology skills. C. Formal Investigations (ss 165 - 169 FSMA) The FSA may appoint an investigator to conduct a formal investigation in a range of circumstances. Usually, the person under investigation will be notified of the investigation but the obligation to notify does not always apply, notably in the case of market abuse investigations. The investigator's powers extend to obtaining documents from third parties; demanding an explanation of documents; obtaining a warrant to enter and search premises and issuing proceedings for contempt of court if the requests/demands are not met. The investigation is ultimately controlled by the FSA. The investigation concludes with the presentation of a factual report to the FSA. The person under investigation will then receive a "Preliminary Findings Letter" giving the individual or the company an opportunity to comment on the factual findings of the investigation before it is concluded. While some may regard these investigations as intrusive, most enforcement matters have been resolved by negotiation. The new procedure, although largely untested, aims to promote fair settlement while at the same time giving firms the opportunity of undergoing a full tribunal process. Notice Procedures There are two enforcement procedures under the FSMA. The statutory provisions dealing with a particular enforcement action specify which procedure applies. Warning/Decision Notice This main procedure involves the FSA issuing a warning and/or decision notice. The warning and/or decision notice is issued once a problem is identified and the investigation (informal/formal) will result in the FSA staff recommending enforcement or not. If there is to be no enforcement action, then the FSA will most likely issue a private warning and the investigation process comes to an end. If an enforcement action is recommended then the Regulatory Decision Committee ("RDC") is notified. The RDC is an enforcement committee of senior individuals (not FSA employees), who report to the FSA board. The RDC is not involved in the investigation, and is therefore one step removed from the enforcement process. The RDC will consider the enforcement recommendation and decide whether to issue a warning notice. If it rejects the FSA's findings then again either a private warning will be issued to the company, or the investigation will end. If the RDC agrees to issue a warning notice then this will be served upon the firm and/or any individual who has information which the FSA wishes to obtain. Those individuals are described as "prejudiced parties". Within 28 days, the firm upon whom the warning notice has been served, together with any other third parties, will be given access to the FSA's documents and can either enter into settlement discussions/mediation and/or make representations to the RDC. The RDC will then consider whether to issue a decision notice embodying any agreed terms or otherwise. If the RDC agrees not to issue a decision notice then it will file a notice of discontinuance. If, however a decision notice is issued the firm will then have a further right of access to the FSA's documents, and a further 28 days to decide whether to refer the matter to the FSMA tribunal. If the decision notice is agreed with then the FSA will issue a final notice. Publicity at that stage is likely. Conclusion: Effect of the Investigation Process if Applied in the FSA Ltd v Dinmore Case The Dinmore case was decided under the Financial Services Act 1986 (the Old Act). Under the Old Act, the FSA's power of investigation is a compulsory power. They enable the FSA or its investigators to compel the provision of information, the production of documents and/or answers to questions for the purposes of conducting an investigation to all persons. Compulsory investigation powers permit the FSA to compel answers to questions from all persons including persons whose conduct is the subject of the investigation. However, the FSA will not be able to use the answers to such questions as evidence in criminal proceedings brought against the person giving the answers (except when the offence being prosecuted relates to a failure to answer questions truthfully). Also under the Old Act, there is no rule on financial promotion and/or provisions on the exemption on financial promotion. This means that all persons should seek authorisation from the FSA before conducting any investment activity and there is no exemption to it. In the absence of the exceptional provisions/rules of the FSMA in the Old Act, activities of any person (company or individual) is regarded as a breach of the Old Act if it was done without authorisation from the FSA. If the Dinmore case was decided on December 2008 under the regime of the New Act, there will be a change in the investigation process of the FSA. Instead of investigating the acts committed by Dinmore as breaches under the FSMA, the line of the investigation will be whether or not the acts committed by Dinmore are exceptions under the extended rule of financial promotion. Dinmore can claim that he is exempted from the provisions of Section 21 of the FSMA his acts being to reduced the cost of informal capital raising as defined and explained in this work. If Dinmore can successfully defend his case in the courts, there is a possibility that the complaint/s against will be dismissed because under the exception of the financial provision, he do not need the authorization from the FSA by virtue of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (SI 2005/1529) (as amended). Read More